Parmalat on verge of bankruptcy

By DAMIAN REECE and STEPHEN CASTLE

LONDON - It's been dubbed Europe's Enron and it has propelled Silvio Berlusconi towards another head-on confrontation with the European Union.

Parmalat, the Italian food group that makes Loseley ice cream and the eponymous brand of long life milk, was on the verge of bankruptcy last night following a US$4 billion accounting scandal.

The crisis immediately raised the prospect of a major political row between the Italian government and the European Union over illegal state aid as Mr Berlusconi, the Italian prime minister, yesterday issued a decree rewriting the country's bankruptcy laws in a desperate bid to salvage Parmalat's assets.

The Parmalat scandal is deeply embarrassing for Mr Berlusconi because he has liberalised Italy's accounting rules since coming to power in 2001. He has also reduced the penalties for false accounting, a move that resulted in the controversial rescinding of an 11-month prison sentence given to Cesare Romiti the former Fiat chairman.

Bank of America, one of Parmalat's main banks, said yesterday it had filed a criminal complaint over the affair with the Italian authorities.

The Italian premier, who has often courted controversy in his own political and business career, suffered an immediate backlash from political opponents yesterday who claim that Mr Berlusconi's more relaxed stance on accounting rules are at least partly to blame for the affair.

Parmalat and its founder, Calisto Tanzi, are now embroiled in an ever widening criminal investigation into the financial black hole at the dairy company which was described as "Europe's Enron" by Giulio Tremonti, Italy's finance minister. There were fears yesterday that the scandal could eventually cost Parmalat creditors and shareholders close to US$10 billion.

The scandal has not only dragged in senior figures from the Italian political and business world but also involves British accountancy firms Deloitte & Touche and Grant Thornton who are Parmalat's auditors. However, unlike Arthur Andersen, the Enron auditor, the two British companies have acted as whistle blowers in the Parmalat scandal, highlighting their concerns over the company's finances.

Another crucial player in the affair is Bank of America. It first alerted the company to concerns about its accounts and last night said it had filed a criminal complaint with Italian prosecutors who have launched a probe into the food group.

Antonio di Pietro, a member of Italy's centre left opposition, yesterday said: "The political responsibility of the government is revealed by a law that decriminalises false accounting to protect false balance sheets and leave thousands of investors in their underpants."

The Italian government was also forced into the humiliating act of pleading with the European Union yesterday to recognise crisis status for its dairy industry as a result of the scandal. Italian milk producers have not been paid since August by Parmalat which buys 8 per cent of the country's milk output.

Italy also said that it would ask Brussels for special dispensation from EU rules on state aid to help the industry, and would also be requesting "support measures" from the EU.

However, Mr Belusconi's new bankruptcy laws and the request for special treatment could be rebuffed by the EU which is concerned the measures could be used by Italy to disguise illegal state aid to Parmalat.

An EU spokesman said: "The bankruptcy decree will have to be assessed by us. The key point is fiscal neutrality."

Parmalat is one of Europe's biggest food groups and makes dozens of Europe's household name brands, such as Malu deserts.

The company was built up by Mr Tanzi who inherited his father's salami business in Collecchio, a village near Italy's culinary capital, Parma.

He started a dairy plant in 1961 to challenge the country's milk monopoly and the business grew to become Italy's first producer of branded milk including the long life, ultra heat treated milk which Parmalat has become so famous for. Parmalat came to stand for everything that was solid and reliable about the hard working inhabitants of industrial Northern Italy.

In typical patrician style, Mr Tanzi splashed out on extravagant sports sponsorships, with his company name becoming familiar to millions of Formula One racing fans around the world after he signed deals with Niki Lauda and Nelson Piquet. Not satisfied with mere sponsorship, he eventually bought Parma football club in 1991, a year after the company floated on the Milan stock exchange.

However, Mr Tanzi has now been forced out of the company he built and faces ruin as most of the Tanzi family fortune was tied up in Parmalat shares. He has been replaced by Enrico Bondi, one of Italy's toughest company doctors.

The Parmalat affair dwarfs previous continental accounting controversies such as Ahold, the Dutch retailer, which was hit by a $US1 billion scandal earlier this year.

At the centre of the Parmalat scandal is a phantom bank account set up by a Parmalat offshoot which was purported to contain US$4 billion. However, on Friday the account was shown to be fictitious, sparking panic among Parmalat shareholders and fears of an immediate collapse of the industrial giant, threatening 36,000 jobs.

Problems at Parmalat first surfaced earlier this month after the company admitted that it had been unable to cash in a US$500 million investment in an obscure, Caymen Islands-registered investment fund called Epicurum.

On December 8 the company was due to repay US$150 million of debt but could only meet the repayment with the help of its lending banks which eventually repaid the money four days late.

The company then failed to pay the first instalment on a US$400 million agreement to buy out fellow investors in a Brazilian joint venture due on December 17.

But the real scale of the crisis only became apparent on Friday when the company admitted in a statement posted on its website that documents from Bank of America, supposedly showing that the company had US$3.95 billion deposited in one of its Caymen Islands bank accounts, were false. The phantom account had been set up by a Parmalat subsidiary called Bonlat Financing Corporation. It is believed that a scanning machine was used to cut and paste letterheads and company names to create the false Bank of America documents. These documents were then used to persuade auditors at Grant Thornton that Parmalat had billions in cash and shares that in reality did not exist.

The criminal investigation now underway into the affair will want to establish the motives behind the false accounts and ascertain whether any Parmalat employees benefited personally or whether the accounts were designed as a way of disguising the company's financial position.

Bank of America said it has passed its evidence to the Italian prosecutors who are now looking into the affair.

The news of the phantom bank account stunned investors and the company's share price crashed, eventually leading to their suspension from trading yesterday by the Milan Stock Exchange.

The company has said it has US$7 billion of debt outstanding to a variety of Italian and international banks but now has no obvious means of repaying it unless the company is broken up and the brands sold off to other European food groups.


- INDEPENDENT