Closure of Alexandria trade would cost Monte Paschi 1 billion euros

SIENA (Reuters) - The European Central Bank has told Monte dei Paschi di Siena to close a loss-making derivatives trade with Nomura <8604.T> by late July, a move that would generate a pre-tax loss of 1 billion euros ($1.06 billion), according to a letter sent by the bank to prosecutors.

The letter, dated Feb. 18 and seen by Reuters, said the ECB had told the Italian bank that the trade should be closed by July 26 "unless a proven legal impediment arose in the future as a consequence of the ongoing civil proceeding or criminal investigation."

Italy's third largest bank entered the derivatives contract with Japan's Nomura in 2009. Known as Alexandria, it turned out to be loss-making and triggered a string of judicial investigations in Italy.

Monte dei Paschi has been hit by the euro zone debt crisis and a scandal over derivative contracts, including Alexandria. It emerged as the weakest lender in a Europe-wide health check of the sector last year.

After a 5 billion euro rights issue last year, the bank is holding a shareholder meeting on Thursday to approve another 3 billion euro cash call to plug the shortfall exposed by European regulators.

On Friday, Monte dei Paschi said it was breaching regulatory limits because its 3.4-billion euro exposure to Nomura, linked to the Alexandria trade, accounted for 35 percent of its capital. That is 10 percentage points more than what is allowed.

Milan prosecutors have said the bank's former management entered Alexandria and other complex derivative trades to conceal losses after stretching its finances to buy rival Antonveneta in 2007 for 9 billion euros.

Monte dei Paschi has already restated its 2012 accounts to reflect losses linked to the derivatives trades.

The bank, its former management as well as Nomura are under investigation in Milan over the Alexandria contract, according to prosecutors' documents seen by Reuters.

Monte dei Paschi confirmed on Friday it and Nomura were under investigation in the probe.

In its letter, Monte dei Paschi said the bank had had informal contacts with Nomura over possible terms for a closure of the Alexandria trade.

Nomura declined to comment on Thursday. It has previously denied any wrongdoing and said it always acted correctly.

In its letter to the prosecutors Monte dei Paschi said the "legal proceedings under way would be irreparably weakened" if the Alexandria trade was closed. The bank noted it would not be able to pursue damages if the trade was closed.

Monte dei Paschi is seeking damages for at least 750 million euros from Nomura and former Monte dei Paschi executives in relation to the Alexandria trade.

(additional reporting by Silvia Aloisi, writing by Stephen Jewkes, editing by Keith Weir)