MILAN: A derivatives scandal engulfing Italy's Banca Monte dei Paschi di Siena (BMPS) has shaken the Italian finance sector and thrown a shadow over the government's efforts to save the world's oldest bank.
A media report on Tuesday that said BMPS would book a 220 million euro ($293 million) loss on a three-year-old derivative contract was a heavy blow for the floundering bank, which is in the process of concluding a deal with the government for 3.9 billion euros in state aid.
BMPS was forced to reveal the 2009 derivative deal with Japanese bank Nomura -- nicknamed "Alexandria" -- and the loss expected in its 2012 results.
The stock market immediately reacted to the news, with shares in the 15th century institution plunging by 5.68 percent on Tuesday and by another 8.43 percent on Wednesday.
BMPS said that the derivative contract is one of several under internal investigation, without providing details on the extent of the scandal or the sums involved.
Derivatives are financial instruments based on the value of a specific security or asset.
They are widely used by companies and financial institutions to hedge risks from price changes, but if not used carefully can result in huge losses.
Italy's financial daily Il Sole 24 Ore said that it expected the bank to face a 2012 loss of "well over two billion euros" -- with "Alexandria" to account for the loss of at least 220 million euros.
Last week, Bloomberg financial news agency reported that another derivative contract, signed with Germany's Deutsche Bank in 2008 and baptised "Santorini", helped BMPS cover up some 367 million euros worth of losses.
The scandal, which appears far from over, has already left one victim in its wake.
Giuseppe Mussari, former chairman of the Monte dei Paschi di Siena Foundation, resigned from his post as head of Italy's banking lobby ABI late Tuesday after it emerged he had personally signed off on the "Alexandria" deal.
Mussari also oversaw the purchase in 2007 of Banca Antonveneta from Santander for nine billion euros -- a deal now under investigation after questions were raised over the apparently excessive amount paid for the north Italian bank.
The derivatives scandal has also hit the bank's chairman, Alessandro Profumo -- former chief executive of Italian banking giant UniCredit -- and BMPS chief executive Fabrizio Viola.
Appointed at the start of 2012, the pair have struggled to refloat a bank which has suffered from exposure to the Italian sovereign debt crisis and losses on contracts linked to government bonds.
The troubled institution is now grasping for a 3.9 billion euro life-buoy in the form of so-called "Monti" bonds.
Under a deal proposed by outgoing Prime Minister Mario Monti, the government would buy debt issued by the bank. The "Monti" bonds would replace 1.9 billion euros in aid given to the bank in 2009.
Friday's general assembly will address the issue of raising 4.5 billion euros in capital to help the bank repay the loan.
The government has said the new bonds would be converted into equity should the bank fail to return to profit, but Viola, among others, has dismissed the situation as unlikely.
The Foundation told Italian news agency Ansa meanwhile that it might take legal action against former bank managers.
Several political figures have also used the scandal to criticise "favours" granted by Monti to BMPS, and to attack the Democratic Party of Pier Luigi Bersani, tipped to win upcoming Italian polls and considered to have close relations with the bank.
Others fear that new banking crises could erupt as Italy strives to pull out of a deep economic recession.
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