Italian PM Under Fire Over Bank Crisis

Rachel Sanderson
Ian Cumming | Axiom Photographic Agency | Getty Images

Mario Monti, Italy's prime minister, was forced to offer to recall parliament on Thursday amid questions about his government's handling of the financial crisis at Monte dei Paschi di Siena and the role of the central bank.

Shares in Italy's third-largest bank by assets, which has requested a second state bailout in four years, have fallen more than 22 per cent in the past few days since revelations five days ago of derivatives transactions that may force the 500-year-old bank to restate hundreds of millions of euros of losses.

Supervision of the struggling institution by the Bank of Italy while Mario Draghi, European Central Bank president, was governor has come under attack as an increasingly fierce political outcry erupts in the run-up to national elections next month.

(Read More: Battle Lines Drawn in Italy's Election)

Among the most vocal criticisms of the central bank, which traditionally has oversight of the Italian banking system, was Mr Draghi's long-time rival Giulio Tremonti, the former finance minister who is again running for office on February 25 for the centre-right.

"In this specific case it is strange that the supervision was not preventive," Mr Tremonti said.

In a sign of the severity of the situation, Giorgio Napolitano, Italy's head of state, made a rare entry into the financial arena. "If the situation is serious we are right to be concerned but I have full confidence in the operations of the Bank of Italy," he told reporters.

In a statement released late on Wednesday, the central bank said Monte dei Paschi had "hidden" information on the derivatives transactions struck between 2006 and 2009, a period during which Mr Draghi was governor.

(Read More: Monte Paschi Shares Plunge on Derivative Loss Fears)

The Bank of Italy said the "true nature" of some of the deals emerged only recently, "following the discovery of documents kept hidden from the supervisory authority and brought to light by the new management of MPS."

It added supervisory and judicial authorities were investigating the transactions.

The ECB told the Financial Times that it was a matter for the Italian authorities and declined to comment.

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Italy's centre-right party, led by Silvio Berlusconi, has seized on the issue to attack its centre-left opponents, who have had long institutional ties with MPS. "Monte dei Paschi is close to collapse," commented Angelino Alfano, secretary of the People of Liberty. "This is an example of how the left would govern the country."

Il Giornale, a Milan daily owned by the Berlusconi family, ran banner headlines saying the more than €4bn paid by Italians in a widely hated property tax imposed by Mr Monti was in effect going to prop up a failed bank.

Shares in Monte dei Paschi, whose shareholders on Friday are due to vote on a €3.9bn bailout from the Italian state, extended losses to give it a market capitalisation of just €2.75bn.

In a letter sent to the bank's employees, Fabrizio Viola, new chief executive of Monte dei Paschi, reiterated that the board had requested an additional €500m in state aid in November. He has put the value of the losses from the transactions at around €720m.

Mr Viola added that the board had already "identified further possible actions that could be taken if necessary". Monte dei Paschi has said it could seek to renegotiate the derivatives deals.

(Read More: Italy Has Regained Respect: Mario Monti)

The bank's board in a statement condemned the "exploitation" by politicians of the bank's situation and reiterated that the lender's request for state aid was "unequivocally sufficient" to restore its financial health and pave the way for its turnaround. Talk of "bankruptcy" was groundless, it added.

Analysts remain concerned that the derivative losses, which are expected to push the bank to a €2bn annual loss for 2012, may increase the risk of the bank being partially nationalised as it will force the state to take an equity stake because the bank will not be able to repay its bail out bonds.