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Mario Draghi approved secret non-standard emergency loan to troubled Italian bank

Frank Galton

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Jan 15, 2011
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One issue bubbling in Italy in parallel with the election campaign is the scandal around the bank Monte dei Paschi di Siena (MPS), the country's oldest. The bank has been limping since a disastrously timed takeover at the height of the bubble in 2007-2008. Each week, some new detail about what the Bank of Italy knew and when they knew it comes out. Note: Mario Draghi's job prior to being ECB President was Governor of the Bank of Italy. The Italian Central Bank has carefully used today (Saturday) to bleed more information into the news about its support for MPS. This Wall Street Journal article (free link as long as the snowstorm lasts!) includes the following --

Italy's central bank arranged the loan in October 2011 because MPS was running short of liquidity and had largely exhausted its ability to keep borrowing from the ECB ... The loan wasn't disclosed at the time by either the Italian central bank of MPS. In a conference call shortly after receiving the emergency loan, MPS executives described the bank's liquidity position as sound.

Mr. Saccomanni said that, with its loan to MPS, the Bank of Italy—which was led at the time of the loan by current ECB President Mario Draghi—didn't violate any rules. The loan was "utterly normal central bank behavior," he said. He added, however, that no other Italian bank was party to such an arrangement.

Under the deal, MPS swapped loans and mortgages for some €2 billion of mainly Italian government bonds.

In discussing the transaction, Mr. Saccomanni said that Italy essentially has two central banks that are both lenders of last resort. One is the European Central Bank, which, via the Eurosystem, includes national central banks of member countries. The other is the Bank of Italy, which can conduct lender-of-last-resort operations on its own account.

"Anyone can do it," Mr. Saccomanni said, adding that similar transactions have been carried out by other national central banks in the euro area.

Some central banks, such as those of Greece and Ireland, have used their own balance sheets for such lending to domestic banks, under the Emergency Liquidity Assistance, a special dispensation from ECB protocols.

Mr. Saccomanni said the Bank of Italy, which never requested to use the ELA, informed the ECB of its loan to Monte dei Paschi, but wasn't required to ask permission.
Bank of Italy Loan to Lender Was 'Classic' Move, Official Says - WSJ.com

The important point for Ireland is that our own bank bailout depended on the kindness of strangers: our banks either had to borrow from the ECB (allowing them to demand no haircuts for senior bondholders), or from the Irish Central Bank Emergency Liquidity Assistance, which needed ECB approval and adequate collateral -- the notorious promissory note.

Now we learn that the Bank of Italy (prop. M. Draghi) had another alternative -- an asset swap of dodgy loans for government bonds -- and no one had to know a thing about it until it was safely unwound.

We've yet to play Italy in rugby. But in bailing out weak banks, they've already won 64 (billion) to zero.

[EDIT: The Bank of Italy briefly referred to the MPS lending operation in a press release at the end of January, however the manner in which it was conducted was only fully explained over a week later]
 
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cabledude

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Jan 23, 2011
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Is this for real????
 

Kev408

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Smacks of divilment by Berlusconi.
 

james toney

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Hope everyone "Takes Note" of this.
 

Roisin3

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What was his answer?
Sorry, I was half listening to his answers as she asked him a series of questions and missed if he even got around to answering it. Basically she brought up the issue and said that people said he kept quiet about it because he wanted to secure the ECB presidency.
 

stopdoingstuff

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So the Italian central bank can do what it wants but ours needs permission?
 

A view from England

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This is the deviant EU/ECB. Why is anyone surprised?
 

puffin

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Aug 2, 2012
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I cannot believe for one minute that an Italian would be guilty of corruption
 

Ribeye

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I cannot believe for one minute that an Italian would be guilty of corruption
Never mind Italian, they're nothing to how corrupt Dragis real 'family" are,

The Goldman Gang:)
 

Mad as Fish

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The whole history of Europe is one of treaties and wars, betrayal and double dealing. We are simply seeing the exact same thing but thankfully without the bloodshed. The kings, emperors, diplomats and soldiers of the last five centuries have their contemporaries amongst today's European ruling elite, whats Dragi if he is not just another self serving court favorite? Sure he's got some history but when you get to certain level it's almost expected of you.

The other side of the coin is that nothing is really written in stone, or not for long anyway. Should Ireland default there will be a fudge cooked up, the storm settled with a little oil on the water, some sweeping under the carpet plus a bit of pantomime crossness from the leading characters, but the world will still turn and Ireland will muddle along, all it takes is some strong leadership, intelligence and sense of both destiny and history.

So yes, we're phucked.
 


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