Closure of 'Alexandria' trade would cost Monte Paschi one billion euros

By Silvia Ognibene and Silvia Aloisi

SIENA (Reuters) - The European Central Bank (ECB) has told Monte dei Paschi di Siena to close a derivative trade with Nomura by late July, a move the Italian lender said would generate a pre-tax loss of 1 billion euros (0.74 billion pounds) but have almost no impact on its core capital.

The ECB request, cited in a Feb. 18 letter, seen by Reuters, that the bank sent to prosecutors, adds to pressure on Monte dei Paschi to settle the trade, as the bank pursues a related civil lawsuit in which it is seeking damages from Nomura and former Monte dei Paschi executives.

In a statement, Monte dei Paschi said closing Alexandria, as the 2009 loss-making trade with Nomura is known, would have an impact "close to zero" on its CET 1 core capital ratio, a measure of financial strength.

The bank said the 1 billion euro loss, mentioned in the letter to prosecutors, was based on an estimate it made at end January and did not refer to the potential impact of terminating the trade on its income statement.

Italy's third largest bank also said it was considering raising its damage claims against Nomura in an Italian civil lawsuit currently underway. At present, the claims stand at around 1 billion euros.

The two banks are both under investigation over the Alexandria trade in a separate criminal probe by Milan prosecutors.

The letter said the ECB had told the Italian bank the trade should be closed by July 26 "unless a proven legal impediment arose in the future as a consequence of the ongoing civil proceeding or criminal investigation."

Monte dei Paschi entered the Alexandria trade with Nomura in 2009. It turned out to be loss-making and triggered a string of judicial investigations in Italy.

In its letter to prosecutors, Monte dei Paschi said it had informal contacts with Nomura over possible terms for the closure of the trade.

Monte dei Paschi has been hit by the euro zone debt crisis and a scandal over derivative contracts, including Alexandria. It emerged as the weakest lender in a Europe-wide health check of the sector last year.

After a 5 billion euro share issue last year, the bank's shareholders on Thursday approved another 3 billion euro cash call to plug the shortfall exposed by European regulators.

Monte dei Paschi has said it was breaching regulatory limits because its 3.4 billion euro exposure to Nomura, linked to the Alexandria trade, accounted for 35 percent of its capital or 10 percentage points more than allowed.

Prosecutors have said the bank's former management entered Alexandria and other derivative trades to conceal losses after stretching its finances to buy rival Antonveneta in 2007 for 9 billion euros.

RESTATED ACCOUNTS

Monte dei Paschi has already restated its 2012 accounts to reflect around 737 million euros in losses linked to the derivatives trades.

The bank, its former management as well as two former Nomura executives and the Japanese bank are under investigation in Milan over Alexandria for alleged false accounting and market manipulation, according to a document wrapping up the probe by Milan prosecutors and seen by Reuters.

Monte dei Paschi confirmed on Friday it and Nomura were under investigation in the probe.

As part of the investigation, prosecutors allege a Nomura manager involved in the structuring of Alexandria received a big bonus from the Japanese bank and gave some of it to his Monte dei Paschi counterpart, said two judicial sources with knowledge of the matter.

One of the sources said the alleged transaction had no criminal implication for either the Nomura or Monte dei Paschi executives involved, but could help Monte dei Paschi in its damage claims against Nomura.

Monte dei Paschi Chairman Alessandro Profumo told Thursday's shareholder meeting his bank was re-calculating the damages it was seeking from Nomura in view of the payment allegations.

"If there is someone that should be worried it is Nomura," Profumo said. "We consider ourselves the damaged party."

Nomura declined comment. It has previously denied wrongdoing and said it always acted correctly.

In the letter, Monte dei Paschi said the "legal proceedings under way would be irreparably weakened" if Alexandria was closed because it would no longer be able to pursue damages.

(Additional reporting by Stefano Bernabei in Siena, with Emilio Parodi, Stephen Jewkes and Danilo Masoni in Milan; Editing by David Holmes and Jane Merriman)