Milan: A derivatives scandal engulfing Italy’s Banca Monte dei Paschi di Siena (BMPS) has shaken the Italian finance sector and cast a shadow over the government’s efforts to save the world’s oldest bank.
A media report on Tuesday that said BMPS would book a €220 million ($293 million) loss on a three-year-old derivative contract was a heavy blow for the floundering bank, which is concluding a deal with the government for €3.9 billion in state aid.
BMPS was forced to reveal the 2009 derivative deal with Japanese bank Nomura—nicknamed “Alexandria”—and the resultant loss is expected in its 2012 results.
The stock market immediately reacted to the news, with shares in the 15th century institution plunging by 5.68% on Tuesday and by another 8.43% on Wednesday.
BMPS said that the derivative contract was one of several under internal investigation, and underscored that with the state aid it was “in a position to absorb consequences from the operations in question.”
Two other derivative deals, “Santorini” and “Nota Italia” have been scrutinised since October, and some elements might have to be renegotiated, BMPS said, while pledging to provide more information by mid February.
Derivatives are financial instruments based on the value of a specific security or asset.
They are widely used by companies and financial institutions to hedge risks from price changes, but if not used carefully can result in huge losses.
The Italian central bank issued a statement on Wednesday which said that “the true nature of some of the transactions reported by the press involving Monte dei Paschi di Siena emerged only recently,” following revelations by the bank’s new management.
“The transactions are now being examined by both the supervisory and the judicial authorities, in close collaboration,” the central bank added.
Italy’s financial daily Il Sole 24 Ore said that it expected the bank to face a 2012 loss of “well over two billion euros,” with “Alexandria” to account for at least €220 million.
Last week, Bloomberg financial news agency reported that the “Santorini” contract, signed with Germany’s Deutsche Bank in 2008, helped BMPS cover up €367 million worth of losses.
The scandal, which appears far from over, has already claimed one victim.
Giuseppe Mussari, former chairman of the Monte dei Paschi di Siena Foundation, resigned from his post as head of Italy’s banking lobby ABI late Tuesday after it emerged he had personally signed off on the “Alexandria” deal.
Mussari also oversaw the purchase in 2007 of Banca Antonveneta from Santander for €9 billion a deal now under investigation after questions were raised over the apparently excessive amount paid for the north Italian bank.
The derivatives scandal has also hit the bank’s chairman, Alessandro Profumo—former chief executive of Italian banking giant UniCredit—and BMPS chief executive Fabrizio Viola.
Appointed at the start of 2012, the pair have struggled to refloat a bank suffering from exposure to the Italian sovereign debt crisis and losses on contracts linked to government bonds.
The troubled institution is now grasping for a €3.9 billion life-buoy in the form of so-called “Monti” bonds.
Under a deal proposed by outgoing Prime Minister Mario Monti, the government would buy debt issued by the bank. The “Monti” bonds would replace €1.9 billion in aid given to the bank in 2009.
Friday’s general assembly in Siena will address the issue of raising €4.5 billion in fresh capital.
The government has said the new bonds would be converted into equity should the bank fail to return to profit, but Viola, among others, has dismissed the situation as unlikely.
The Foundation told Italian news agency Ansa meanwhile that it might take legal action against former bank managers.
Several political figures have also used the scandal to criticise “favours” granted by Monti to BMPS, and to attack the Democratic Party of Pier Luigi Bersani, tipped to win upcoming Italian polls and considered to have close relations with the bank.