Italy Sees No Threat to Finances From Derivatives Deals

Italy’s Treasury said derivative deals the nation used to reduce interest-rate and currency risks on its borrowings pose no threat to the country’s finances.

Italy didn’t use the contracts to improve its accounts when it sought to join the euro and the financial reporting of the transactions have been vetted by the region’s statistics agency, Eurostat, the Treasury said in an e-mailed statement.

The Financial Times reported earlier today Italy faces losses of 8 billion euros ($10.4 billion) on about 32 billion euros of derivatives. The newspaper attributed the estimate to its own analysis of a Treasury report that details some of the country’s derivative agreements as they stood in the first half of 2012.

Italy holds derivatives contracts on about 160 billion euros of debt, or almost 10 percent of government securities in circulation, a government official said in March 2012. The amounts involved and the specific contracts aren’t publicly disclosed.

“There won’t be any negative impact on public accounts,” Finance Minister Fabrizio Saccomanni said at a press conference in Rome. “These are instruments used to manage interest-rate risk.”

Derivatives Deals

The Treasury said today it submits information to the government auditor’s office on derivative deals every six months. In March, the country’s finance police, acting on behalf of the auditor, requested documents related to a group of deals with Morgan Stanley that have been terminated and the Treasury complied with the request. Italy last year paid New York-based Morgan Stanley $3.4 billion to close contracts from the mid-1990s, a person with direct knowledge of the transactions said at the time.

In a separate statement, the auditor’s office said it receives regular reports from the Italian Treasury on the country’s public debt. The estimates of potential losses from the derivatives contracts reported by the FT came from independent experts used by the newspaper and not from the auditor, it said in the statement.

Italy said today it used swaptions, options to enter into a swap, to cut the cost of servicing debt. The mark-to-market on existing contracts cannot be considered a loss and only in specific cases can the unwinding of the contracts be demanded by the counter-party, the Treasury said.

Italy’s 10-year bond yield fell 12 basis points, the biggest one-day decline in more than two weeks, to 4.74 percent.

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