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Ministry of Economy and FinanceItalian Treasury: No danger to the national accounts

With reference to conjectures made by some newspapers, the Department of the Treasury of the Ministry of Economy and Finance provides clarifications and explanations useful to understand that the interest rate risk hedging tools currently managed do not entail losses.

Press Release N° 103 of Wed Jun 26 18:24:00 CEST 2013

1.      Every six months the Treasury provides to the “Corte dei Conti” (the Italian Public Court of Auditors) all the information concerning transactions executed in derivative financial instruments. In March 2013 the “Corte dei Conti”, through the “Guardia di Finanza”, asked for the documentation relating uniquely to the activity of unwinding of a large group of derivative transactions with Morgan Stanley. In response to this request and according to a time schedule agreed with the “Guardia di Finanza”, the Treasury provided all the required documents for each transaction, including previous contracts (confirmations) from which each transaction originated (including a copy of each confirmation and the relevant ministerial decrees with which each transaction was formally approved), accompanied by a detailed explanatory report.

2.      The philosophy underlying the use of derivatives by the Republic is based on criteria driven by the pursuit of sake of the Republic, aiming to protect against market risks, mainly foreign exchange and interest rate risks. With particular reference to the latter, the activity in derivatives was aimed at lengthening the public debt overall duration , in order to hedge from a potential rise in interest rates, paying fixed and receiving floating. This insurance strategy was pursued through IRS (interest rate swaps) and options on interest rate swaps (swaptions), fixing long-term rates which, at the time of execution, were historically low for the tenors which they referred to. Securing through derivatives a fixed rate "to pay" in exchange for a floating rate "to receive" is a protection against future shocks on market interest rates, a situation that Italy already experienced on several occasions, such as the severe monetary and financial crisis of 1992. In fact, if in such circumstances a sovereign issuer has to offer short-term bonds, the risk of debt cost increase at the time of renewal of maturing bonds is neutralized - for the portion hedged - by the receiving leg of the swap (floating rate), and the actual cost is capped by the fixed rate paid in the swap. Like any insurance contract, however, if the event to which one wants to be protected from does not happen, this will bring nonetheless a cost which is justified by the priority given to the avoidance of serious consequences stemming from adverse scenarios. The market value of derivatives at a specific point in time, the so-called mark-to-market, cannot be considered in any case a realized loss. It is only in case of existence of specific clauses that counterparties may mutually require for the payment of the above mentioned market value, according to the procedure agreed in the contracts.

3.      It is absolutely groundless the hypothesis that the Italian Republic has used derivatives at the end of the nineties to determine the conditions required for the entry into the euro. The transactions executed at the time were always recorded correctly, following the usual practice, in accordance with accounting principles both national and European. The checks carried out systematically by Eurostat starting from the second half of the nineties, including those resulting from the introduction - in several stages - of new guidelines on derivative financial instruments, have always confirmed the compliance of these transactions’ accounting.

Rome Wed Jun 26 18:24:00 CEST 2013

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