UPDATE 1-Portugal says in talks with Santander on risky swap deals

Tue Jun 18, 2013 8:59am EDT

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LISBON, June 18 (Reuters) - Portugal's finance ministry said on Tuesday it was in talks with Spain's Santander to cut potential losses from high-risk derivatives contracts sold to Portuguese state firms and settle a row that has involved mutual threats of legal action.

"We are maintaining talks with Santander. Since there is a possibility of having a deal that would safeguard the state's interests, the negotiating channel is always open," a ministry spokeswoman said.

The government would prefer a quick solution to remove uncertainty, she said, adding that all contracts with early termination options bearing particularly high risk for state finances had already been cancelled.

Cash-strapped Portugal, recipient of an international bailout, has already renegotiated the costly interest rate hedging contracts sold by other banks, cutting potential liabilities by about a half to some 1.5 billion euros ($2.00 billion), the spokeswoman said.

Santander-Totta, the Portuguese unit of Santander, is the only remaining bank that has not yet accepted an agreement in the dispute. Lisbon has labelled the contracts "toxic" and threatened in April to challenge them in court.

Santander-Totta was not immediately available for comment on the issue.

Last week, the finance ministry said it had reached an agreement with JP Morgan in the row, which stems from complex hedging products sold by various banks to companies such as the Lisbon and Porto metro operators.

The row has echoes of similar disputes in countries such as Italy where bank clients said they were missold products. ($1 = 0.7492 euros) (Reporting By Sergio Goncalves, writing by Andrei Khalip, editing by Gareth Jones)

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