4 July 2007

Blow-up costs Milan bank ¬610m

Blow-up costs Milan bank ¬610m | Markets | Business | Money | Telegraph: "A derivative blow-up at the Italian bank Italease has sent tremors through Milan's banking fraternity and exposed the hidden dangers of exotic credit instruments.

The bank has paid off €610m (£419m) in recent days to counter-parties in what amounts to a massive margin call after interest rate rises in Europe caused hedging and derivative losses by clients to mushroom out of control. The share price has tumbled 9pc so far this week, and is down 64pc since the troubles first began to emerge in April.

'These derivatives were very complex and suddenly turned against us,' said Pierantonio Arrighi, the bank's spokesman.

'They started moving in a non-linear way, so the losses were rising exponentially. We were afraid that in the worst case some of our clients would not be able to pay the contracts, so we stepped in to protect them, which means we took over the risk,' he said."

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