Italy is earning $7 bln from new sales taxes in its latest budget even as GDP contraction begins and Technocrat Mario Monti juggles with expenditures to manage on a razor thin deficit in a bid to balance it according to the new Fiscal compact requirements in return for the European Bailout funds. In the meantime this government will be apying out Morgan Stanley to the tune of $3.4 bln for derivatives on interest rates sold to it by Morgan Stanley as an insurance for not enforcing the contract.
The complex derivatives were a bet on interest rates sold to the Italian Government in the 90s as a one way bid to reduce the interest costs on its debt. Once the rates started moving down, the government had to pay out extra to Morgan Stanley , a fact it never bothered with as a “will never happen ” floor/base scenario o fthe derivatives to sweeten the cost at then prevailing rates.
That obviously meant the counterparty (Italy) would be bankrupted by extraordinary payouts if the scenario was triggered. The government paid out $3.4 bln to Morgan Stanley, ensuring some sweet profits for Morgan Stanley to compensate for its blind faith on European bottoms in November i n this case
Morgan Stanley said in a Jan. 19 filing with the U.S. Securities and Exchange Commission that it “executed certain derivatives restructuring amendments which settled on January 3, 2012” and reduced its Italian exposure by $3.4 billion.
MS CFO says
Morgan Stanley had a gain of about $600 million in the fourth quarter related to the unwinding of contracts with Italy. That gain was a reversal of charges it took earlier in the year to reflect the risk that the country wouldn’t pay the full amount it owed, Chief Financial Officer Ruth Porat said in a Jan. 19 interview.
Meanwhile James P Gorman joined int he background voice of Jamie Dimon asking sales teams to not use Greg Smith’s letters for converting clients from Goldman, while in an unrelated move two lady sales team members ( MDs ) quit today after 19 years of Service.
- Italy to pay Morgan Stanley $3.4-billion on interest rate bet (business.financialpost.com)
- European Sovereign Debt Crisis: Debt Saturday in Greek letters () (advantages.us)
- Italian leader says EU focus must be on growth (seattletimes.nwsource.com)
- Despite What Everyone Thinks, Most Italians Are Actually All For Mario Monti’s Austerity Plans (businessinsider.com)
- Italian PM Mario Monti: EU must recognise Italy’s efforts to fight debt crisis (telegraph.co.uk)