Italy probes use of derivatives to hedge public debt

By Guy Dinmore in Rome

Italy’s judiciary has opened an inquiry into the Treasury’s use of derivatives to hedge public debt after reports that the state faced potential losses of billions of euros on contracts restructured during the eurozone debt crisis last year.
Nello Rossi, Rome’s deputy prosecutor, told the Financial Times on Wednesday that he would meet the various institutions involved, including the Treasury, the Bank of Italy and state auditors. He stressed, however, that this was not a criminal investigation.

The inquiry was prompted after a Treasury report was leaked to the FT and Italian daily La Repubblica detailing the restructuring of eight derivatives contracts in 2012.
Independent experts who examined the data concluded that Italy risked a potential loss on the contracts, based on market prices last week, of about €8bn on a total notional value of €31.7bn. Last year Italy said it had a derivatives portfolio totalling some €160bn, about 10 per cent of total state bonds in circulation.
Mr Rossi’s inquiry is assisted by the finance police who requested information on Italy’s derivatives contracts from the Treasury’s debt management office at the request of the Corte dei Conti, the state auditors.
Politicians said the inquiry was likely to run into a wall of secrecy surrounding the management of Italy’s €2tn of public debt, with the Treasury citing commercial confidentiality as a reason for not making public its derivatives contracts with the same banks that act as prime dealers in debt auctions.
“The state of Italy’s finances are like the formula for Coca-Cola. It is a secret,” said Renato Brunetta, spokesman for the centre-right People of Liberty, which formed a coalition government with prime minister Enrico Letta’s centre-left Democrats in April. “There is total opacity in the finance ministry,” Mr Brunetta added.

Earlier on Wednesday, the finance ministry dismissed as “absolutely groundless” reports in two newspapers quoting unnamed Italian officials that Italy had used derivatives in the late 1990s to “window dress” its accounts through upfront payments by foreign banks to meet financial criteria set by the EU for the country to enter the euro at its launch in 1999.
The ministry said its use of derivatives posed no risk to public finances and that the market value of such instruments, used to hedge against interest rate movements, could not be treated as an actual loss. It did not dispute the reported figures.
“It is a big misunderstanding. There is no loss,” Fabrizio Saccomanni, finance minister, said.
The ministry said it had provided finance police with requested information related to Italy’s payment of €2.57bn to Morgan Stanley in January 2012 after the US investment bank used a break clause to close a derivatives contract taken out in 1994.
Mario Draghi, head of the European Central Bank, referred reporters to the ministry’s statement when asked about the reports. Mr Draghi was head of the Italian Treasury from 1991 to 2001 before moving to Goldman Sachs, a US investment bank, in 2002.
In Brussels, Simon O’Connor, the European Commission’s economic spokesman, said the reports on Italy’s derivatives operations would not affect its evaluation of Rome’s current debt and deficit projections, saying Eurostat had thoroughly vetted Italy’s budget data as part of its normal semi-annual review process.
Commission officials also said that accounting rules in place when Italy was accepted into the euro were far less transparent with regards to derivatives than they are today.
“Italy was accepted into the euro on the basis of the rules that were in place at the time,” said Mr O’Connor.
Additional reporting by Peter Spiegel in Brussels

Source: Financial Times