REFILE-Italy faced potential derivatives cost of 29 bln euros in September

Tue Jan 21, 2014 11:26am EST

By Giuseppe Fonte

MILAN Jan 21 (Reuters) - Italy's central government faced a potential cost of as much as 29 billion euros last year from derivatives deals, mostly made with foreign banks, Bank of Italy data show.

Derivatives contracts with foreign banks accounted for 27 billion euros of Italy's international liabilities at the end of September, the Bank of Italy said in its economic bulletin on Friday.

Separate central bank data showed that by June, derivatives with domestic banks brought the total exposure to 29 billion euros. A source close to the matter said the situation hadn't changed in the third quarter.

The data was released as part of a transparency push by the Treasury. It has begun to provide previously unavailable data to the central bank after a controversy erupted in 2012 over a 2.6 billion-euro payout to Morgan Stanley to close out derivatives contracts.

The 29 billion-euro exposure represents the mark-to-market value of derivatives contracts taken out by the Treasury. It shows how much the Treasury would have to pay at a given moment to terminate the contracts early. Their value changes over time in line with changes in market interest rates.

Italy holds derivatives contracts based on government bonds worth around 160 billion euros, or 9 percent of the total value of its bonds issued. More than half of them are interest rate swaps, allowing the Treasury to swap a floating rate for a fixed one, hedging against a rise in interest rates.

Derivatives contracts held by Italy's central and local administrations have added 2 billion euros a year between 2010 and 2012 to interest payments, national statistics data show.

Italy's foreign liabilities, including the Treasury's derivatives exposure to foreign banks, outstripped its foreign assets by 450 billion euros ($610 billion) at the end of September, the Bank of Italy's bullettin showed.

Intesa Sanpaolo economist Luca Mezzomo said that at 29 percent of national output these liabilities, known as Italy's "net international investment position" fared well in comparisons with other southern European counties also hit by the sovereign debt crisis.

"Countries like Portugal, Greece or even Spain, that has started running a current account surplus, all have a net international investment position of around 100 percent of gross domestic product," he said. ($1 = 0.7376 euros)

Comments (0)
This discussion is now closed. We welcome comments on our articles for a limited period after their publication.