Bloomberg News

Five Banks Have $6.8 Billion of Derivatives With Italy, EBA Says

July 27, 2011

July 22 (Bloomberg) -- Five European banks have a total of 4.8 billion euros ($6.8 billion) of derivatives contracts with the Italian government, according to data released for the first time by European regulators.

Deutsche Bank AG has the most with contracts valued at 1.78 billion euros, followed by BNP Paribas SA with 1.13 billion euros, Dexia with 777 million euros, UniCredit SpA with 661 million euros and Intesa Sanpaolo SA with 458 million euros, according to data from the European Banking Authority’s stress tests last week. Banks had 326 billion euros in all of such deals with Italian central and local governments, the EBA said.

“It’s a big deal,” said Gustavo Piga, author of “Derivatives and Public Debt Management,” and a professor at Tor Vergata University in Rome. “Now we have more tools to pressure governments to be more forthcoming about derivatives,” he said. “This makes it more difficult for them to hide.”

The disclosures, required for the first time in this year’s stress tests, shed light on an aspect of government debt management that is subject to only limited disclosure. In 2001, Greece used off-market swaps with Goldman Sachs Group Inc. to conceal the true size of its borrowings. Repeated revisions of Greece’s figures, beginning in 2009, spurred a surge in borrowing costs that pushed the country to the brink of default and triggered a region-wide debt crisis.

Managing Exposure

Governments sell long-dated debt and enter into interest rate swaps with investment banks to adjust the duration of their debt portfolio. Greece also used cross-currency swaps to receive up-front payments and reduce the size of its foreign-denominated debt in euro terms.

The data also show indirect exposure through contracts with third parties, such as banks, that reference specific countries, indicating how banks were managing their exposure to countries through derivatives. Of the 2 trillion-euro total exposure to EU governments reported by the EBA, derivatives account for 263 billion euros. Most of the contracts have a maturity of one year or less. The longer-dated positions include debt management- related swaps with sovereign counterparties, and credit default swaps between banks that reference the sovereigns.

The data indicate BNP Paribas may have being buying protection against a potential Italian default. The lender’s contracts with other counterparties that reference Italy with a duration of between three and five years had a total negative fair value 1.38 billion euros. Credit-default swap contracts typically have a duration of five years. Negative fair value indicates a short position. Officials at the lender declined to comment.

UniCredit Swap

Armin Niedermeier, spokesman at Deutsche Bank in Frankfurt, declined to comment beyond the EBA figures. The exposure to Italy UniCredit reported for the end of December mainly referred to one large interest rate swap position the bank held with the treasury, the lender said in an e-mailed statement. The other banks declined to comment.

EBA analyst Paolo Bisio said the direct sovereign exposure figure referred only to derivatives contracts between the banks and the sovereign, essentially central and local government counterparties. Other public sector derivatives, such as those with state-backed companies, were excluded.

--Editors: Edward Evans, Paul Armstrong.

To contact the reporters on this story: Nicholas Dunbar in London at

To contact the editors responsible for this story: Ted Merz in New York at; Edward Evans at

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