|Palazzo delle Finanze, Rome Photo: Government of Italy
Italy is exposed to potential losses of billions of euros on derivative
contracts it restructured at the height of the euro crisis, according to an
internal report prepared for the Italian Treasury that reveals the use of
derivative financial instruments to massage economic data to meet the criteria
for countries to enter the euro system in 1999. Last year, Bloomberg estimated
that losses on derivatives amounted to $31bn at current market values.
Mario Draghi, now ECB president, was the director general of the Treasury
The Financial Times says today that a potential loss of about €8bn on
contracts with a notional value of €31.7bn are estimated but the internal report
seen by the FT likely does not include all outstanding financial derivatives.
The financial contracts allowed payments from foreign banks to be booked
immediately while payments to banks were stretched out over several years.
The FT says that Italy had a budget deficit of 7.7% in 1995 but by 1998, a
key year for approval of its euro membership, it had fallen to 2.7% without any
significant changes in tax revenues or public spending, as ratios of GDP (gross
reported last year:
"When Morgan Stanley (MS) said in January it had cut its 'net exposure' to
Italy by $3.4bn, it didn’t tell investors that the nation paid that entire
amount to the bank to exit a bet on interest rates...The cost, equal to half the
amount to be raised by Italy’s sales tax increase this year, underscores the
risk of derivatives countries use to reduce borrowing costs and guard against
swings in interest rates and currencies can sour and generate losses for
taxpayers. Italy, with record debt of $2.5tn, has lost more than $31bn on its
derivatives at current market values, according to data compiled by the
Bloomberg Brief Risk newsletter from regulatory filings."
Last December an Italian court found Deutsche Bank , Depfa Bank, JP Morgan
and UBS guilty of fraud for mis-selling derivatives to the city of Milan.
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