A forthcoming report from an international securities association will criticize at least one European Union member's use of interest-rate derivatives and market makers fear this could lead to increased regulation. The report is expected to claim Italy entered swaps to camouflage the true size of its debt and rig its entry into the European Union. The International Securities Market Association, an international securities trade association and the body behind the report, declined to name the country involved. But interest-rate derivatives market makers pointed the finger at Italy. The report is due to be published Tuesday.
Regardless of which sovereign(s) the report takes on, market makers said such an accusation could lead to more regulation, even though the swaps market is a legitimate tool for sovereign debt management. "This could lead to some consequences on the regulatory side," said one head of interest-rate trading in London, adding, "the good thing about derivatives is flexibility, but with that comes a certain degree of responsibility." Another said, "this will definitely shine a spotlight on sovereigns' uses of swaps."
The evidence of the shenanigans is that in the mid 1990s there was much speculation among market pros that Italy did not have the wherewithal to service its public debt. But as the country moved closer to European Monetary Union, it was somehow able to get the budget deficit down, according to one trader. Also Italy is widely rumored to have used swaps in recent years, although it has never acknowledged doing so. However, given the size of swap positions that would have been necessary, a handful of market pros added the report may also be referring to smaller countries such as Greece, which also saw a marked improvement in its budget deficit prior to EMU membership.
Antonino Turicchi, a director in the public debt management department at the Ministero dell' Economia e Finanze in Rome, did not return calls.
