Can You Bank on Italy?

By Jeff Israely/ Rome

The call came just after midnight, and Gianpiero Fiorani knew immediately that the news was good. Antonio Fazio, Italy's central bank chief, was on the line to say he had just signed off on the bid by Banca Popolare Italiana (BPI) to take over another northern bank, Antonveneta. What neither man knew was that authorities probing BPI chief Fiorani's role in the attempted takeover were listening in. "Ah, Tonino, I'm moved," he said, addressing Fazio by an affectionate nickname, adding that he had "goose bumps."

The near cinematic display of favoritism--the top bank regulator chumming it up with someone he is supposed to regulate--reinforced Italy's nearly mythic status as Europe's most rigged economy. The scandal created a major crisis for the government of businessman Silvio Berlusconi, itself no paragon of arm's-length transactions. Yet even Berlusconi finally found enough moral high ground to call on Fazio to resign his lifetime post after Finance Minister Domenico Siniscalco quit in protest when his calls for Fazio to step down had no effect. Siniscalco's replacement, Giulio Tremonti, who clashed with Fazio in an earlier stint as Finance Minister, tried to force him out by snubbing him at an International Monetary Fund meeting in Washington. Fazio still refused to budge.

The Fazio melodrama comes as Italy--the world's seventh largest economy--continues to struggle with European economic integration. Cross-border bank mergers are common in the euro zone, but not in Italy, where the banking system remains largely a fortress under the eye of the all-powerful central banker. Although Fazio no longer sets the price of money, he has wielded every ounce of his notable clout. His stated goal is for Italian banks to be at the service of Italian businesses. In practice, this has meant keeping foreign firms out. It's a shortsighted view and dangerous: some blame the insulated Italian banking industry for the $9.6 billion Parmalat scandal of 2003, as the mega-leveraged dairy giant was able to create new debt wherever it turned.

In the wake of the Fazio-Fiorani revelations, BPI's bid for Antonveneta has been blocked by magistrates, and its rival, Dutch bank ABN Amro, has taken a majority stake in Antonveneta, making it the first foreign owner of a major Italian lender. Meanwhile, Fiorani, under investigation for allegations of insider trading, market rigging and giving false statements, has resigned as BPI chief.

Fazio holds on, however, despite being under investigation in the same probe of the takeover bid. So what drives the decisions of Italy's top central banker? Some answers can be traced back to 2002, when Fazio traveled to the northern town of Lodi for a conference organized by Fiorani's bank, then called Banca Popolare di Lodi. During the afternoon break, the two men decided to stroll together through the center of town in front of a cadre of journalists. It was a blatant signal to all that Fazio had anointed Fiorani to be the next banker on the fast-growth track. Perhaps more than the now infamous phone call, the public display in Lodi is evidence of how Fazio has viewed the job he has now held for 12 years. "He says, 'It is I, not the markets, who knows what's best,'" says a Bank of Italy official. "The way he interprets his role is not to hide the fact that he is behind this bank or that one. It's really arrogance of power."

Fazio's top aides say he feels that resigning would be an admission that he did something wrong. Tito Boeri, an economics professor at Milan's Bocconi University, says the Fazio-Fiorani phone call was "appalling" but not necessarily surprising. "There is no accountability. We really must change the [banking] rules. It even comes before changing the person." Only once the playing field is leveled will Italy begin to attract foreign business leaders for something other than a Chianti getaway.