Italy ❤ currency swaps too | FT Alphaville

Italy ❤ currency swaps too

Turns out, sovereigns are not the only public bodies with a love of currency swaps.

Bloomberg reported on Wednesday that Italian municipalities are increasingly under domestic pressure over their prevalent use of derivatives in the last few years.

According to the chairman of the state audit court, Tullio Lazzaro — as quoted by Bloomberg:

“Many local authorities used such instruments to get immediate liquidity for current expenditure,” Tullio Lazzaro, chairman of the Court of Accounts, said in a speech in Rome today. “This will leave them and the future generations with forms of increasingly onerous debt.”

The Bloomberg report stated more than 519 Italian municipalities now face an estimated €990m in losses from such derivative contracts, according to to data from the Bank of Italy.

And it’s not something the Italian authorities are taking lightly. As Bloomberg continued:

Police are investigating losses on derivatives linked to 870 million euros of bonds sold by the Apulia regional government in 2003 and 2004, the prosecutor’s office in Bari said on Feb. 3.

In a separate investigation in Milan, prosecutors seized assets from four banks including JPMorgan Chase & Co. and UBS AG in April and requested they stand trial for alleged fraud in derivative contracts bought by the City of Milan.

Hearings started this month. “The distorted use of derivatives was aimed at goals unrelated to risk coverage,” Mario Ristuccia, the court’s general prosecutor, said today. This practice “extended sometimes even to local authorities of modest size and lacking the needed structures and expertise to make a financial and economic assessment.”

Jane Foley, research director over at, meanwhile noted how the matter could complicate things for Europe:

Complicating matters further have been fears that Italian municipalities may have significant derivatives exposure which has dragged Italy’s government budget under the spotlight. While Italy appeared to be running a healthy primary surplus in the years ahead of EMU its huge public debt points to years of poor fiscal management. Whether or not its budget was enhanced by the use of derivative operations does need to be clarified.

It also turns out that Italy has been a dab hand at currency swaps for some time.

In a separate but not un-related story, the ECB put out a denial on Wednesday that Bank of Italy governor Mario Draghi had played any role in arranging the now infamous Greek sovereign ‘deficit smoothing’ currency swap while employed at Goldman Sachs. As Bloomberg reported:

“Swap deals involving Goldman Sachs and the Greek government were made previously to Mario Draghi’s appointment at Goldman Sachs” in 2002, the Bank of Italy in Rome said in a statement today. Draghi had “nothing to do with those transactions,” nor with any subsequent swaps, a spokeswoman said by phone. She declined to be named in line with the central bank’s policy.

According to Bloomberg, Italian authorities developed somewhat of an expertise in this area back in the 1990s, when Italy first used derivatives to lower its deficit to qualify for membership of the euro. As the wire stated: “The swaps allowed it to temporarily cut the amount of interest paid and to trim the 1997 deficit. The European Commission reviewed the operation and approved the transaction.”

There was nothing wrong with this at the time because the country’s official currency was still the lira, Italian Finance Minister Guilio Tremonti told reports in Brussels on Wednesday.

We, meanwhile, would remind that currency derivatives were also aggressively marketed by western and err Italian banks in areas like Eastern Europe in the last few years. Polish media estimated back in February 2009 that derivative-related losses in forex the previous year may have amounted to as much as 20-30bn zlotys for Polish firms.

In which case, are derivative losses stemming from such transactions in more established markets really such a surprise then?

Related links:
Goldman’s Trojan currency swap – FT Alphaville
The big (local) debt trap in Europe – Money Supply