SIENA, Italy, Jan 25 Italian Prime Minister Mario Monti called on Friday for an immediate investigation of a widening scandal at Monte dei Paschi di Siena over the historic bank's losses of nearly $1 billion in a series of complex derivatives deals.
Monti defended the Bank of Italy, whose governor at the time of the losses was Mario Draghi, the European Central Bank chief now facing criticism for failing to spot the trouble brewing at Monte Paschi.
"This episode has to be dealt with the maximum clarity and those responsible have to be dealt with rigorously," Monti told RAI radio.
Monti has promised to address parliament on the matter but he denied the government shared responsibility and said the problems did not affect the Italian banking system as a whole. He expressed "full and total confidence" in the Bank of Italy.
"Italian savers should know, and I think they know, that Italian banks have been among the most solid during the crisis," he said, adding that Monte Paschi was the only bank to be required to boost its capital by European authorities.
The Tuscan bank, Europe's oldest, which is already seeking a 3.9 billion euro ($5.22 billion) government bailout, this week revealed derivatives and structured finance trades that could cost it as much as 720 million euros.
The case has already become a major political issue ahead of national elections on Feb. 24-25 because of historic links between the bank and the centre-left Democratic Party, which is leading in opinion polls.
Bank of Italy Governor Ignazio Visco, under pressure for the central bank's supervision of the case, rejected criticism, saying it had nothing to hide.
"It's wrong to insinuate that there was a lack of supervision by the Bank of Italy," he told CNBC television at the sidelines of the World Economic Forum in Davos.
He said there was no threat to the stability of Monte dei Paschi, which is already under investigation for the expensive acquisition of smaller rival Antonveneta in 2007.
"There is no question that the bank is stable," he said.
However doubts were raised about the Bank of Italy's assertion that it was unaware of the trades at the centre of the scandal by reports in the Corriere della Sera daily.
It quoted central bank documents saying said inspectors had expressed concerns about the monitoring of derivatives as long ago as 2010. No immediate comment on the report was available from the Bank of Italy.
Monte Paschi shares, which had fallen 20 percent this week, rebounded strongly on Friday, rising almost 9 percent as prices rebounded after the recent losses.
In Siena, where Monte Paschi was holding a special shareholder meeting to discuss the scandal on Friday, Chairman Alessandro Profumo said the bank was still evaluating the impact of the derivatives trades on its finances.
But the bank management faced criticism from shareholders enraged by a scandal that has raised the spectre of nationalisation of a bank whose origins go back to the Renaissance and which is synonymous with the beautiful Tuscan city.
"What they did to Monte dei Paschi is worse than Bribesville and Parmalat put together," said Beppe Grillo, head of the anti-establishment 5 Star Movement, who attended the meeting. He was referring to the two biggest scandals in recent Italian history.
"That's the scale of the damage they've done. They've turned the party into a bank and the bank into a party," he said in reference to the Democratic Party's links with the bank.
The case has already forced former chairman Giuseppe Mussari, who left the bank in April, to step down as head of the Italian banking association this week.
The Bank of Italy has said the former management of Monte Paschi hid details of the trades while Visco said the central was working with judicial authorities investigating the case.
"There is no immediate action from the Bank of Italy. We are actively collaborating with the judiciary," he told Reuters.
The latest deals to be revealed are the so-called "Alexandria" trade with Japanese bank Nomura, the "Santorini" trade with Deutsche Bank and a derivative called "Nota Italia", which several sources said was structured by JP Morgan. JP Morgan declined to comment.
The Corriere della Sera said central bank inspectors had expressed misgivings about the supervision of both the Alexandria and Santorini deals.
Findings of a review on the trades are expected to be submitted to the bank's board by mid-February.
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