The City of Milan is in talks with four foreign banks to annul interest-rate swap agreements in return for about 400 million euros ($526 million) from the institutions.
The amount represents Milan’s mark-to-market gain on the swaps and will be invested in deposits and government bonds, generating an estimated return of about 350 million euros over 23 years, city officials said at a press conference today.
Milan plans to drop claims for damages as part of a criminal trial involving the lenders: JPMorgan Chase & Co., Deutsche Bank AG, Dublin-based Depfa Bank Plc and UBS AG. They face charges of mis-selling swaps to the municipal government of Italy’s business capital.
The city so far has made money on the swap agreements, said David Corritore, a Milan official. Milan will use the 750 million euros of proceeds to cover interest payments on its outstanding bonds, which will bear a fixed interest rate of about 4 percent.
The city is in talks with banks to define new terms on its derivative agreements, according to an e-mailed statement.
Karina Byrne, a spokeswoman for Zurich-based UBS in New York, said “negotiations are currently taking place,” and declined to comment further. Jennifer Zuccarelli, a spokeswoman for New York-based JPMorgan, declined to comment on the talks.
Spokesmen for Depfa and Frankfurt-based Deutsche Bank also had no immediate comment.
Across Italy, cities faced with shrinking income and rising expenses bought swaps from banks to cut short-term interest costs, putting them at risk of paying more in the long run. About 300 municipalities were losing a total of 912 million euros on such derivatives as of March last year, Bank of Italy data show.
Local governments and regulators in Germany and the U.S. also have brought cases against banks over derivatives contracts.
U.S. states, municipalities and nonprofit institutions such as Harvard University paid more than $4 billion in fees to banks when the derivatives, sold as a way to minimize risk, exploded as the housing market’s collapse cascaded through financial markets.
Jefferson County, Alabama, was pushed toward bankruptcy as it and other governments were saddled with soaring costs tied to interest-rate swaps just as the longest recession since World War II took hold.