July 4, 2007 (LPAC)--A consortium of Italian banks are facing serious losses, as the result of the unfolding collapse of credit derivatives. On June 29, Italease, a real estate leasing company, announced $610 million in losses on credit derivative swaps, involving Deutsche Bank, Paribas and Societe General. Italease also announced a potential additional $120 million in potential losses. Italease is owned by a consortium of Italian banks, dominated by Banca Popolare di Verona e Novara. Sources familiar with the Italease case say that the firm got caught in the drying up of the yen carry trade and the hike in European Central Bank interest rates. An analyst from one of Italy's largest commercial banks told Executive Intelligence Review on July 4 that the Italease case reflected an ignoring of reality: "We have been warning about ECB rate increases in our weekly bulletins at least since the beginning of the year," the analyst complained. He further warned that European banks may be even more heavily exposed to a blow-out of the derivatives bubble than U.S. banks. The analyst cited Deutsche Bank, Barclays, BNP Paribas, UBS, Royal Bank of Scotland, and the Credit Suisse Group as the most vulnerable to a derivatives crash.
In a related development, reflecting the consequences of the drying up of cheap credit, the Daily Telegraph's Ambrose Evans-Pritchard reported on July 4 that the planned private equity fund takeover of Alliance boots, one of Britain's biggest chain stores, for a reported $22 billion, could be put on ice, for lack of cash. Alliance is the first FTSE 100 firm targeted for a private equity takeover. According to Dr. Suki Mann of Societe Generale, "The market is in no mood to try to pick the bottom here. Any signs of systemic risk will lead to an over-reaction." In the case of Alliance, the takeover would saddle the firm with so much leveraged debt that it would constitute nine-times the projected 2007 earnings of the company. Among the banks behind the takeover scheme, who are an estimated $16 billion short of investment money, are Barclays Capital, Citigroup, Deutsche Bank, JP Morgan, Royal Bank of Scotland, Unicredit, and BAS Capital Funding.
The signs of panic over the potential blow-out of the derivatives market are also hitting the British parliament. On July 3, the Guardian reported that Jon Moulton, head of the private equity fund Alchemy Partners testified before the UK Parliament's Treasury Select Committee on Private Equity, that highly leveraged buy-out funds are at risk of collapse, especially if interest rate rises continue. He told the committee, "[A collapse] could be very close. It could be a year or two forward. It's very hard to call. It is near future ... The sub-prime mortgage market in the US ... is a very interesting prototype for us. It's financed in the same way that the leveraged loan market is structured here, through CLPs and it's got an enormous number of parallels. You can take a view that we will have the same sort of problems at some point arising out of an over-enthusiastic market."
