Berlusconi Claims Deutsche Bank Manipulated Italian Bond Markets To Oust Him From Office

Former Italian Prime Minister Silvio Berlusconi is stirring the pot again – this time with Germany’s largest bank in his crosshairs – as he attempts to regain his old position.

Today, Berlusconi told CNBC that his resignation, which came in late 2011 when Italian bond yields rose to their highest levels of the crisis (see chart below), was a “coup d’etat” led by Deutsche Bank.

Italian bond yields

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CNBC’s Matt Clinch writes:

[Berlusconi] pointed the finger at one of Germany’s largest banks for the spike in Italian bond yields, which rose above 7 per cent in November 2011, forcing him to step aside.

“Deutsche bank imposed a sell-off of all its Italian and Greek government bonds. American and international investors questioned the move,” he said. “Some assumed that the German bank had some specific information that nobody else had. It was a huge lie.”

His resignation led to the appointment of technocrat Mario Monti as Italian Prime Minister, but Berlusconi said Monti’s government had failed by pushing the economy into a worsening decline.

Berlusconi’s comments advance a theory put forward by Renato Brunetta, an Italian economist who served in Berlusconi’s cabinet as Minister of Public Administration and Innovation until the former prime minister’s resignation last year.

Brunetta’s claims involve Deutsche Bank’s alleged cover-up of billions of dollars of losses on derivatives positions during the financial crisis. Earlier this month, the FT’s Tom Braithwaite, Kara Scannell, and Michael Mackenzie reported that story:

The three complaints, made to regulators including the US Securities and Exchange Commission, claim that Deutsche misvalued a giant position in derivatives structures known as leveraged super senior trades, according to people familiar with the complaints.

All three allege that if Deutsche had accounted properly for its positions – worth $130bn on a notional level – its capital would have fallen to dangerous levels during the financial crisis and it might have required a government bail-out to survive.

Instead, they allege, the bank’s traders – with the knowledge of senior executives – avoided recording “mark-to-market”, or paper, losses during the unprecedented turmoil in credit markets in 2007-2009.

Deutsche Bank’s alleged mismarking of derivatives positions as reported by the FT (which the bank denies) occurred two years before the period in which Brunetta and Berlusconi accuse the bank of manipulation.

However, the charge still plays prominently into Brunetta’s version of events. Chris Emsden of Dow Jones reports:

Mr. Brunetta sought to link allegations that Deutsche Bank AG (DB) hid potential derivative losses from regulators to the bank’s large-scale sale of sovereign bonds issued by peripheral euro-zone nations, including Italy.

The U.S. Securities and Exchange Commission is investigating allegations made by two former traders. Deutsche Bank has denied the claims.

Mr. Brunetta said that German bund yields had been inching up in early 2011, highlighting fears of the solvency of Germany’s banks. He claimed the banks, “probably with the implicit support of Berlin, decided to transfer the potential crisis of their own private banking system on to countries considered the weakest in the euro area.”

As yields rose in peripheral countries, they fell sharply in Germany, allowing Ms. Merkel to seek to “create a hegemony over the euro zone” and turn the focus from banking to public finances, Mr. Brunetta said, describing the operation as “almost a victory in the third world war.”

In other words, Brunetta and Berlusconi are saying that Deutsche Bank sought to manufacture a sovereign debt crisis in Italy, which would have the effect of bringing bond yields down in Germany as investors sold their holdings of peripheral bonds, including those of Italy, and fled to the “safe-haven” status afforded by German bonds.

Furthermore, Berlusconi’s resignation provided the impetus to install an unelected technocrat, Mario Monti, as prime minister.

The chart below illustrates Brunetta’s theory (Italian government bond yields are shown in green and German yields in orange):

German and Italian government bonds

[credit provider=”Bloomberg”]

Both sovereigns saw yields begin to rise together in the autumn of 2010. However, it wasn’t until the summer of 2011 that Italian borrowing costs really took off, and German yields finally began to fall.

(h/t @dsquareddigest)