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Monte Paschi probe enters crucial week as Italy elections near

By Philip Pullella

ROME (Reuters) - An investigation into possible fraud by Monte Paschi bank enters a crucial few days as magistrates question key witnesses in a scandal that has touched off a political fire storm just three weeks before Italy's elections.

Magistrates in the Tuscan city of Siena, where the world's oldest bank is based in the 14th century palazzo of Rocca Salimbeni, are due to question its former president Giuseppe Mussari and former director general Antonio Vigni this week.

About 10 people are being investigated but Mussari and Vigni will be the highest-ranking former executives to be questioned so far in the probe, which has helped the center-right of former Prime Minister Silvio Berlusconi narrow the gap with the center-left in the run up to the February 24-25 elections.

The 450-year-old bank is under investigation for possible fraud over opaque derivatives and structured finance contracts between 2007 and 2009 that have left it facing losses of 720 million euros and dependent on a state lifeline.

The probe is also trying to determine whether bribes were paid at the time it purchased Antonveneta for 9 billion euros ($12 billion) from Banco Santander in 2007, just a few months after the Spanish bank had bought it for just 6.6 billion.

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Berlusconi and allies have used the scandal to attack both center-left rivals and outgoing prime minister Mario Monti, whose Treasury approved the Monte Paschi bailout last month.

Tuscany is a traditionally leftist area. Monte Paschi has for decades had close ties to the Democratic Party (PD), the largest in the center-left opposition coalition, through local government and dominance of a charitable foundation which is the bank's largest shareholder.

"We are risking a banking crisis of confidence over Monte Paschi," Roberto Maroni, head of the Northern League, a key Berlusconi ally, said on Sky Italia on Sunday.

"The bank is controlled by the foundation, which is controlled by the PD. It would be in the PD's interest to clarify everything," Maroni said.

According to one poll on Friday, the center-right is now only five points behind the center-left.

Another key part of the Monte Paschi puzzle will play out on Wednesday, when a review of three loss-making derivatives trades will be submitted to the bank's board.

The three financial transactions are the so-called "Alexandria" 2009 trade with Japanese bank Nomura <8604.T>, the "Santorini" 2008 trade with Deutsche Bank , and the "Nota Italia" 2006 trade with J.P. Morgan .

The bank has estimated losses linked to those contracts at around 720 million euros, but analysts and rating agency Standard & Poor's have said they could be bigger.

The scandal has spread from Tuscany's rolling hills to the European Central Bank (ECB)'s skyscraper in Frankfurt.

ECB head Mario Draghi, Bank of Italy governor at the time of Monte Paschi's risky deals, has been accused of lax oversight.

Despite having doubts about Monte Paschi's operations and accounts as long ago as 2009, the Bank of Italy said it did not summon the bank's management until late 2011 and applied no sanctions until after the executives stepped down last year.

On Saturday, a Rome court ruled a plan by Italy's central bank to use bonds to bail out Monte Paschi can go ahead.

(Reporting by Philip Pullella, additional reporting by Silvia Aloisi; Editing by Jason Webb)

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