Readers, personally I would have entitled this article differently, more on the order of Don't Forget Greece, But Look At How This Derivative Collapse Is Spreading To Other Countries. In about a year the economic landscape is going to look much worse. Neo-Classical or as William Black likes to say, Theo-Classical Economics, is essentially as massive criminal conspiracy, some times also described as corporatism. The phrase "Eat The Rich" comes to mind because they continue to coerce politicians to consume the middle class and produce great numbers of newly poor as if it were the result of divine intervention rather than their unfettered greed. Kleptocracy is another term that has been used. We need to be busy building our own safety nett and enforcing laws against fraud. Admin

MILAN: Financial markets are gripped by the role derivatives have played in

Greece's debt crisis, but Italy also has a derivatives time bomb,
and hundreds of cities are in the 24 billion euro blast zone.

Many local governments eager to cut financing costs for years rushed to sign up for complex derivatives contracts, even when the terms were in English. But some cities, facing big losses when interest rates go up, are now trying to pull out of derivatives and suing the international and local banks that arranged the deals.

In a test case, a judge in Milan will decide in coming weeks whether to try 13 people and four banks — UBS, Deutsche Bank, Germany's Depfa and JPMorgan Chase & Co — on aggravated fraud charges. The case stems from a derivatives swap over a 1.68 billion euro ($2.28 billion) 30-year bond, the biggest issued by an Italian city.

Milan, Italy's financial capital, is facing a 100 million euro loss on the deal, city officials say. Milan is also suing the banks for 239 million euros in overall liabilities.

In the southern region of Puglia, prosecutors are seeking to bar Merrill Lynch, a unit of Bank of America Corp, from government contracts for two years. The move stems from derivatives losses from 870 million euros in regional bonds.

JPMorgan, UBS and Deutsche have denied wrongdoing, and Depfa has declined comment. Merrill has not commented.

Make the switch

Almost 500 small and large Italian cities are facing mark-to-market losses of 2.5 billion euros on the contracts, according to the Bank of Italy. Analysts say that figure will balloon when interest rates go up.

Most of the contracts involved switching fixed rates on loans to variable ones with banks.

"With the economic crisis, the problem has been lessened a bit (with lower rates) ... But in fact with a rate rise it becomes an even worse problem," said Fabio Amatucci, an expert on local government finances at Milan's Bocconi University.

The European Central Bank is expected to start hiking rates at the end of this year or early next year.

US and European officials are looking into how U.S. investment bank Goldman Sachs Group Inc may have helped Greece disguise the size of its budget deficit through the use of cross-currency derivatives in 2001.

The Italian deals differ somewhat from the Greek case since the instruments were usually for switching rates on loans, but Italy stands out because of the vast number of cities, regions and public entities — even a theatre association — that turned to them from 2001 to 2008.

The Bank of Italy put the notional value of derivatives contracts at 24.1 billion euros in June 2009. However, Il Sole 24 Ore business newspaper on Thursday cited Treasury data to put the overall figure at 35.5 billion euros — a third of local governments' debt — when wider criteria were used.