Ancient haven San Marino fights for banking life

By Deepa Babington

SAN MARINO (Reuters) - San Marino has seen medieval intrigue and papal army invasions in its 1,708-year history, but a modern-day banking scandal and blitz on tax havens risks bringing the world's oldest republic to its knees.

From its hilltop perch near Italy's Adriatic coast, the offshore banking center just a third of the size of Washington D.C. is battling a concatenation of crises -- capped by a money-laundering scandal at its largest bank -- that has forced a frantic rethink of its financial model.

"We're not going to hide that this is a difficult time for San Marino," Antonella Mularoni, the state's foreign secretary said in her office with 19th-century frescoes on the ceiling.

"It's been a few months of huge difficulties and we clearly need the crisis to blow over rapidly."

Blow after blow have rained on the Most Serene Republic of San Marino in months, leaving the city-state of 31,000 people harder hit than larger offshore rival Luxembourg, according to the Fitch ratings agency which downgraded its sovereign ratings.

First came the credit crunch and ensuing downturn, followed by a global crackdown on offshore centers to fight tax dodging. Arrests of top executives at its most important bank, Cassa di Risparmio della Repubblica di San Marino (CRSM), and a tax amnesty approved by Italy this month completed its misery.

"A climate of uncertainty and mistrust has been generated -- for broader reasons and for reasons specifically related to San Marino -- which is certainly weakening the system," said Biagio Bossone, chairman of San Marino's four-year old central bank.

"Now when one talks of San Marino, it is spoken of badly. It seems as if the world is against us."

Wealth managed in San Marino slipped to about 13.6 billion euros ($19.41 billion) in April from over 14 billion last August, while unemployment has risen as fewer tourists visit to buy the microstate's postage stamps and souvenirs.

Funds paid out to finance temporary layoffs jumped more than six-fold in January-April from a year earlier.

After 3 percent annual average GDP growth from 2000 to 2008 -- which easily outpaced neighboring Italy's sluggish 1.2 percent average in that period -- San Marino's government now expects its economy to contract 10 to 12 percent this year.

CHRISTIAN REFUGE

Legend has it that San Marino was founded on Mount Titano in the fourth century by a stonemason seeking a refuge for Christians, though lately it enjoys a less altruistic image as a haven for Italians hiding from the taxman.

Recent scrutiny on tax havens and the threat of sanctions by G20 nations have made it clear it can no longer rely on the promise of anonymity to lure capital.

"It was easy for big countries -- they didn't have enough money at home at a time of crisis so they've gone to search where they think the money could be," Mularoni said.