An investigation into the governor of the Bank of Italy in relation to alleged fraud comes on the heels of the collapse of Parmalat, writes Paddy Agnew in Rome

Just when Italy's business community reckoned that things could hardly get worse, up flashed the news this week that Mr Antonio Fazio, governor of the Bank of Italy, was "under investigation" in relation to the allegedly fraudulent practises of Banca 121, formerly the Banca del Salento in Puglia, southern Italy.

In effect, the governor stands accused of having aided and abetted fraud through his failure as central bank chief to properly oversee the activities of Banca 121.

Mr Fazio's involvement in this latest Italian banking scandal may well owe more to normal judicial procedure (he has been named in a complaint filed by a disgruntled Banca 121 investor) than to administrative wrongdoing on the part of the Bank of Italy.

Yet, coming at the end of two months that have been dominated by the spectacular €14.5 billion collapse of dairy giant Parmalat, the governor's difficulties hardly make for reassuring news. After all, among the most important, and thus far unanswered, questions concerning the Parmalat collapse are the allegations of collusion between Parmalat, auditors and banks, as well as concern about the regulatory control (or lack of) imposed by the Bank of Italy.

By the standards of the Parmalat crash, Banca 121 represents small fry, with approximately 100,000 small investors having lost €2.7-€3 million.

The alleged scam saw Banca 121-offered products with names such as BTP-tel, BTP-index and BTP-online, names that sound reassuringly similar to good-old Italian government bonds. In reality, the products in question were not government bonds but high-risk investments linked to worldwide stock market results.

The risks may be high, too, for the Italian banking system.

This week, EU Affairs Minister Mr Rocco Buttiglione felt obliged to warn against the danger of creating a climate of summary justice that would block the banking system in just the same way that the infamous Tangentopoli investigations of 10 years ago blocked the awarding of public contracts.

"With the inclusion [of governor Fazio\] in this [Banca 121\] enquiry, the credibility of the entire Italian banking system has been put in the dock. We could even be looking at a paralysis that would have devastating consequences for our economic development," he said

To some extent, the Italian (and international) banking system has been "in the dock" for the best part of the past two months, ever since the pre-Christmas crash of Parmalat.

On Tuesday, for example, inspectors from the US Securities and Exchange Commission (SEC) arrived in Parma for meetings with the Italian prosecutors who are investigating the Parmalat bankruptcy.

Although the SEC inspectors revealed no details of their meeting, Italian sources suggest that the two sets of investigators were comparing notes about the possible responsibilities of US and Italian banks in the scandal. As of now, Bank of America, Morgan Stanley, Deutsche Bank, Citigroup and Capitalia are among the major banks called on to "collaborate" with investigators on both sides of the Atlantic.

The SEC, which in December charged Parmalat with securities fraud over the sale of $1.5 million (€1.2 million) worth of bonds in the US, is also believed to be investigating whether US banks had been "negligent or reckless" by selling Parmalat bonds.

Perhaps even more worrying is the fact that the SEC inspectors are now believed to be looking into alleged money-laundering related to the Parmalat collapse. Both Swiss and Luxembourg authorities, incidentally, have initiated similar money-laundering inquiries regarding Parmalat in the past month.

Nor has the Italian banking system been much helped by the evidence given to investigators by Mr Fausto Tonna, Parmalat's former chief financial officer, currently under arrest. He has alleged that Parmalat was pressurised into the 1999 purchase of milk-processing company Eurolat by the then Banca di Roma, now part of the Capitalia banking group.

Parmalat bought Eurolat from another since-collapsed food company, Cirio, at the time heavily in debt to the Banca di Roma, which therefore stood to gain from the sale. Cirio filed for bankruptcy protection in November 2002, after defaulting on a bond, whilst its founder, Mr Sergio Cragnotti, one-time owner of Lazio football club, was arrested two weeks ago on fraud charges.

Investigators too may have stopped to take a deep breath when financial officer Mr Tonna explained that Parmalat had been losing up to €450 million per annum from the mid-1990s onwards and that the total losses may have been accumulated and hidden over a 30-year period.

Is it possible that no one in the banking system was aware of such prolonged and systematic malpractice?

In a recent meeting with the foreign press corps in Rome, Confindustria president Mr Antonio D'Amato, whilst acknowledging the full gravity of the Parmalat collapse, did point to the fact that people had been immediately arrested (under the terms of preventive detention) as proof of Italy's determination to set its house in order. By comparison, he pointed out, two years passed before some of the senior Enron executives were brought to court.

Certainly, the Parmalat arrests have continued apace. Last week, Giovanni, Francesca and Stefano Tanzi, respectively the brother, son and daughter of Parmalat padrone Mr Calisto Tanzi were arrested, again on fraud charges. On Wednesday, Mr Romano Bernardoni, former chief of the Tanzi family's tourism business, Parmatour, was also arrested.

It remains to be seen whether the spate of arrests, allied to planned reforms of Italy's regulatory authorities, will restore international confidence in Italy as an investment target.

What does seem certain is that the restructuring plans of a number of major Italian companies may be radically overhauled.

Before the Parmalat collapse, further bond issues were reportedly among the options being considered by, amongst others, several indebted Italian fashion companies. However, market analysts say that the state of the corporate bond market in Italy now makes that a very difficult option.

"Companies will have to rely on their own resources... including the sale of assets," analyst Ms Francesca di Pasquantonio told the International Herald Tribune this week. She was speaking before Mr Fazio had received notification of his involvement in the Banca 121 scandal.