Junk bonds are just the kind of investment that widows and orphans, and pensioners looking for somewhere for their life savings, should avoid. Yet in recent years in Italy, such investors have not only been filling their portfolios with high-risk corporate paper, but have been encouraged to do so by their banks.

Sooner or later this game had to end in tears and recriminations. It did – at the end of July with the collapse of Cirio, a food processing concern, that has left thousands of savers nursing big losses and even bigger grudges against the banks that sold them bonds in the busted group. But mis-selling is only part of the complaint. Even more serious are allegations that banks stuffed the bonds into investors’ portfolios in order to reduce their own exposure to Cirio.

The saga of Cirio’s bonds – seven issues totalling more than E1.1bn during the past three years, none of which enjoyed the quality-mark of rating by credit-rating agencies – began last November when default was declared on E150m of maturing bonds. For nine months, advisers, banks, bond-holders and Cirio's main shareholder were locked in talks to find a way out of the mess but they failed. At a meeting in London on 28 July, bond-holders turned down the restructuring plan that had been laboriously put together, and Cirio was put into liquidation three days later when a handful of top Italian banks failed to agree on providing fresh money to keep the group afloat.

One lesson for investors is that big-name brands are no guarantee of a solid investment. Cirio is Italy’s best-known brand of canned tomatoes, yet its makers were in trouble; at year-end 2002, a year in which consolidated losses were almost E550m, it had negative net equity of E400m and financial debt of E1.6bn.

During two and a half years of frenzied bond issues, Cirio was able to slash its bank borrowings from E870m to E335m. While shifting the load may have seemed good for banks at the time, magistrates’ current investigations may prove embarrassing for them. Several of the bonds that they shifted were issued by Cirio companies abroad without proper propectuses, getting round safeguards designed to protect Italian investors.

Culprits are being sought and auditors, Consob (the companies and stock market watchdog), the treasury ministry and the Bank of Italy could all be in the line of fire. But most Italians are convinced that the blame really rests with the banks.

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