Protecting the Italian Economy

Article published on Feb. 27, 2006
Article published on Feb. 27, 2006

This article has not been vetted by an editor at Paris HQ

The banking scandal that erupted in Italy at the end of 2005 was not merely an Italian tragedy, the credibility of the European Union’s free market was also put at stake. Other controversies are now also emerging from Europe’s economic closet.

Italy’s financial storm emerged last summer after the central bank, governed by Antonio Fazio, blocked the foreign takeover bids for two Italian banks, Banca Antonveneta and Banca del Lavoro (BNL), by a Dutch (ABN AMRO) and a Spanish bank (Banco Bilbao Vizcaya Argentaria, BBVA). Soon after rejecting the foreign takeovers, he demonstrated his support of Banca Popolare Italiana (BPI) and the insurance group Unipol, which also targeted Banca Antonveneta and BNL respectively, proving his reject of Italian banks in foreign hands.

Adrian Michaels, Milan correspondent of the 'Financial Times', said that Fazio notoriously opposed foreign takeovers of Italian banks. “In [Fazio’s] more that 12 years as governor, no foreign group had been allowed to buy one. He believed that Italian banks needed to become fitter and larger before being exposed to the global mergers and acquisitions market.”

On July 27, the prominent Italian newspaper ‘Corriere della Sera’ published a conversation, recorded by investigative magistrates, between Fazio and the chairman of BPI Gianpiero Fiorani, which disclosed the shady actions of Italy’s central bank governor.

The phone call between the two bankers featured Fazio reassuring Fiorani that BPI’s takeover bid for Banca Antonveneta had been approved by the central bank. In the same conversation, Fiorani thanked Fazio for his support saying: "Tonino, I’m overwhelmed. I have goose bumps, thank you, thank you… I would give you a kiss right now on your forehead if I could.”

The disclosure of this intimate conversation between Fiorani and Fazio sparked the uproar of Europe’s financial institutions. The European Central Bank demanded Fazio’s resignation; the European Commission began legal action against the Bank of Italy for breaching the EU’s free market regulation; and ABN AMRO, which had been outmanoeuvred by Italy’s central bank demanded some clarification.

Threat of a new 'Tangentopoli'

After nearly six months of chaos and immobility, the Italian magistrates were able to end the embarrassing deadlock following the controversial phone call between Fazio and Fiorani, which had stained the reputation of Italy’s leading financial institution.

Investigations led to the arrest of Fiorani and four other bankers for criminal association, and forced Fazio’s resignation. However, as investigations continued, Fiorani revealed that numerous political figures and bankers were also involved in the scandal.

Within the financial sector, Giovanni Consorte, former chairman of Unipol, was identified as the 'coach' of a broader illicit manoeuvre linked to the takeover of both Banca Antonveneta and BNL. In the political elite, Berlusconi, Italy’s prime minister, and Piero Fassino, leader of the Left Democrats, were listed by the investigators as people close to Fiorani and Consorte. Although neither of them were accused of any wrongdoing, Michaels of the Financial Times says: “The banking scandals demonstrate that protectionism runs deep on both sides of the political spectrum.”

Many in Italy feared the arrival of a new Tangentopoli (Bribe Ville), however a senior Italian finance analyst, working in the City of London, said: “There is no evidence that the entire financial system in Italy is corrupt. But what needs to be learnt from the Italian controversies over Bank Italia is that Italy has to open itself to the global economy without discriminating its business partner.”

The future of Italy’s financial role in Europe

As investigations in Italy’s financial scandal continue, financial analysts are questioning the future of Italy’s banking sector. As Mario Draghi, former vice chairman of Goldman Sachs International and treasury official, takes over as new governor of the Bank of Italy, the US based magazine Newsweek expressed a widespread concern that “Italy’s financial role in Europe may never be the same”.

However, all EU and financial institutions have applauded Draghi’s appointment, and are convinced he will represent a new and more transparent era in the Italian banking system. Draghi is renowned for being a supporter of privatisation and will not favour any form of protectionist measures, as Fazio did.

ABN AMRO, which eventually won the bid for Banca Antonveneta, also expressed optimism at Draghi’s appointment to the central bank. Jochem Laarschot, spokesman of the Dutch bank, said: “It was a rollercoaster situation for half a year after we launched our offer. However, the rollercoaster ride has ended and we are satisfied with a positive ending of the Banca Antonveneta operation.”

BBVA has decided not to run for BNL, which ended up in the hands of the French bank BNP Paribas. However, Gonzalez Patiño, spokesman of BBVA, preferred not to comment when asked how he felt about the Italian scandal, underlining that his bank preferred to forget about the whole event.

As the financial turmoil reaches an end, Italy’s business role in Europe remains unclear. Legislative reforms have been implemented to transform the central bank’s governance and greater power has been given to the business watchdogs. However as a new financial debacle emerges in Poland, involving similar nationalistic practices, there is evidence that stronger intervention will be needed.

The EU will have to step in and reform the current banking directives to limit powers of national banking regulators to block cross-border mergers and acquisitions.