Italy would have risked default if it had launched a dispute with Morgan Stanley at the end of 2011 over the early closure of a derivative that cost the public coffers 3,1 billion in cash. This was stated by Vittorio Grilli, former general manager of the Treasury from 2005 to 2011 and then economy minister with the Monti government from 2012 to 2013, heard in a hearing by the banking commission the day after the hearing of theformer CEO of Unicredit, Ghizzoni. “Opening a dispute meant automatically for Italy to put it in pre-default or default condition, we would no longer be able to repay a debt of 500 billion a year; bringing a counterparty to court would have had devastating consequences” for the public debt. According to Grilli, Treasury executive Maria Cannata did well in attempting to renegotiate the contract with the US bank.
Grilli, answering the questions of Renato Brunetta (Fi), reveals that he had learned from the director of Public Debt Maria Cannata of the problem for the contract with Morgan Stanley only "in October-November 2011", a circumstance which provoked a reaction of surprise from Brunetta for the fact that since 2005 the director general of the Treasury had had no previous knowledge of the early termination clause contained in the contract with the US bank. “I became aware of the clause when Cannata informed me of a derivative issue with Morgan Stanley. Cannata rightly suggested having a novation of the contract with Morgan Stanley at the end of 2011”. Grilli adds that the contract with Morgan Stanley dated back to the master agreement of 1994 when he was not at the Treasury but that he had no doubts "that that clause at the time was market-related". According to Grilli, the early closure makes sense because “if the clauses hadn't been triggered, the Treasury would have had to make an ever-increasing flow of payments with market rates at zero. Without activation of the early repayment, the payment flow would have been greater than that paid with the repayment".
Grilli explained that with the sovereign debt crisis, “government bonds increase not due to the increase in Euribor rates but because Italy's credit risk explodes. How do you protect yourself in these cases? A private individual with CDS (Credit default swap). However, the Treasury cannot buy protection against its default”. In this scenario, moreover, as a result of the ECB's monetary policy, the Euribor rates went to zero. So what happened to the Treasury, explains Grilli, "is not that it subscribed to a poorly written derivative but that it found itself faced with an event that cannot be protected by any derivative".
Grilli also adds his opinion on why the US bank asked for the early termination of that contract. According to the ex-minister, at the end of 2009 the US bank had transformed itself from an investment bank into a real bank and the US supervisory authorities were pushing to dismantle costly positions, as was the case on Italy. "The cost of the derivative, until the CDS exploded, was a normal cost: when the cost of Italy became dissociated with the jump in the spread to 500 basis points, the cost for them increased tenfold".
Another theme addressed during the hearing was that of the so-called "revolving doors". “I don't like the term revolving doors because of its negative connotation” said Grilli who worked in important international investment banks both before and after his government experience. “In my opinion there is little public-private exchange in Italy. In other countries it is much more common. In Italy, those who start working in the public sector end up there too and the same path also applies to the private sector. This creates two almost incommunicable worlds and it is a negative fact. The exchange of experiences – continues Grilli – is absolutely beneficial. It must be encouraged, certainly it must not be without rules of transparency”. In Italy, adds Grilli, there are rules but they need to be improved especially on the non-competition obligation for twelve months. "There isn't a dry constraint, we should be clearer and not leave the interpretation to the Antitrust". The approach on the subject should be changed according to what happens in the US experience: the non-competition obligation comes at a price . "You can't say you can't work, but get by".
Finally, Mps. Grilli said that Monte dei Paschi was also discussed during the lunch at Palazzo Chigi in the summer of 2016 in which Prime Minister Matteo Renzi invited JpMorgan's world number one, Jamie Dimon, to Rome on the occasion of the centenary of the opening of the Italian headquarters of the US bank. “There was talk of many issues of the world economy and there was also talk of Mps” , said Grilli who at the time was president of JP Morgan Europe. Lunch was nothing special adds Grilli. The world number one of JpMorgan asks to meet the heads of government when he travels to the various countries.
