Why Italy faces a derivatives time bomb


Ian Simpson
Reuters
March 11, 2010

Financial markets are gripped by the role derivatives have played in Greece’s debt crisis, but Italy also has a derivatives time bomb, and hundreds of cities are in the €24-billion blast zone.

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Many local governments eager to cut financing costs for years rushed to sign up for complex derivatives contracts, even when the terms were in English. But some cities, facing big losses when interest rates go up, are now trying to pull out of derivatives and suing the international and local banks that arranged the deals.

In a test case, a judge in Milan will decide in coming weeks whether to try 13 people and four banks – UBS, Deutsche Bank, Germany’s Depfa and JPMorgan Chase & Co – on aggravated fraud charges. The case stems from a derivatives swap over a €1.68-billion 30-year bond, the biggest issued by an Italian city.

Milan, Italy’s financial capital, is facing a €100-million loss on the deal, city officials say. Milan is also suing the banks for €239-million in overall liabilities.

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