Italy risks potential losses of billions of euros on derivatives contracts it restructured at the height of the eurozone crisis, according to a confidential report by the Rome Treasury that sheds more light on the financial tactics that enabled the debt-laden country to enter the euro in 1999.The facts seem difficult to piece together, but the amounts are significant. Some of the derivatives date back to 1994-1996 when Italy dressed up its finances to meet Maastricht treaty criteria, including a budget deficit less than 3 per cent.
A 29-page report by the Treasury, obtained by the Financial Times, details Italy’s debt transactions and exposure in the first half of 2012, including the restructuring of eight derivatives contracts with foreign banks with a total notional value of €31.7bn.
Experts who examined it told the Financial Times the restructuring allowed the cash-strapped Treasury to stagger payments owed to foreign banks over a longer period but, in some cases, at more disadvantageous terms for Italy.
The senior government official who spoke to the Financial Times and the experts consulted said the restructured contracts in the 2012 Treasury report included derivatives taken out when Italy was trying to meet tough financial criteria for the 1999 entry into the euro.
Three independent experts consulted by the FT calculated the losses based on market prices on June 20 and concluded the Treasury was facing a potential loss at that moment of about €8bn, a surprisingly high figure based on a notional value of €31.7bn.
Early last year Italy was prompted to reveal by regulatory filings made by Morgan Stanley that it had paid the US investment bank €2.57bn after the bank exercised a break clause on derivatives contracts involving interest rate swaps and swap options agreed with Italy in 1994.
An official report presented to parliament in March 2012 found that Morgan Stanley was the only counterparty to have such a break clause with Italy and disclosed, for the first time, that the Treasury held derivatives contracts to hedge some €160bn of debt, almost 10 per cent of state bonds in circulation.
The Bloomberg News agency calculated at the time, based on regulatory filings, that Italy had lost more than $31bn on its derivatives at then market values.
"Italy had a budget deficit of 7.7 per cent in 1995" but the deficit magically shrunk to 2.7% in 1998, the approval year for Italy joining the eurozone. The odds of that being legitimate are approximately zero percent.
ECB president Mario Draghi was head of the Italian central bank at the time much of this took place, so it's no wonder details are scant.
Recall that Bloomberg lost a freedom of information lawsuit against the ECB regarding derivatives used to hide Greek debt on the basis "disclosure of the files would have undermined the protection of the public interest so far as concerns the economic policy of the European Union and Greece”.
I would be far more interested to see the complete Italy files, but clearly that's not going to happen either.
Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
