Italian Towns Play Tit for Tat with Chase, UBS

JP Morgan Chase, UBS, Deutsche Bank, Depfa, and a handful of individuals will stand trial in Italy for aggravated fraud. The banks are accused of adjusting interest rates on derivatives deals with the city of Milan, causing the city government to lose about 100 million euros. The BBC reports:

In the case of Milan, the four banks are accused of misleading the city authorities when they agreed a derivatives deal on a 1.68bn euro ($2.31bn; £1.51bn) loan in 2005. The deal adjusted the interest payments on the loan – a move which Milan says leaves it facing a 100m euros loss.

The arrangements between banks and cities, including Milan, were designed to reduce interest payments on their loans. Prosecutors say the trial, which is due to begin in May, is an important test case for hundreds of Italian cities who have lost money through similar deals.

JP Morgan denied employees involved had acted inappropriately, while Deutsche and UBS also denied any wrongdoing. Depfa was not available for comment.

Alphaville’s Joseph Cotterill has describes Depfa, in case you weren’t aware:

Depfa, for the uninitiated, is a Dublin-based German-Irish bank owned by Hypo Real Estate, which was itself nationalised by Berlin a year ago.

Milan also wants an extra 239 million euros in liabilities from the banks, according to Reuters, which reports on a possible Italian derivatives epidemic:

Almost 500 small and large Italian cities are facing mark-to-market losses of 2.5 billion euros on the contracts, according to the Bank of Italy. Analysts say that figure will balloon when interest rates go up. Most of the contracts involved switching fixed rates on loans to variable ones with banks.

The Bank of Italy put the notional value of derivatives contracts at 24.1 billion euros in June 2009. However, Il Sole 24 Ore business newspaper on Thursday cited Treasury data to put the overall figure at 35.5 billion euros — a third of local governments’ debt — when wider criteria were used.

Local governments rushed into derivatives in part because they helped ease the rigidity of a 2001 law that bars taking on new debt except to finance investment. But another big draw was the upfront payment many cities got in advance for signing revamped agreements, usually done without a bidding process, analysts said. Renegotiated deals shoved back payment and costs in a “political manipulation” of signings, said Giampaolo Gialazzo with the Tiche consultancy in Treviso.

When rates are low, as they were when many contracts were agreed, local authorities using a variable rate could find their costs shrinking. However, when rates rose, officials would find themselves owing more money. Milan has argued, as have many other local administrations, that the contracts were murky, carried hidden costs and banks had failed to explain them.

Court cases aside, Milan still wants in on derivatives, according to Reuters. The city council is now looking for a fixed-rate derivatives contract.

Governments and banks are both playing the same game: You didn’t make me rich, now I’m going to try to screw you. Italy is, what, Round 3? Round 4? Will anyone ever end up on top of this game?