Italy's MPS scandal widens among anger and reassurances

MILAN, Italy - Italy's caretaker prime minister Mario Monti on Friday pledged to clear up a derivatives scandal at the country's third-largest bank Monte dei Paschi di Siena (MPS) which has been dragged into the heart of an electoral campaign for its ties with the center-left Democratic Party (PD).

"It is a matter of achieving the maximum clarity .. also from the penal standpoint if necessary," Monti told Rai state radio as the lender, in an extraordinary meeting faced with shareholders' anger, agreed plans for a capital increase to underpin a request of 3.9 billion euros (5.2 billion U.S. dollars) of state bailout.

Local reports broke the news this week that up to around 750 million euros had been lost by MPS in "secrete" deals with Japanese bank Nomura and German bank Deutsche Bank that MPS said it only recently discovered after its new management team launched an accounting overhaul.

The "hole" added up to a series of setbacks for the oldest bank in the world that was already on track to end 2012 in the red after it stocked up 1.6-billion-euro losses related to its exposure to 24 billion euros of Italian sovereign debt, and facing an investigation for the as costly as shady acquisition of smaller rival Antonveneta in 2007.

The episode, which forced former chairman Giuseppe Mussari to step down as head of the Italian Banking Association (ABI), piled pressure on PD which has historically been closely linked to MPS, and spurred strong criticism of the Monti government for using taxpayers' money to save the lender.

Monti, who is running in the February 24-25 national election at the helm of a centrist coalition against PD leader Pier Luigi Bersani, who now leads opinion polls said that the center-left "had a role" in the scandal due to its long-standing "influence" on MPS.

The historical phenomenon of "mingling banking and politics has to be further rooted out," he said.

Though he vowed to address parliament on the matter, the outgoing prime minister denied his cabinet shared responsibility and reassured Italians that the scandal did not affect the country's "solid banking system" as a whole.

The MPS's shares, which had dropped 20 percent this week, rebounded on Friday, rising over 11 percent. Yet, the bank was overwhelmed by shareholders' anger over its mounting losses, while some experts raised the prospect of nationalization.

During the Friday meeting, Beppe Grillo, a comedian turned politician who has mustered thousands of Italians disillusioned with mainstream parties, accused MPS of hiding "a 14-billion-euro shortfall" in its accounts, prompting Chairman Alessandro Profumo to shoot back there was "no hole" though he could not give up-to-date figures as an internal probe was pending.

Other shareholders expressed sorrow for the turmoil surrounding "a bank whose origins date back to the Renaissance."

According to a statement from the bank's CEO Fabrizio Viola, as far as there are losses, these are not expected to impact the balance sheet, a professor of financial markets and intermediaries at Bocconi University of Milan, Stefano Gatti, told Xinhua.

Gatti said should the derivatives loss amount indeed to around 750 million euros as supposed so far, it can be easily absorbed by the bank's current assets.

"However, there is a big question mark here, as the losses could also be much bigger," he pointed out.

The head of Italy's central bank Ignazio Visco, under pressure for its supervision of the case, also rejected criticism while echoing the MPS management that there was no threat to the stability of the lender.

"It is wrong to insinuate that there was a lack of supervision by the Bank of Italy," he told CNBC television at the sidelines of the World Economic Forum in Davos.

However, doubts were raised about the central bank's declaration that it was unaware of the derivatives contracts by largest circulation newspaper Corriere della Sera, which quoted documents showing that inspectors had expressed concerns about the monitoring of those deals in 2010.