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Italy's Monti steps into Monte Paschi scandal

Outgoing Italian Prime Minister Mario Monti addresses the annual meeting of the World Economic Forum (WEF) in Davos January 23, 2013. REUTER
Outgoing Italian Prime Minister Mario Monti addresses the annual meeting of the World Economic Forum (WEF) in Davos January 23, 2013. REUTER

By Stephen Jewkes and Silvia Aloisi

MILAN (Reuters) - Italian Prime Minister Mario Monti weighed in on the scandal surrounding Banca Monte dei Paschi di Siena on Thursday, rejecting suggestions that the authorities had failed to spot large trading losses threatening the bank.

Already in need of a 3.9 billion euro bailout, Monte dei Paschi this week revealed loss-making derivatives trades that could cost it as much as 720 million euros (US$956 million), lurching center stage in a crucial general election campaign.

Seizing on the bank's historical links to the center-left PD party, center-right and far-left politicians canvassing for votes on February 24-25 have accused the PD of mismanaging the bank and have criticized Monti for using taxpayer money to save it. The PD is leading in opinion polls.

"Monte Paschi is worse than the Parmalat case. They tried to save Monte Paschi with an amount equal to what Italians have paid for (housing tax) IMU," center-right MP Stefano Saglia said in a note on Thursday.

Monti responded: "I don't think there is an issue of (regulatory) oversight." Speaking at a news conference on the sidelines of the World Economic Forum in Davos he added that he was ready to discuss the issue in parliament.

Monte Paschi said its board was shocked by how its situation was being used by politicians for campaign motives before the elections.

"The board ... is bewildered for how superficially the issue of recapitalization of the bank is being treated," the bank said. "The situation is completely under control".

Italy's President Giorgio Napolitano on Thursday described the situation at the bank as a "serious issue" and said he was confident the Bank of Italy would handle the case.

On Wednesday, the Bank of Italy said Monte Paschi, which is already being probed over the pricey acquisition of smaller rival Antonveneta in 2007, was cooperating with regulators and judicial authorities on the structured trades.

It said the new management, headed by Chairman Alessandro Profumo, had produced documents that had previously been hidden from it. When asked why the Bank of Italy had not been informed, the bank's Chief Executive Fabrizio Viola told Il Messaggero newspaper, "You'll have to ask them (the old management). I can only make suppositions. And I prefer to keep them to myself."

Profumo, former CEO at Italy's biggest bank UniCredit, took up his new role at Monte Paschi last April in place of Giuseppe Mussari, while Viola took over as CEO in February from then managing director Antonio Vigni.

Mussari stepped down as head of Italy's banking association late on Tuesday. He has denied any wrongdoing.

During the period in question the governor of the Bank of Italy was Mario Draghi, now head of the European Central Bank.

The Italian Treasury said on Thursday that Monte Paschi had not yet met conditions to receive some 3.9 billion euros of state loans that have been authorized but still not delivered, and added that the Bank of Italy still needed to give its opinion.

A spokesman for main shareholder Fondazione Monte dei Paschi di Siena told Reuters it did not exclude taking legal action against those responsible, depending on the outcome of analyses that are under way.

MORE TO COME?

Monte Paschi shares closed down 8 percent on Thursday at 0.2333 euros, valuing the bank at around 2.8 billion euros, a fraction of the sum Italian taxpayers are being asked to pump into it. The shares have lost a fifth of their value in a week.

The latest deals to be revealed are the so-called "Alexandria" trade with Japanese bank Nomura, the "Santorini" trade with Deutsche Bank and a derivative called "Nota Italia", which several sources said was structured by JP Morgan. JP Morgan declined to comment.

Findings of a review on the trades are expected to be submitted to the bank's board by mid-February.

UBS said in a research note on Thursday that it was including in its estimates a loss of 720 million euros on the derivative trades, pending more clarity, pushing the full-year expected loss to over 2 billion euros.

"Since the bank's statement spoke of an analysis exclusively of three products, the worry is there could be more and that's spooking the market," said one analyst, who asked not to be named.

Viola, who has said the three products were never submitted to the bank's board, told Il Messaggero the management would now open every drawer in the bank for caution's sake. "But I think we're very close to completing the (clean-up) job," he said.

The bank said on Wednesday that 500 million euros requested in extra state aid in November would be enough to absorb a hit on its capital from the structured trades, which were linked to its massive 24 billion euro Italian government bond portfolio.

"The bank is facing some tough challenges as its asset quality deteriorates and this is eroding its capital base. There is a risk of nationalization and a chance bondholders could be asked to share the burden of a bank restructuring," said a bank analyst, who asked not to be named.

The bank had a board meeting on Thursday to pave the way for a shareholder meeting on Friday to vote on a cash call underpinning the state bailout.

On Thursday, Italy's Treasury minister Vittorio Grilli said there was no sign that other Italian lenders could face problems similar to those at Monte Paschi.

"It's an isolated case and I don't see any reputational risk for other Italian banks which are much more solid than foreign banks as regards their exposure to derivative," said Giovanni Fiori, professor of accounting and business at Rome's LUISS Guido Carli university.

($1=0.7530 euros)

(Additional reporting by Lisa Jucca and Danilo Masoni. Editing by Sophie Walker)

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