The Virus spreads...

...Italy now firmly in the cross-hairs.

ROME—Derivative contracts taken out by Italian municipalities could jeopardize local public finances for decades, even though the global financial crisis has softened the blow in the short term, Italy's Audit Court said Wednesday.

"Certain debt and imbalances are magnified over time, and may wring sacrifices from future generations for 20 or even 30 years," Mario Ristuccia, the chief prosecutor of the administrative court, said in a speech delivered here.

The Greek government's use of derivatives has stoked claims of deception and fraud as Athens used the sophisticated over-the-counter contracts to prod its fiscal accounts into apparent compliance with European Union rules.

Italy itself used a currency swap to help its application to join Europe's monetary union at its inception more than a decade ago.

National governments aren't alone. After a 2002 Italian budget law allowed local administrations to engage in sophisticated finance, local governments entered into around €35 billion ($) worth of derivative contracts. That is equivalent to almost a third of all debt held by Italy's regions, provinces and municipalities. More than 500 municipalities signed derivatives deals.

The contracts were often designed to protect public bond issuers against adverse interest-rate movements, until the central government banned the practice in 2008. But while the derivatives were supposed to hedge balance-sheet risks, they also were used to rake in upfront cash to use for current spending, and at times with a pure "speculative intent," Mr. Ristuccia said.