Italy Faces €8bn Debt Restructuring Losses


Italy could face losses of about 8 billion euros on derivative contracts that were restructured at the height of the eurozone crisis, reported the Financial Times and Italian daily La Repubblica, which also alleged that Rome used the contracts to “window dress” its public accounts to join the euro in 1999.

The newspapers, which quoted a 29-page report from the Treasury, said the contracts worth about 32 billion euros were taken out in the 1990s while European Central Bank president Mario Draghi was Director General of the Italian Treasury.

At that time the Italian government was trying to improve its accounts to meet tough criteria for euro membership by taking upfront payments from banks, the newspapers said.

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According to Italy’s La Repubblica, the Treasury restructured the debts “between May and December 2012” when the eurozone crisis was at its worst, a move that could result in total losses of around 8 billion euros based on market prices on June 20.

Such restructurings allow the Treasury to stagger payments to banks over a long period albeit at disadvantageous terms.

"Many mistakes were made in the 1990s to get Italy into the euro," a government official told La Repubblica on the condition of anonymity. "And today they transform into even more debt, hidden by the official accounts in a very grey area of the Treasury that only a few people are able to understand and manage.”

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The Treasury on Wednesday said the allegations were “absolutely baseless” and derivatives were used as a standard means of hedging against foreign exchange and interest rate risks and that there was always a cost of such insurance, which was justified by the protection provided against more serious potential losses.

"The market value of derivatives instruments at a specific time ... cannot in any case be treated as an actual loss," it added.

Finance Minister Fabrizio Saccomanni dismissed concerns about the potential threat posed by the derivatives contracts. “There is a big misunderstanding, there is no loss,” he told reporters at a press conference. “There has been no negative impact on public accounts. These are instruments used to manage interest-rate risk.”

But the Financial Times on Wednesday reported that the Italian judiciary has opened an inquiry into the Treasury’s use of derivatives to hedge public debt. Nello Rossi, Rome’s deputy prosecutor said he would meet the various institutions involved, including the Treasury, the Bank of Italy and state auditors.

Rossi, however, stressed that this was not a criminal investigation.

Wednesday's report was the latest in a series that have highlighted the potential problems stemming from Italy's huge legacy derivatives portfolio.

Italy holds derivatives contracts on about 160 billion euros of debt, or almost 10 percent of government securities in circulation, a government official said in March 2012. The amounts involved and the specific contracts are not publicly disclosed.