Tuesday, April 28, 2009

Milan police seize €476m of assets in bond probe

Posted on the Financial Times website by Vincent Boland:

Police in Milan said on Tuesday they had seized €476m in assets from four international banks in a dramatic escalation of an investigation into controversial municipal bond issues.

The city’s financial police began the investigation last year into a €1.6bn bond issue the city of Milan launched in 2005, and were probing the role of four banks – Deutsche Bank, JP Morgan, UBS and Depfa, a German bank specialising in public finance – in that and other transactions.

In a statement on Tuesday, the financial police said they had taken control of €476m in assets from four banks, though they did not name them. The assets seized included the banks’ stakes in Italian companies, real estate, and accounts.

The move marks a sharp escalation of the probe into the bond issues. Milan, Italy’s financial capital and one of its wealthiest cities, is already suing the four banks, claiming that derivatives contracts linked to the bond issues allowed the banks to earn around €90m in “hidden commissions”. It also complains that the bond issues were not in the city’s best financial interests.

None of the banks had any immediate comment on Tuesday.

The case is being watched closely by cash-strapped Italian local authorities who issued billions of euros of bonds with similar contracts until the Bank of Italy stopped the practice in 2007. The municipalities now face deteriorating fiscal positions as the global financial crisis begins to bite.

Many of the derivatives contracts exposed the authorities to rising debt service costs between 2005 and 2008, when eurozone interest rates rose from 2 per cent to 4.25 per cent. Estimates of the losses facing Italian authorities vary. The government has denied speculation that the losses could reach €30bn, but analysts say a more conservative estimate of up to €10bn may be more accurate.

At issue in the Milan case are provisions in the bond issue that enabled the city to set aside sums at regular intervals towards repayment of the principal. But as interest rates rose, the authorities found that funds earmarked for the sinking fund were being eaten up by debt servicing. The municipality claims the banks argued that the structure of the bond would reduce debt service costs.

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