Italy risks potential losses of billions of euros on derivatives contracts it restructured at the height of the eurozone crisis, according to a report by the Rome Treasury that sheds more light on the financial tactics that enabled the debt-laden country to enter the euro in 1999.
The report details Italy’s debt transactions and exposure in the first half of 2012, including the restructuring of eight derivatives contracts with foreign banks with a total notional value of €31.7 billion. The report does not name the banks or give details of the original contracts – questions that worried the state auditors – but the experts said they appeared to date back to the period in the late 1990s. At that time, before and just after Italy entered the euro, Rome was flattering its accounts by taking upfront payments from banks in order to meet the deficit targets set by the EU for joining the first wave of 11 countries that adopted the euro in 1999.
Italy does not disclose its total potential exposure to its derivatives trades. The experts contacted by the FT, who declined to be named, noted that the report revealed just a six-month snapshot on a limited number of restructured contracts.
Early last year, Italy was prompted to reveal by regulatory filings made by Morgan Stanley that it had paid the US investment bank €2.57 billion after the bank exercised a break clause on derivatives contracts involving interest rate swaps and swap options agreed with Italy in 1994.
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