Municipalities with built-in debt

Grillo steals the show in Bologna
(1:30)

Alviano (1554 inh), Baschi (2742 inh), Guardea (1883 inh), Lugnano in Teverina (1593 inh), Polino (284 inh) Stroncone (4815 inh) are not actually Municipalities, but rather investment banks. Together with otherUmbrian Municipalities they bought into swap arrangements, or “derviative” financial instruments, to the tune of 466 million Euro. Even some small municipalities where the word “swap” has some sort of mystical, metaphysical or even hallucinogenic quality landed up in debt because they tried to act as financial experts.
Swaps enable the investor to get money in advance from the banks on the basis of significant predicted earnings. Now, after the crisis, these Municipalities find themselves having to pay back money with the initial capital gone. Swaps are like legalised usury, a game of Russian roulette played with only one empty chamber. You take the money today, trusting in God and paying sizeable commissions to the trading banks. In the case where a Municipality is unable to settle the accumulated debt, they can refinance the debt by taking another gamble, another swap, and so on until the crash happens. In this way, they hide any budget shortfalls by making risky investments that remove resources from subsequent annual municipal budgets.
What usually happens is that the mayors that deal in swaps never have to answer for their actions because the losses are shouldered by their successors and the local citizens. In total, the local municipalities invested in swaps to the tune of 35 billion Euro, which makes up one third of their entire debt (source: Financial Times).
Derivatives are somewhat like the field of miracles in the tale of Jack and the Beanstalk. The field of miracles where they planted gold coins and trees sprang up overnight to make the money grow. How can any municipality hope to ever escape from this unsustainable debt resulting from the trade in derivatives? They lodge a complaint against the banks, which, in their opinion, defrauded them. Milano has led the way by lodging complaints againstJP Morgan, Depfa, Deutsche Bank e UBS. The"Milanese derivatives" were subscribed to back in 2005 by Albertini, the parking garage king, who is now enjoying his old age as a Euro-Parliamentarian in Brussels. A thirty-year investment the equivalent of an annual budget, namely 1.7 billion Euro. The Municipality doesn't want to bear 100 million Euro of loss (accumulated to date) and has taken legal action to claim 239 million Euro in compensation. The Municipality only realised after four years that they had signed an idiotic contract, which did however give them access to cash up front, thereby admitting that they were not of sound mind. The court case is due to commence in May and this blog will be following the proceedings closely.
Who was it that allowed the Municipalities to empty their coffers into derivatives? The unstoppable Tremorti of course, Italy's king of debt, via the 2002 Budget Law . Given the resulting disaster, he proceeded to ban this type of investment in 2009, what a forward thinker!.