Italian Bond Yields Spike To 6 Week Highs On Surge In Monte Paschi Loss Expectations

Nearly a month ago, the first expose on a previously secret money-losing derivative at Italy's Banca dei Monte Paschi emerged and nobody took notice. A few days later a second derivative emerged, and the market finally paid attention sending the stock plunging and political spirits in Italy stirring due to the repeatedly bailed out bank's close ties to the leading Italian Democratic Party. Then a third and a fourth derivative emerged. This, of course was just after Italy's Finance Minister Grilli assured everyone that Monte Paschi is "solid", that oversight of the bank was "continuous and thorough", that "aid was not to help an insolvent bank" and most hilariously, that "the Italian banking system is unique for no bailouts" (except for all the bailouts as Rajoy might add).

It was also after various assurances that the first two derivatives were all there was, that Mario Draghi did not know about any of this, until it was revealed he knew years ago, and that no other banks would be impaired. Well, while we still don't know how deep the derivative rot has spread in Italy, but it is guaranteed it does not stop at BMPS, we have now learned of yet another derivative, this time with JPM, that the bank had lied even more, and also that the previously loss estimates for Monte Paschi were, naturally, optimistic and that the final loss may be up to (or over) €1 billion.

Reuters reports:

Monte dei Paschi lied to the Bank of Italy about the terms of the so-called FRESH 2008 hybrid instrument, worth around 1 billion euros, which it used to partly fund its acquisition of Antonveneta, a judicial document showed on Wednesday.


The document, obtained by Reuters, said Monte dei Paschi's then chief financial officer Marco Morelli had signed an indemnity document in favour of J.P. Morgan which was hidden from the regulator. J.P. Morgan in 2008 underwrote a 1 billion euro capital increase in Monte dei Paschi, and then structured the Fresh 2008 hybrid instrument, convertible in Monte dei Paschi's shares, and sold it to a number of investors.


J.P. Morgan in Milan declined to comment.


According to the prosecutors' document, Morelli also gave a so-called indemnity side letter to Bank of New York, which acted as an intermediary in the FRESH 2008 deal, "at the time of a meeting of the FRESH investors", which was also hidden from the regulator.


Prosecutors suspect that the indemnity side letter violated requirements set by the Bank of Italy by making the FRESH 2008 work like a bond rather than an hybrid equity instrument.

At this point the latest bailout of BMPS, which the Bank of Italy has already pre-cleared, appears assured, as does the emergence of even more money-losing derivative transactions.

The only unknown is how many other banks will be dragged down once Silvio, in an attempt to discredit the Democratic party and gain even more popularity, reveals all the dirty laundry that only he knows as he was the Prime Minister until November 2011 when Goldman's new head of the ECB, Mario Draghi forced him to resign by sending Italian bonds plunging.

The market appears unwilling to wait to find out, sending Italian bonds sliding, and yields spiking to 4.583% or the highest since December 14.

Revenge may well be a dish best served uncollateralized for Bunga Bunga, as Silvio exposes just enough dirt to get none other than the man who was responsible for his ouster to step down, this time from his role as ECB head as even more humiliation is piled upon the former Bank of Italy head.