Corruption, EuroStyle: ECB Chief Draghi Fudged Italy’s Books to Secure Eurozone Entry, Italy Stuck With Derivative Losses

As readers of the financial press may recall, there was a kerfluffle over the fact that Greece had used a currency trades designed by Goldman in 2001 to mask the level of its indebtedness and secure Eurozone entry. Goldman continued to help Greece dress up its books and offered to intervene in 2009, although Greece turned them down then. The amount of debt raised, as in hidden, was €2.8 billion in 2001, and as a result of a restructuring in 2005, increased to €5.8 billion. Goldman earned large fees for these deals.

These transactions were of keen interest in the Eurozone, not merely because Goldman had helped Greece fudge its accounts and without this, erm, help, Greece would not have qualified for Eurozone entry (there have been efforts to downplay the accounting finesse, since Brussels was allegedly aware of the fact that Greece really was not qualified to enter). Mario Draghi, who was then the heir apparent to Jean-Claude Trichet as ECB chief, had joined Goldman in 2002 and was head of the group that handled the restructuring in 2005. The Bank of Italy issued a denial about Draghi’s involvement that Simon Johnson read as unpersuasive.

Roughly a year later, Trichet vetoed a request by Bloomberg to the ECB’s EU’s court to release more information. This was a month before the ECB nomination hearing for the new chairman. Pascal Canfin, Member of Parliament and former chairman of the ECON committee, grilled Draghi on how he could have known about these transactions and allowed them to go through. He was not satisfied with the answers. The New York Times reported after Draghi’s nomination was approved that Draghi had marketed similar transactions to European govenments

A new story by Financial Times shows that Draghi and the ECB had far more to hide than the Greece scandal. It appears Draghi was directly involved in arranging similar, much larger transactions for Italy while Draghi was the director general of the Bank of Italy, in 1999. Draghi then went to Goldman. The FT also reports that Draghi’s deputy on these deals, who left the Bank of Italy in 2000, returned as director general in 2012 with Draghi’s support. Sure looks like payback time.

The scandal is coming to a head now because the Italian government is set to lose billions of euros as a result of restructuring of derivatives, including the 1999 derivatives, at the worst of the crisis. The FT stresses that all the details are not known, but the losses look to be troubling:

The report does not specify the potential losses Italy faces on the restructured contracts. But three independent experts consulted by the FT calculated the losses based on market prices on June 20 and concluded the Treasury was facing a potential loss at that moment of about €8bn, a surprisingly high figure based on a notional value of €31.7bn.

The names of the banks involved in these transactions have not been disclosed, but previous reports show that Morgan Stanley and JP Morgan have been among the Italy’s counterparties.

There are two, possibly three, ugly implications.

First, the revelation that Italy is facing previously undisclosed derivative losses comes at a time when periphery Eurozone countries are again under stress, including Italy. From Ambrose Evans-Pritchard today at the Telegraph:

Mediobanca, Italy’s second biggest bank, said its “index of solvency risk” for Italy was already flashing warning signs as the worldwide bond rout continued into a second week, pushing up borrowing costs…

The report warned that Italy will “inevitably end up in an EU bail-out request” over the next six months, unless it can count on low borrowing costs and a broader recovery….

taly’s €2.1 trillion (£1.8 trillion) debt is the world’s third largest after the US and Japan….Italian 10-year yields spiked to 4.8pc, up 100 basis points since the Fed began to toughen its language in May. But Mediobanca is particularly concerned about the gap that has emerged between yields on short-term bills (BOTs) and longer-term bonds (BTPs) near maturity that expire at the same time. BOTs retiring on July 31 are trading at a yield of 0.48, while the equivalent BTP is trading at 0.74pc. The reason is that BOTs are protected from debt restructuring….

Mediobanca said the trigger for a blow-up in Italy could be a bail-out crisis for Slovenia or an ugly turn of events in Argentina, which has close links to Italian business. “Argentina in particular worries us, as a new default seems likely.”

Second is that given Draghi’s involvement in Italian books-cooking, it seems even more implausible than before that he did not know of the Greece deals with Goldman.

Third is that if Goldman was one of the counterparties to Italy when Draghi was at the helm of the Italian central bank, his subsequent employment looks an awful lot like a payoff.

The Bank of Italy and the ECB are certain to fight tooth and nail to defect questions about Draghi and might not be above using market stresses as part of their excuses for stonewalling. But the magnitude of these losses may galvanize the Italian public. The matter is now in the hands of the state auditors and the financial police, so how far this goes will also be a function of how they operate in the face of large public scandals. Stay tuned.

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  1. jake chase

    Gosh, who would have believed that Eurocrats cooked the books to lever southern countries into the Eurozone? All this time I thought all they wanted was to make vacation travel easier for the little people.

    The Euro has proved to be the greatest fat cat coup since…well, since NAFTA.

  2. Chris Rogers

    When it comes to looting the public purse and pockets of the average Joe across the EU, no one is more professional, or indeed, gentlemen like than our own European bankers – Yanks are amateurs by contrast and would never be allowed into the elite clubs that our European brethren inhabit between stealing our cash.

  3. AbyNormal

    my fav grumbling from the Eurozone Crisis Live

    Italian Ministry explains scrutinized derivatives…

    “Like any insurance, however, if the event to which you protect yourself from happening, you carry a cost, although it remains justified by the priority given to the prevention of serious consequences in the event of adverse scenarios.”

    Efficiency in Fraud.
    ~Profoundlogic (one of NC’s very own’)

  4. Jose

    The request by Bloomberg was to the European General Court (attached to the European Court of Justice), not to an “ECB General Court” that does not exist.

    There is no “Court” at the ECB, a truly unaccountable body that is likely the main center of power within the institutional structure of the EU/eurozone.

    1. Yves Smith Post author

      Will correct, hasty AM drafting (working from a source, must have misread, aargh). Thanks.

      But how did Trichet block it, which is what the summary I relied on (pretty well referenced) said took place.

      1. Jose

        The Bloomberg piece provides a hint – that’s the way the system is supposed to work. The ECB is insulated from any kind of meaningful control. It´s a really unaccountable Institution – a chef d’oeuvre of European architecture.

        From the article published at

        “Unlike the Bank of England and the U.S. Federal Reserve, the ECB doesn’t publish minutes of governing council members’ deliberations at policy-setting meetings. The ECB argues that policy shields policy makers from political pressure in their home countries.

        In a separate case, the ECB this year won the backing of the European Ombudsman in a decision to keep its dealings with governments private. The Strasbourg-based EU agency, which handles complaints against EU institutions including freedom-of- information requests, sided with the ECB’s decision to withhold an August 2011 letter to the Spanish government on economic reform in response to a public access filing.

        Disclosing the letter could expose Spain to “speculative threats” and undermine its economic policy, the Ombudsman said in its assessment of the case published in July.”

  5. allcoppedout

    This is an old story updated. If governments, even if south of the Olive Line, have been and continue doing this kind of bent accounting, what have the banksters done and continue with?
    I’ve been working on energy figures for a petrol from air machine (there is a real prototype). Obviously we’d like energy out to be more than energy in (air is still free). All I need to do is include the next run’s output and discount the input to future years to make it work. If this seems bent, what about using past and current losses as Tier 1 capital because of future worth (of losses) set against future tax!

    The idea of accounting fraud is very old – and the main idea in it involves hope that future good times will cover it up. At this point one can say the risk was worth it because without the fraud there would be no business and no current profits – everyone, including creditors get paid in full instead of cents on the dollar haircuts. I’ve know many businesses that lied for a loan and then paid it all back by work on the future contract it enabled.

    The reliance on good time bubbles of decent return and growth generally has some attraction as risk-taking – but current accounting now neglects that real work is needed to provide return and that nine out of ten risks have to succeed for the system to work.

    My guess is that none south of Olive Line countries also cook books. If there was real transparency, surely our debates would be very different and based on a widely accepted spreadsheet with figures we all trusted. My client’s petrol for air process ‘works’ commercially now subject to ‘ifs’ – including energy input that would normally be wasted in electricity generation, and almost (with current catalysis) on the basis of constant input from, say, wind power on the Hebrides. These costings are complex, but we could all follow them and add ‘what if’ variations. Given investigatory carte blanche I suggest we’d all be able to find what is rotten in the State of Italy quicker.
    I suspect the game is you show me yours and I’ll show you mine. The first to undress in public have already been shafted – Ireland, Greece, Cyprus … the name of the game is to keep your trousers on and prevent measurement of ‘inflated claims on the size of the economy’.

  6. Can't Help It

    Will turn out to be another non-event in the end. As long as there’s pasta to eat, what’s a couple of billion dollars among friends? Over the past year, a clown’s made it into the electorals, another clown made a political return and things are still the same. Again, my belief remains the same, the so called austerity has been a faux one irregardless of the so called impact, etc. I know any arguments against austerity is unpopular in this site, but then again it must not be so bad after all, otherwise there’s already blood on the streets by now.

  7. Yancey Ward

    One may as well be shocked watching the Sun rise in the morning. Did anyone, and I mean anyone, really believe Italy qualified to join the Euro under the terms of the treaty?

  8. TheCatSaid

    On a related matter–when can we expect a post on the explosive revelations coming out of Ireland?

    Since this past Sunday–and continuing daily–audio tape excerpts are being released. They are in-house tapes of phone conversations between top-level bankers at Anglo Irish Bank in the lead-up to the Irish bank guarantee in fall of 2008. There are also tapes made after the bank guarantee.

    The tapes reveal bankers laughing at their scheme to deliberately misrepresent the size of bailout that Anglo Irish bank needed, laughing at the Irish Central Bank officers, and laughing at the bank regulators.

    It is remarkable to hear these uncensored conversations.

    1. NotTimothyGeithner

      I don’t know about good policy, but I think we are nearing a point where the neo-liberals and the people who have gone along with them will begin to turn on them. Brazil’s government has been making promises about revenue and profit for next year’s World Cup. To a country like Brazil, its a status symbol which matters in the post-colonial world, but whatever their projections were. They now have to be made in light of 2 million people marching around on a random night and providing security. How does Brazil react when a rich American/European beats up an indian prostitute from the slums of Rio next year? They can’t squeeze the poor as the bus-fare protests have demonstrated, so their only way to diffuse the mob is to make serious changes which means weakening the power of the rich over everyone else or massive security increases which means a tarnished reputation, decreased tourism, and again higher taxes on some group (the middling and bourgeois classes if not the wealthy) which means destroying electoral coalitions.

      They have made a promise for $25 billion worth of new improvements. Who wants to buy Brazilian bonds when millions of people are in the streets? The money has to come from somewhere or the promise fails. In the end, these soccer tournaments are going to probably workout the way Brazil had hoped, and they aren’t going to have the money to lavish on defense industries and the playgrounds of the wealthy the way they thought because the money will go to the poor, the security state, or just not come from tourists and sponsors who don’t want to be associated with heavy handed practices in this age of the internet.

    2. NotTimothyGeithner

      The conservative PM of Albania who has more or less governed since the fall of the Iron Curtain was shown the door today in favor of the socialists who are promising to fight corporate and government corruption. It may be a small country, but my guess is the new government of Albania may not be rushing to pre-order F-35s.

  9. The Dork of Cork.

    Are we to feel some sort of moral outrage in this ?

    These guys are part of the greatest criminal syndicate the world has ever seen.
    Its what they do for Christ sake.

  10. Walter Map

    Draghi and Goldman have done nothing wrong. Banks and banksters are legally entitled to commit fraud and robbery. Usury was just the appetizer.

    For all you know, they’ve already sold off your body parts to help out their quarterly profit expectations. Pray they do not schedule physical delivery any time soon.

  11. The Dork of Cork.

    Its not explosive , its normal banking practice – these are very structured leaks.

    I kind of like the straightforward dialogue of those guys.

    Again ,Its what banks do ……

    The CB is their big sister.

    She likes to pretend they don’t sleep around like she did but knows better.
    Besides the money from whoring can be pretty good.

    The Irish story goes much deeper then little Anglo.
    Again those guys refer to The Bank of Ireland as “The Bank”

    After 2009 things get really interesting.
    Thats when the really big bank takes over formal control as M . Lynch leaves the building.

    I would have liked to be a fly on the wall during those meetings ………but we will never know.
    You see –
    Really big banks write history.

  12. gc_wall

    From a young age we are taught the benefits of exploitation, usually with euphemisms such as exploring, discovering, conquering, settling and trading. The acceptance of exploitation is related to the concepts of conniving and theiving. Capitalism cannot function without dishonesty. Profit margins, sales commissions, quality and durability are commonly portrayed dishonestly. Honesty is the enemy of capitalism; therefore, acceptance of dishonesty is essential to the infinite expansion of markets based on an unending growth in demand. When dishonesty can no longer support the artificial construct that moves a business plan, reality interfers and the plan collapses. Some exploitation has a longer shelf life than others stimulating gambling fever among investers.

  13. TC

    What is it with mouthpieces of the Anglo-American oligarchy recycling old news of late? First Snowden, now this. The Banca Monte dei Paschi collapse already resulted in this very same disclosure of cover up perpetrated by Draghi when he was at the BoI. So, now that Berlusconi is out of the way it’s time to attack a weak flank in hope of collapsing the euro and precipitating capital flight into the bankrupt core of the trans-Atlantic banking system, while at the same time creating an environment where choice assets become available for pennies on the dollar? It sure looks that way, huh.

  14. alex morfesis

    but what about germany…???

    did not berlin file bankruptcy around 2004/2005

    yet I cant seem to find any downgrades(not that I looked that hard)…but the City/State of Berlin was insanely underwater in respect to its pensions and obligations…yet moodys and s&P act as if life is beautiful…


    although it is amusing watching the kindergarten teacher finland has as a finance minister(jutta)dictate that greece needs to sell its governmental enterprises due to eu regs when finland has almost 50 percent MORE of government enterprises that would need to be privatized under these same “guidelines”…and the german finance minister…did he not have a brother running a nice little brewery subsidized and owned by the government until thomas’ heart attack and passing in january…

    details details…
    the eu rules are only for das little peoples…of south europe…

  15. don

    Since early on in the onging crisis I noticed all at the top who caused the mess moved higher or got reappointed.
    from an analytical standpoint the only reason I could see to do so was you could be sure they would be motivated to continue a cover up, and try to hide their mistakes. This is further proof.

    the ecb knew what they got in draghi, I am sure those at the top knew this as well. you don’t take someone high up in goldman without knowing they will look the other way when it matters most to the public, and are willing to do really shitty things for money

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