The sentence of the Cassation of May 12, and his effects could be catastrophic for some banks but enormously beneficial for local authorities and businesses. Let’s go back. For almost fifteen years, Italian banks, but especially foreign ones, have placed thousands of derivative contracts with 797 local authorities and throughout the country, unknown and incomprehensible to most. Municipalities, provinces and regions have found themselves, without knowing it, with billionaire holes, and the effects of those contracts still last today and will do so for many years to come, as some have a thirty-year term. It is very often about bets disguised as insurance, where the insured to act as insurer to the bank. After huge losses, in 2014 the government banned them, but the Ministry of Economy now has 149 territorial bodies still involved, which each year pay, in addition to interest on debt, 250 million for derivatives (source Eurostat). The potential losses estimated by the Bank of Italy only towards Italian banks (Unicredit, Bnl, Mps, Intesa) are 1 billion. –
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How the bet works
Also the central administration, that is the state has entered into contracts for over 150 billion to cover the risk of rising interest rates on securities that finance public debt; transactions renegotiated over the years, but many times always with the formula of the bet with advance of money. The simplest operation works like this: the insurance guarantees me that if the rates go beyond 3% I will always pay 3%, even if they will go down, as happened then.
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But why enter into such contracts, given that most stocks such as BTPs are already fixed rate? In addition, since I have to cover losses and therefore I need money, I do another operation that gives me cash immediately to close the hole, on which I pay even higher interests, thus widening the debt. Renegotiations that move the problem further, and on which the bank makes tens of millions in commissions.
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The state loses 36 billion
Eurostat has calculated that, since 2011, we paid the banks 37.5 billion in interest, which went on to increase public debt.
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instead the potential loss hanging over the state’s accounts of about 36 billion euros – practically all the plafond that we could take in Europe from the Mes – and which is equivalent to 37% of the notional value of the existing derivatives. The independent financial consultancy firm Ifa Consulting has estimated that the probability of having to shell out this money (something more or less) in the coming years is very high.
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The sentence that puts an end to the word
Twist: now most of those contracts may be void, sanctioned the highest judicial authority in Italy. After years of clashes in the courts – and various laws enacted to try to close this chasm in the accounts of the Bodies – the Court of Cassation in United Sections in May set principles that could now apply to all disputes against banks. The ruling concerns the municipality of Cattolica and the Bnl, for a derivative signed in 2003. After a clash that went on for years, the supreme judges established that those contracts are to be canceled and that were not to be signed, for six reasons.
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2) the local authority must in any case know what the maximum risk to which it is exposed, for example, by exchanging its variable rate with a fixed rate;
3) must know the value of the contract, what in jargon is called mark-to-market
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5) must be informed of hidden costs, which for years have instead been hidden from institutions, enticed by the liquidity that the bank paid them at the beginning, the so-called upfront; in essence, the local administrator got into debt by betting on the interest rates to be paid, immediately received money – vouchers to be spent on electoral consent – and left the bill to be paid to the mayors or governors who would come later. Yes, but how much? Nobody knows, except the bank, which can estimate the risks;
6) the Court of Cassation has established the principle according to which, when restructuring a debt with derivative contracts, economic convenience must prevail and not only financial convenience.
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Precisely for this, the judges still write, the decision to accept derivatives was not to be taken by the mayor or by the manager of the local authority but by the city council, as it is a question of indebting future generations. a ruling harmonizing national and international financial practices and accounting standards, both public and private, with jurisprudence, explains Nicola Benini, partner of Ifa Consulting, which has been dealing with derivatives for thirty years. As constructed, the sentence – analyzes the Catholic jurist Antonella Sciarrone Alibrandi – destined to have an impact also on derivatives entered into with companies (about 90,000) and also on some products sold to small savers.
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The role of Abi, Consob and Bankitalia
Ma was it really impossible to know the risks of a derivative? The Cassation says no, because they could be estimated with the probability scenarios. According to what was explained in a hearing in the Chamber of Deputies in 2015 by the then director of public debt, Maria Cannata, when in 2011 it was discussed to insert the probabilistic scenarios in the regulation on derivatives allowed to local authorities, the reaction was negative by the ‘Abi. Yet the Bank of Italy on April 14 of the same year wrote to the Treasury that it was appropriate to adopt these scenarios as an indispensable decision-making tool for the institution.
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Suggestion accepted? No. Why? Cannata in audition explained it as follows: The technicalities would be further complicated, making the rule too difficult for administrators to interpret. In short, the reasoning was: they would not understand anyway, better to leave them in the dark. To lose citizens’ money. However, according to Benini, they are as easy to understand as the drug leaflet that exposes the various probabilities of the side effects. Goodbye to the scenarios, therefore. Not only from derivatives, but also from the financial product prospectuses addressed to the public (such as the subordinated bonds of banks), which were also foreseen by a Consob regulation in 2009 but eliminated shortly after by the same commission then chaired by Giuseppe Vegas.
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Thousands of contracts at risk
Since the government banned them, derivatives have gradually declined due to natural end or early extinction – often by decision of the contracting banks and at a high price for the state coffers – as when in 2012 Morgan Stanley closed a derivative with the state and imposed a payment of 3.5 billion euros to the Treasury. It was paid on the nail and there was not even an attempt to negotiate. Meanwhile, for those still outstanding, the causes continue. Just last week the Japanese bank Nomura cited the Sicily Region in London, yet another episode of a statutory tug of war now ten years old. Bank lawyers are now studying the Cassation ruling in depth, because if the principle is affirmed in the courts of merit, thousands of contracts are at risk. And billions of euros of interest unduly collected by the great derivatives specialists: Morgan Stanley, Deutsche Bank, Nomura, Goldman Sachs, Jp Morgan, Ubs, Bofa-Merrill Lynch.
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June 28, 2020 | 23:01
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