UPDATE 2-Italy denies risk to public finances from debt derivative deals
MILAN, June 26 (Reuters) - Italy's Treasury denied its use of derivatives as a hedge on its huge debt pile posed any risk to public finances, following reports the country faced billions of euros in potential losses from one set of contracts.
The Financial Times and La Repubblica said the eight contracts, restructured at the height of the euro zone crisis in 2012, could result in combined losses of around 8 billion euros ($10.5 billion) based on market prices on June 20.
The newspapers, which quoted a report from the Treasury, said the deals had a total notional value of 31.7 billion euros and had been taken out in the 1990s, some while European Central Bank president Mario Draghi was director general of the Italian Treasury.
At that time the Italian government was trying to improve its accounts to meet tough criteria for euro membership by taking upfront payments from banks, the newspapers said.
The reports said the 2012 restructurings allowed the Treasury to stagger payments to banks over a longer period but in some cases at more disadvantageous terms. La Repubblica said the restructured deals, mainly interest rate swaps, were due to expire between 2017 and 2040.
Economy Minister Fabrizio Saccomanni dismissed concerns about the potential threat posed by the derivatives contracts.
"There is a big misunderstanding, there is no loss," he told reporters on Wednesday. "There has been no damage to public accounts."
The Treasury also said suggestions Italy had used derivatives contracts to help it squeeze its budget deficit to meet the euro entry criteria in 1999 were "absolutely baseless".
It said derivatives were used as a standard means of hedging against foreign exchange and interest rate risks and there was always a cost for such insurance, which was justified by the protection against more serious potential losses.
"The market value of derivatives instruments at a specific time... cannot in any case be treated as an actual loss," the treasury said.
However, the government admitted in March 2012 it had paid U.S. investment bank Morgan Stanley 2.57 billion euros to close derivatives contracts dating back to 1994.
The reports came as signs of nervousness have returned to financial markets following the U.S. Federal Reserve's indications that it is planning to wind down its extraordinary monetary stimulus measures.
At an auction of six-month debt on Wednesday, yields almost doubled from a month previously to hit their highest level since February although the Treasury sold its full targeted volume and the reports had little impact on market trading.
FORREST GUMP'S "BOX OF CHOCOLATES"
Further losses would complicate Italy's efforts to manage its finances in an increasingly risk-wary market, but even a potential figure of 8 billion euros would be dwarfed by the overall debt pile, which stands at around 2 trillion euros.
The European Commission said the reports did not alter its view that Italy could exit its disciplinary budget procedure, which requires Rome to peg its budget deficit below 3 percent of gross domestic product, but they caused bankers some unease.
"Eight billion is not a huge amount in relative terms and I don't think it will move the dial either way," Enrico Cucchiani, the chief executive of Intesa Sanpaolo, Italy's biggest retail bank, said.
"(But) it's not good news. One might recall the famous line from Forrest Gump - 'life is just like a box of chocolates, you never know what you're going to get'."
The Treasury confirmed that financial police had sought documentation on the contracts and Rome prosecutors said they had opened a file on the case, which is standard practice with operations involving the police.
Wednesday's report was the latest in a series that have highlighted the potential problems stemming from Italy's huge legacy derivatives portfolio. The government told parliament in March 2012 its derivatives holdings totalled some 160 billion euros, or almost 10 percent of state bonds in circulation.
"Many mistakes were made during the 1990s to get Italy into the euro and today those are turning into more debt, hidden in the official accounts," La Repubblica quoted an unnamed government official as saying. ($1 = 0.7649 euros)