Italy Embroiled In Latest Derivative Loss Fiasco Through Another Mario Draghi-Headed Scandal

Tyler Durden's picture

It was roughly four years ago when details surrounding such Goldman SPV deals as Titlos first emerged, that it became clear how for over a decade, using deliberately masking transactions such as currency swaps, Greece had managed to fool the Eurozone into believing its economy was doing far better, and its debt load was far lower than it actually was in order to comply with the Maastricht treaty's entrance requirements.

That this happened with the implicit and explicit knowledge of such European and Goldman "luminaries" as Helmut Kohl and Mario Draghi did not help Europe's credibility.

As for the Pandora's Box that was opened following the disclosure of just how ugly the unvarnished truth in Europe is, following the Greek disclosure, leading to the general realization that the European experiment has failed and it is now only a matter of time before its final unwind, any comment here is unnecessary - ths has been widely discussed here and elsewhere over the past several years.

Now it is Italy's turn.

Overnight, the FT reported that "Italy risks potential losses of billions of euros on derivatives contracts it restructured at the height of the eurozone crisis, according to a confidential 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. A 29-page report by the Treasury, obtained by the Financial Times, 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 €31.7bn."

What was the point of these derivative contracts? The same as in Greece: to transform reality and make it mora palatable: "... 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 had a budget deficit of 7.7 per cent in 1995. By 1998, the crucial year for approval of its euro membership, this had been reduced to 2.7 per cent, by far the largest drop among the Euro 11. In the same period tax receipts increased marginally and government spending as a proportion of GDP fell only slightly."

The chronology of events is presented below:

And while Mario Draghi managed to evade serious inquiry following his role as head of the Bank of Italy at a time when Monte Paschi was engaging in various swap transactions as reported previously, just as he managed to evade scrutiny in his role as a Goldman banker before that, when he was instrumental to aiding and abetting Greece in its economic embellishment efforts (even as Goldman was being paid generously for its "advice") when in June of 2012 the ECB outright refused to respond to Bloomberg's FOIA request on the central bank's Greek-ECB-Goldman currency swaps, Mario the untouchable, may finally be called to task: after all he was once again instrumental in covering up yet another financial crime this time as director-general of the Italian Treasury!

Only a handful of Italian officials, past and present, are aware of the full picture, according to bankers and government sources. The senior government official who spoke to the Financial Times and the experts consulted said the restructured contracts in the 2012 Treasury report included derivatives taken out when Italy was trying to meet tough financial criteria for the 1999 entry into the euro.


Mario Draghi, now head of the European Central Bank, was director-general of the Italian Treasury at the time, working with Vincenzo La Via, then head of the debt department, and Ms Cannata, then a senior official involved with debt and deficit accounting. Mr La Via left the Treasury in 2000 and returned as its director-general in May 2012 – with the backing of Mr Draghi, according to Italian officials.


An ECB spokesman declined to comment on the bank’s knowledge of Italy’s potential exposure to derivatives losses or on Mr Draghi’s role in approving derivatives contracts in the 1990s before he joined Goldman Sachs International in 2002.

Of course the ECB will decline to comment: doing so would open up the can of worms of just how much alleged criminal activity Europe's central bank may have engaged in for its own benefit, for the benefit of members such as the Bank of Italy, and of course, for the benefit of such "financial advisors" as Goldman Sachs. After all let's not forget that we are now into the fourth year of the Fed's investigation into Goldman's role as facilitator of Greek currency swaps. That's right: we remember, and we are still holding our breath.

To summarize:

  • Mario Draghi, complicit and aware of the Greek currency swap arrangement, as a member of Goldman Sachs in the mid-2000s.
  • Mario Draghi, complicit and aware of various Monte Paschi derivative deals, as head of the Bank of Italy.
  • Mario Draghi, complicit and aware in rejecting Bloomberg's FOIA requests that would have blown all of these scandals wide into the open, as current head of the ECB.
  • And now, Mario Draghi, complicit and aware of at least one (and likely many) Italian window dressing derivative deals with one or more US investment banks, as Director-General of the Italian Treasury.

Just where does Mario Draghi's rabbit hole of endless scandals finally end?

Still, the ability to push yet another Draghi-centered scandal under the rug may be impossible especially if Italy suffers billions in losses on this latest derivative fiasco:

While the report leaves out crucial details and appears intended not to give a full picture of Italy’s potential losses, experts who examined it told the Financial Times the restructuring allowed the cash-strapped Treasury to stagger payments owed to foreign banks over a longer period but, in some cases, at more disadvantageous terms for Italy.


In April police of the Guardia di Finanza visited the offices of Maria Cannata, head of the Treasury’s debt management agency, asking for more information on the report drafted by the agency, including details of the original derivatives contracts, the senior official said.


The leaking of the 2012 Treasury report, which was also obtained by La Repubblica, the Italian newspaper, is likely to fuel debate over Italy’s exposure to derivatives. It comes at a time when markets have begun to exhibit new nervousness with the cost of borrowing rising sharply recently for eurozone peripheral countries like Italy.

Needless to say the last thing the scandal-prone country, whose most popular politician was just sentenced to 7 years in jail for underage sex, is yet another disclosure that its financial system has been lying, and is about to suffer billions in cash outflow for legacy liabilities. Liabilities, whose total damage may be in the tens of billions:

The report does not specify the potential losses Italy faces on the restructured contracts. But three independent experts consulted by the FT calculated the losses based on market prices on June 20 and concluded the Treasury was facing a potential loss at that moment of about €8bn, a surprisingly high figure based on a notional value of €31.7bn.


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.

And with derivatives being zero sum (unless there is a counterparty failure in the collateral chain in which case everyone loses), Italy's loss was someone else's gain. In this case Morgan Stanley (among others):

Early last year Italy was prompted to reveal by regulatory filings made by Morgan Stanley that it had paid the US investment bank €2.57bn after the bank exercised a break clause on derivatives contracts involving interest rate swaps and swap options agreed with Italy in 1994.


An official report presented to parliament in March 2012 found that Morgan Stanley was the only counterparty to have such a break clause with Italy and disclosed, for the first time, that the Treasury held derivatives contracts to hedge some €160bn of debt, almost 10 per cent of state bonds in circulation.


The Bloomberg News agency calculated at the time, based on regulatory filings, that Italy had lost more than $31bn on its derivatives at then market values.

In the past, the orders to push back investigations into such illegal, shady dealings most certainly came not only from the very top Italian power echelons, but from the ECB, and ultimately, banks like Goldman. The question is: will Italy's state auditors, the Corte dei Conti, finally stand up for the people and expose the corruption, and the people behind the billions in soon to be revealed losses:

Releasing its own report in February on the state accounts for 2012, Salvatore Nottola, prosecutor-general of the Corte dei Conti, noted that “the damage done to the state’s income constituted by the negative outcomes of derivatives contracts is particularly critical and delicate”.


The Corte dei Conti declined to comment on the report and the finance police did not respond to inquiries. A finance ministry spokesman confirmed the existence of the report but declined to comment on its contents and possible losses, citing commercial confidentiality. He would not comment on requests made by the police to Ms Cannata.


Gustavo Piga, an Italian economics professor, caused a storm in 2001 when he obtained one such derivatives contract taken out in 1996 and accused EU countries of “window-dressing” their accounts. Mr Piga did not identify the country nor the bank involved but they have since been named in the media as Italy and JPMorgan.


“Derivatives are a very useful instrument,” Mr Piga wrote. “They just become bad if they’re used to window-dress accounts,” he said, accusing the unnamed country of disregarding standard derivatives contracts in order to delay until a later date its debt interest payments.

And speaking of openness, transparency, and the lack thereof, none of the above is news. At least not to the one person most instrumental for ushering in the failed European monetary experiment: Germany's Helmut Kohl.

Last year Der Spiegel, a German magazine, obtained official documents which it said demonstrated that in 1998 Helmut Kohl, then chancellor, decided for political reasons to ignore warnings from his experts that Italy was believed to be “dressing” up its accounts and would not meet the Maastricht treaty criteria for entry, including a budget deficit less than 3 per cent. Italian officials, including former finance minister Giulio Tremonti, have said the EU was aware and approved of Italy’s use of derivatives in the build-up to euro entry.

Not surprising considering in his own words, "he acted like a dictator to bring in the euro." And considering that Europeans have gladly ceded all their rights and powers to live in a dictatorial pipe-dream for the past decade, and which has since exploded into the worst depressionary nightmare the "developed" world has ever known, perhaps all those 20%, 30% and more unemployed should look in the mirror when deciding whom to blame for their plight.

But don't worry - the Goldmans, the Mario Draghis, the Cannatas, and the Berlusconis of the world are doing perfectly well, thank you, even as Greek and Spanish youth unemployment is now in the 60% range. Which is roughly just as one would expect of every neo-feudal, dictatorial regime.

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Newmoney24's picture

buy more pizza to help Italy's economy

max2205's picture

Dont hate on the cheaters, liars, criminals.....

Short Memories's picture

Reminds me of "Four legs good, two legs better"


tooktheredpill's picture

oh c'mon, Greece fooled the EU? Brussels were more than happy to invite them into their lair.

Ronaldo's picture

This is very bullish!

cloudybrain's picture

we will see more countries have liquidity, derivatives, debt and hyperinflation problems

Yen Cross's picture

     This is not a typo. 

     02:10       EUR             Italian 6-Month BOT Auction     1.052% >  0.538%      Yes, that's double the previous auction!

NoDebt's picture


If you thought near-zero percent interest would break stuff, just watch all the broken glass as they rise off of zero.

As Dr. Krugman likes to say: 'debts and deficits don't matter.'  To which I add: until there is a cost associated with them. I think we're about to see cost associated with them for the first time in a long time.

Poor Grogman's picture

Mario should be allowed to explain his version of the story in front of a large crowd of unemployed and drunk soccer fans.

Now that would be worth paying to see...

sgt_doom's picture

I just can't believe all this bad-mouthing of Mario, after all, he is a member of the illustrious Group of 30, established by the Rockefeller Foundation in 1978 to speak on behalf of the speculators and central bankers:

and the membership roster is exemplary:  Jean-Claude Trichet (when was he last indicted in France?), Timothy Geithner (go, Timmy, go!), Paul Krugman, Ernesto Zedillo (whose extradition was recently requested by the Mexican government, but denied by the American gov't --- seems he had something to do with signing that NAFTA when he was the Mexican prez back in the early 1990s, then out of nowhere Zedillo decides to float the Mexican peso, which allows it to be arbitraged downward in relation to the US dollar to which it was pegged, allowing for the banksters to buy up the Mexican banks, forbidden to be foreign owned until the passage of NAFTA, much cheaper), Larry Summers ("women can't do science" and let's blow up Harvard's Endowment Fund, etc., along with the US economy, etc.), Kenneth Rogoff ("I still can't figure out those darned Excel spreadsheet functions!"), Philipp Hildebrand (BlackRock), William (the dickhead) Dudley, and a bunch of other neat guys!

Wile-E-Coyote's picture

If they are quoting a figure then you know the real losses are much, much worse. Italy is f***d

taketheredpill's picture

Agreed.  If these losses are either linked directly to Contracts that took Deficit/GDP down from -7% to -2.5%, or are linked to papering over losses on those contracts, then real figure must be larger. 

Itlay GDP back then is about $7 Trillion.  5% Deficit is $350 Billion.


$35 Billion sounds like pocket change.



GreatUncle's picture

These sort of articles really make you wonder if quite a few sovereigns have been masking their true budget defecits and debt in derivatives for quite some time. Are derivatives cloaked in the shadow banking really nothing but sovereign debts with a nice new name????

You could also ask is the USA debt really near 17 trillion or is it "MORE, MUCH MORE". Ditto the UK, EU, Japan and all the rest.

toadold's picture

When the bond hit's your eye like a big fresh cowpie that's a Mario. 

"What's a stop loss Mommy?", "That when you stop trading a semi-useless asset for a totally useless asset, now stop babbling and go give the butcher his weekly BJ and pick up some more tripe. while you are there."

jubber's picture

Incredibly the FTSEMIB is up over 250 points after this report.

chubbyjjfong's picture

Its hard to resist a FTSE massage, trouble is that Tinea takes a while to surface under the fingers nails, once thats noticed.. too late.. its already all up in your knob and its 'get the hell out at all costs'.  Long Anti fungal cream!

Devotional's picture

Bullish indeed ... there goes the gold "price" again :) Time to shop for some bullion. The Eurozone is not a mess, naaaaaah, not insolvent at all, naaaaaaah...

Satan's picture

The word " fiasco" was invented here in Italy.

chubbyjjfong's picture

The words "ce l'hai piccolo" were invented in Italy for Ben Bernanke.

svoboda59's picture

The price for entering the € goes the Government of Amato

XIII Legislatura (9 maggio 1996 - 9 marzo 2001)
elezioni politiche il 21 aprile 1996
Governo Amato II
Governo D'Alema II
Governo D'Alema
Governo Prodi
paulie's picture

3 communists who else ?

VonSalza's picture

Draghi is boss.

jubber's picture

FTSEMIB now up 350 points, just fucking crazy

Ghordius's picture

how I hate it when my beloved ZH becomes so keynesian and vague - as it often does when it comes to europe

example for keynesian: "...exploded into the worst depressionary nightmare the "developed" world has ever known, perhaps all those 20%, 30% and more unemployed should look in the mirror when deciding whom to blame for their plight"

example for vague: the words of Helmut Kohl, "live in a dictatorial pipe-dream for the past decade" and "neo-feudal, dictatorial regime"

Skin666's picture

So you're saying that things are hunky dory in Europe?

Ghordius's picture

nope - not at all. but I hate when ZH becomes so vague. who was behind this scam? The Squid. And yet Tyler fails to make a difference between the host and the parasite - meanwhile suggesting the recipe for solving the issues would be "do something" in the keynesian style

it's a bit more complicated than that, including the role of the ECB, the whole idea behind the restrictions about who was eligible for entering the eurozone, who scammed who in this regard, etc. etc.

Skin666's picture

It's not just the squid though is it...

Have you read "The Tragedy of the Euro" by Phillip Baggus?

The original free trade and faintly libertarian roots of the EEC was taken over by more socialist forces, as anyone acquainted with Praxeology could have logically deducted would happen...

We (ZH's) all know that government and centralization is a scam to centralize power, take the politicians further from the people they are elected to represent, and generally to rob steal and skim the wealth of the producers (the middle class), and give it to the unproductive (Politicians, special interests, banks, and the poor) in exchange for votes and further consolidation of power...

There are many details and semantics that can be argued over ad nauseum, but it doesn't change the fact that the people of Europe have been fucked over again, by the psychopaths that always rise to the top of politics...



shovelhead's picture

Extra credit for succinct pithiness.

Ghordius's picture

lol - I both agree in principle and disagree on many details regarding your comment

btw, the imo better article over this specific theme is here on ZH, from PivotFarm’s-€8bn-loss-draghi


to Philipp Baggus's book: imo most of it is distorting propaganda from a very British point of view - including the "free trade roots". The ECC previously and the EU now has never been about "free global trade" - except in the eyes of the British. On the contrary, it was always about presenting an united front vs certain unsavory sides of globalization, so you should, imho, score it as a "faintly protectionistic" thing - as a threath of protectionism if necessary

faintly libertarian? depends if libertarian means against the nation-state or just critical of it, but yes, broadly speaking, yes

a simple example: the EU is now drafting a little law that - if it passes - will fine Google et al with 2% of their global revenues if caught passing over personal data to governments. "faintly libertarian"? a club of sovereign nations minding a trade zone and fining immensely powerful megacorps for spying on behalf of... sovereigns? I'd say... yes

I reject this simplistic "government and centralization is a scam to centralize power", btw. your "the politicians further from the people they are elected to represent" is line of reasoning often used in the european context to dismantle the confederative roots of the thing in favour of federative (and so further centralistic) ones. most eurozoners have a completely differently structured view on the thing because we have a different approach to our "nation states"

example: Portugal. you could shut down everything "state" there, but you can't shut down the Portugese nation, culture, language, customs, history, etc. - so even if you would try in earnest, something else would arise and serve as replacement for what is now the Republic of Portugal. the same applies for even "little things" like a Greek state TV - there is a real demand for that

this does not apply this way to Wales, Scotland, England, New Zealand and every single state and the whole countries of the US, Canada and Australia

mkhs's picture

Well played.  From Draghi's fraud to Durden's vagueness to Baggus' distorting propaganda.

Totentänzerlied's picture

Pedantic, longwinded, vacuous, incoherent, and utterly moronic. It's almost as if you've distilled the essence of continental European intellectual imbecility.

You think politics has anything to do with anything. In fact, everything to do with anything. You lack even the faintest hint of adequate understanding to even begin to understand the problem, and thus are part of the problem.

Go sign some treaties, make up some statutes, circle-jerk with some MPs, whine about improperly applied policies, and demand the deference of your vassal subjects for your noble service.

I bet you think The Enlightenment was a good thing.


Ghordius's picture

politics has to do with everything, and everything flows back to politics, imho

how much has "The Problem" to do with the continent, in your opinion?

you are welcome, and I thank you for your criticism, though I miss... arguments

Josephine29's picture

Never fear the Italian Treasury has just told us there is nothing to see here!


The Italian Treasury has responded to the derivatives issue already. Via Google Translate


There‘s absolutely no foundation for the hypothesis that the Italian Republic has used the derivatives at the end of the nineties to create the conditions required for the entry into the euro.

I am reminded of the words of Jim Hacker from Yes Minister which I gather may have originated with Otto Von Bismarck.

Never believe anything until it is officially denied

The lies and fiddling of statistics never seem to stop do they?

WTFUD's picture

SuperMario! After his under the table back door sneaky cunt banksta criminal italian job he was the perfect fit to head/ mannage the international team on the global stage!
Meanwhile back on terra firma roma burns.

Skin666's picture

Somebody nail this to the door of the vatican...


Escapeclaws's picture

With the price of gold so low and Italy possessing an inordinate supply of gold, maybe this comes out now to serve as a pretext for raiding Italy's gold reserves.

paulie's picture

Thank you Tyler for this one and for writing the truth, may God protect you.

dcb's picture

hello, just like bernanke, just like geithner, these people are advanced into higher positions to continue the cover up, and because they can be trusted too keep attempting to hide what they fucked up.


plus, you don't take someone from high up in goldman unless you want someone with very dirty hands in the postion. this is exatly what they wanted and got.

taketheredpill's picture

Eur $ 8 Billion doesn't seem right.  Assuming these are contracts that are associated with Euro Entry (or purchased later as a short-term fix for problems from contracts from way back at Euro Entry) then are they associated with taking Deficit/GDP down from 7% to 2.5% then the Dollar amounts would be more than EUR $ 31 Billion wouldn't it?  Is this just one group of contracts that have somehow been disclosed.


shovelhead's picture

Magic by Mario.

Mario: "You watcha...Imma gonna pull a rabbit outta thisa hat...


Kid: "That's a stuffed rabbit."

Mario: "Real...stuffed? Hey, whatsa difference? She's a nice rabbit, no?"

taketheredpill's picture

Say Greece lost - 5B on their GS swap adventure.  Italy GDP is 30 X Greece.  So maybe Italy loses - $150 B?  This is 20 X the official disclosed losses, so maybe 10X is more reasonable guess at real number, say $ 80 Billion.

kennard's picture

Greece didn't "lose" anything. Italy has not "lost" anything.

See my comments below.

jesusonline's picture

Greece didn't "lose" anything. Italy has not "lost" anything.

Excuse me? Are you fucking kidding me or what? Most likely you are. 

 See my comments below.

So you call the Greek accounting debacle which led to skyrocketing of funding rates and the ensuing recession which turned into a full-blown depression and resulted in Greece having the highest rate of youth unemployment in the EU - A NON EVENT?

And Italy smuggling it's way into EU via derivative swaps is an OK too? 

You must be some kind of a con artist. 

The problem with your thinking is that twats like you say that twisting accounting rules doesn not really amount to anything, nah it's just some gimmickry.

Now if you could just give it a little thought about just who the fuck is on the austerity receiving end of free-wheeling banks selling derivative crap to could-care-less governments - that would amount to something. 

There are no "losses", everyone is a winner! You've made my day, no shit, you really did.  

Totentänzerlied's picture

There is no austerity. Sorry dude. All I see is welfare state, far as the eye can see. The most extreme austerity your greedy mind can imagine is still extreme socialist insanity compared to the most advanced nation states of 100 years ago. Perspective is what you lack.

kennard's picture

Gaining Eurozone membership permitted Papandreou to continue running deficits. If the "accounting gimmicks", as you call them, had not been available, then Greece would have had an economic crisis a decade early, accompanied by necessary belt-tightening. They would not have had the opportunity to dig themselves a deeper hole. They might well have restored their fiscal ship and regained a strong economy.

So where should your anger be directed? At the socialist Papandreou who wanted to run deficits forever? At the enabler EU (i.e. Germany) that wanted Greece as a captive market for its products? At American investment banks trying to make a buck?

If your accountant told you that he could get a new loan for your business by using some legal "accounting gimmicks", you borrow and then cannot repay in a few years, who then is responsible for that bad decision? In politics, neither the voter nor poltician is responsible for bad outcomes, so who gets blamed?

kennard's picture

Currency swaps were used to enable countries that did not meet the 3% deficit-to-GDP and the 60% debt-to-GDP limits to qualify for EEC membership. This is well documented. The essence of the accounting slight-of-hand is set out on pages 117 et seq of a 2001 paper by by Gustavo Piga, the economist referenced in the FT article:

Interest expense was lowered by using an EEC accounting rule that recorded the interest expense of the pre-swap obligation, in these cases a low-rate denomination. Recorded debt was similarly reduced.

Investment banks benefited from advisory fees for structuring the transactions and transaction fees on swaps.

The accounting mismatches with reality had to be corrected at maturity, which is what we are now seeing. A simple analogy would be an FX carry trade gone bad due to exchange rate: bad news, but to be expected. There are no "losses" and the only "scandal" is the accounting shuffle to qualify sick men for EEC membership.

Another analogy are public corporations, which regularly enter into transactions that boost recorded earnings using FASB/GAAP, but are of little economic value. Sale-leasebacks that lack a cross-border tax component are an example. These transactions are often not recorded in the footnotes and generally increase share price/market cap, so, yes, accounting rules should be changed.

With governments, however, it is all political, so there is much squealing when it is time to pay the piper.