Italy risks loss of billions on derivatives

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.

Italy risks loss of billions on derivatives
Italy could lose €8 billion. Photo: Images of money/Flickr

"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."

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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Salvini vows not to yield to Brussels in Italy budget dispute

Italy's Deputy Prime Minister Matteo Salvini vowed Saturday not to back down in a dispute with Brussels over the country's budget as Rome scrambles to avoid EU punishment for failing to reduce its heavy public debt load.

Salvini vows not to yield to Brussels in Italy budget dispute
Matteo Salvini at a press conference following last week's European elections. Photo: AFP

The EU infuriated Rome this week by warning over its soaring debt, rekindling a process that could eventually see Italy hit with sanctions for breaking spending promises to the EU.

“Next week I will tell Brussels 'let us do what Italians request: fewer taxes and more jobs',” Salvini said during a political rally.

“And if they say 'no', we'll see who is more stubborn,” he added.

The country's public debt stands at 132.2 percent of GDP in 2018.

This is well above the 60 percent threshold set by European rules and next week the European Commission is expected to recommend opening an “excessive deficit procedure” as punishment.

Italy's populist coalition — Salvini's far-right League and the anti-establishment Five Star Movement (M5S) — told the commission late Friday it will review both the country's tax system and public spending.

“The government is setting up a comprehensive program to review the current spending” ahead of the budget law for 2020, Finance Minister Giovanni Tria said in a reply to Brussel's request for an explanation over Italy's finances.

The government will also review Italy's revenue, including taxes, Tria said.

The opening of the EU procedure, which needs to be validated by EU finance ministers, could result in financial sanctions of up to 0.2 percent of Italian GDP, equivalent to three billion euros.

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