LOCAL AUTHORITIES, CREDIT DERIVATIVES AND ART. 117, 119 OF THE ITALIAN CONSTITUTION

Financial derivatives are the most complex instruments conceived by financial engineering. In the past forty years, an increasing number of local governments - on both sides of the Atlantic - entered into derivatives transactions, such as the swap contracts, to lower expected borrowing costs. In the USA, Germany, France, Italy and other EU countries, derivative contracts were written in ways that obscured the underlying economics, generating huge losses, which created large problems in local governments. In Italy, the introduction, during the 1990s, of fiscal austerity and market-oriented reforms, in line with the EMU and the Stability and Growth Pact, and the devolution of fiscal and administrative authority, caused a reduction of fund transfers from the central state to local government level. The process of decentralization granted local authorities a greater autonomy in the administration of their finances and the possibility to use bonds and derivatives. The recurring, inappropriate use of derivatives by banks and intermediaries (for speculative rather than for hedging purposes), the passive role of unsophisticated municipalities - interesting that the Milan Court of Appeal ruled in 2014 to subvert the first degree sentence, which found several managers, officers and banks guilty - and the need to prevent them from postponing the financial burden of debt forward in time, has driven the Italian Parliament to restrict derivative transactions, firstly, limiting the scope only to debt restructuring, and eventually - by prohibiting new transactions to local governments. In the light on the last section of Art. 119 and Art. 117 (lett. e), the Constitutional Court (Decision No. 52/2010) declared that the law was constitutionally legitimate.