Italy risks loss of billions on derivatives

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Italy could lose €8 billion. Photo: Images of money/Flickr
11:11 CEST+02:00
Italy is facing losses of about €8 billion on derivative contracts taken out in the late 1990s to dress up the accounts so that the country could join the eurozone, a report in La Repubblica newspaper said on Wednesday.

"There is a time bomb in the public accounts," the left-wing daily said, warning that "today, and even more in the next few years, there will be quite a bill to pay for the load taken on."

The paper said it had seen a confidential 29-page report which said the Italian Treasury had restructured the debts "between May and December 2012"
when the eurozone crisis was at its worst.

The loss was particularly damming considering the contracts were worth 31 billion, it said.

"Many mistakes were made in the 1990s to get Italy into the euro," a government official told the daily on the condition of anonymity.

"And today they transform into even more debt, hidden by the official accounts in an very grey area of the Treasury that only a few people are able to understand and manage," he said.

Responding to the news, the Italian Ministry of Economy and Finance said derivatives pose "no danger to public accounts".

"The hypothesis that Italy used derivatives at the end of the 1990s to create the conditions necessary to enter into the eurozone is absolutely groundless," the ministry said in a statement.

Christian Schulz, senior economist at Berenberg Bank in London, said in a note that the report should not spark undue panic.

"€8 billion are only 0.5 percent of Italian GDP (gross domestic product), not enough for a major change the assessment of Italy's fiscal health," he said.

However, he said it raised questions, for example whether the loss had been absorbed into the deficit last year. And he called for Italy and the European Commission to "quickly shed light on the risks from these and similar derivatives deals in order not to undermine confidence in Eurostat's public finance data."

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The reported technique is redolent of derivative and accounting devices used by Greece to mask the weakness of its public finances before it joined the eurozone

The report in Repubblica puts the head of the European Central Bank (ECB) Mario Draghi into the spotlight, as he was head of the Italian Treasury at the time the derivatives were taken out.

It will also be an unwelcome distraction for Prime Minister Enrico Letta, who is struggling to push measures through to revive Italy's growth amid hissy fits from a sparring coalition and bad news on the debt bond market, after borrowing costs rose in Tuesday's auction.

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