Monte dei Paschi could face an extra loss of up to 1.5 billion euros ($2 billion) because of the way it accounted for derivatives trades, according to a leading consumer group challenging the bank's state bailout.
The derivatives trades, carried out from 2008-09, are at the centre of an investigation into alleged fraud and corruption at the world's oldest bank. The scandal has triggered a political storm ahead of an election on February 24-25 because of the lender's close ties to the centre-left Democratic party (PD).
Monte dei Paschi's new bosses said on February 6 the bank will take a 730 million euro hit in 2012 from those trades and may have to restate previous financial accounts.
However, a document filed with a Rome court by consumer group Codacons challenged the accounting of two structured deals worth a combined 5 billion euros as long-term repurchase agreements to finance the purchase of Italian government bonds.
The document, prepared by former Goldman Sachs and Morgan Stanley banker Giuseppe Bivona,who is a consultant to Codacons in the case, said those two deals were effectively credit default swaps and, therefore, should be accounted for by market price.
Given that Italian government bond prices have fallen since the deals were put in place, Bivona estimated a total loss of between 1.0-1.5 billion euros if the trades were classified as credit default swaps.
"It is highly probable that these operations are, in fact, credit default swaps," Bivona said in a report submitted to the court and reviewed by Reuters.
Codacons is asking a regional court in Lazio to halt a 3.9 billion euros state bailout for Monte dei Paschi, alleging that central bank supervisors failed in their oversight of the lender.
Monte dei Paschi and the Bank of Italy declined to comment on Codacons' allegations and estimates of potential additional losses.
In a conference call with analysts on February 7, Bivona asked Monte dei Paschi chief financial officer Bernardo Mingrone whether the two repo deals in question, which expire in 2034 and 2031 respectively, should be treated as credit default swaps.
"These transactions that Monte Paschi has assessed are very common with the entire banking system, and are documented this way not only by the Monte Paschi Group, but by the market in general," Mingrone said.
On the same conference call, chief executive Fabrizio Viola told analysts the details of the contracts would not be disclosed. He said that the regulator in Italy was looking at how such trades are accounted for.
"We have highlighted in our press release, too, that on the part of the supervisory authorities there are some talks in place that concern the entire banking system," Viola said.
"If in the future there will be changes in the accounting principles, or guidelines ... that will involve the whole banking system, we will of course adapt to that."
Bivona told Reuters he was not being paid by Codacons and had expressed the same reservations about the accounting of the structured deals in letters to the Bank of Italy, market watchdog Consob, the government, and parliament.
Under the bailout scheme, Monte dei Paschi is due to issue 3.9 billion euros of bonds to the Italian treasury by March. ($1 = 0.7487 euro)
(Additional reporting by Roberto Landucci; Editing by Carmel Crimmins)