Italy ‘Risks Heavy Losses on Derivatives’

Italy could be saddled with losses running into billions of euros on derivatives contracts it restructured at the height of the eurozone crisis, according to a report in the Financial Times. The paper, citing a confidential report by the Rome Treasury as its source, said that the contracts were originally taken out in the late 1990s.

The 29-page Treasury report details Italy’s debt transactions and exposure during the first half of 2012, including the restructuring of eight derivatives contracts with foreign banks with a total notional value of €31.7bn, the FT report suggests.

The FT cited experts who explained that the restructuring enabled the country to stagger payments owed to foreign banks over a longer period, but in some cases at more disadvantageous terms to Italy. It added that a European Central Bank (ECB) spokesman had declined to comment on the bank’s knowledge of Italy’s potential exposure to derivatives losses.

Although the Treasury report did not quantify potential losses on the contracts, the FT consulted three independent experts who calculated the losses based on market prices on 20 June. From this, they 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, the paper added.

The Italian finance ministry later responded to the report by explaining that the contracts were taken out to protect Italy against any potential replay of the financial crises of the early 1990s. The contracts protected against market risks including “foreign exchange risk and interest rate risk”.

It added that “like any insurance” this came at a cost although “it remains justified by the priority given to the prevention of serious consequences in the event of adverse scenarios”.

The ministry insisted that the transactions complied with national and European accounting principles. “Checks carried out systematically by Eurostat from the second half of the 1990s” found them to be acceptable, it stressed. The Italian Treasury dismissed reports that it used derivative contracts to massage the figures prior to Italy’s entry into the single European currency as “completely baseless”.

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