EU Economy: Europe's Attention Turns to Italy

The revelations about Greece's currency swap -- about which fuller details are expected in the coming days -- have raised questions about Italy.- First, there was some concern that Italy Central Bank Governor Draghi may have been involved with the swaps with Greece when he worked for the US investment house that has been linked to the transactions. The Bank of Italy has formally denied this. - Second, there is some concern that Italy may have used similar tactics to dress up its accounts. Reports indicate that Italy did in fact use derivatives to lower its deficit to meet the Maastricht requirements to join EMU. Swaps were apparently used to temporarily reduce the amount of interest paid and lower the 1997 deficit. The European Commission had reportedly reviewed and approved the transaction. Yesterday Finance Minister Tremonti hinted that the technical issues--like the existence of the Italian lira and budget figures kept in lira--prevented the swap from being identified as a way to mask the size of the deficit.

On a different front, the Italian Banking Association reports that Italian banks are awash with cash (deposits and new bond issuance) but, like banks elsewhere, they are not lending. Italy's banks have thus far avoided the need for extensive government support and do not appear to have the exposures to the weaker European credits as do German, French, British and Swiss banks.

For the complete report: Europe's Attention Turns to Italy -- Seeking Alpha