The Monte dei Paschi di Siena story is not just an Italian affair. Revelations that complex financial transactions used by the country’s third-largest bank had the effect of hiding losses are causing a political storm in Italy.

With a general election only weeks away, Silvio Berlusconi looks like being the main winner from the political spat. The former prime minister’s camp has attacked Pierluigi Bersani’s Democratic Party, which is leading in the opinion polls, for being close to Monte dei Paschi. It has also criticized Mario Monti, the current prime minister, who agreed to increase the bank’s bailout to 3.9 billion euros.

The scandal will not be enough to get Mr. Berlusconi back as prime minister. But it could prevent a Bersani-Monti coalition from running the country with a solid majority in both houses of Parliament. If so, fears about Italian political risk could return to haunt the markets.

The still-murky story has also put Mario Draghi under the spotlight because the European Central Bank president ran the Bank of Italy when Monte dei Paschi was getting into such a mess. Giulio Tremonti, who was finance minister in Mr. Berlusconi’s last government, said in a Twitter message that it was “stupefying” that Mr. Draghi had failed to discover or prevent the complex transactions.

The Italian central bank’s defense is that, while some of its supervisors knew about the transactions, it did not know that they were linked to other unprofitable operations because crucial documents were hidden from it. What is more, even though it was worried about Monte dei Paschi’s weak risk management, it did not have the power to fire bank directors, despite Mr. Draghi requesting such authority from the last Berlusconi government. Its moral suasion did, though, eventually help remove the old Monte dei Paschi management last year.

The Sienese bank’s troubles began in November 2007 when it bought Antonveneta, another Italian bank, from Santander of Spain for 9 billion euros. This was a crazy price. The subprime crisis had already burst into the open and the price was 60 percent more than what Santander had itself paid only a few months earlier when it helped carve up ABN Amro, the Dutch banking group, with the Royal Bank of Scotland and Fortis of Belgium. Italian prosecutors are now investigating why Monte dei Paschi paid so much.

Some people think the Bank of Italy should have stopped Monte dei Paschi from buying Antonveneta. But its defense is that it did not have the power to say a deal was overpriced. All it could do was insist on the bank raising more capital, which it did.

Even so, the Antonveneta deal left Monte dei Paschi with a weak balance sheet just as the financial crisis was about to go into overdrive. That is when two other investments, which have set off the current turmoil, went bad: one nicknamed Santorini and the other called Alexandria.

The original Santorini deal was done with Deutsche Bank in 2002 to warehouse Monte dei Paschi’s shares in yet another Italian bank, San Paolo di Torino. That transaction allowed Monte dei Paschi not to report losses on the stake, provided it did not fall below a certain level. In 2008, however, the value of the stake plummeted, meaning that Monte dei Paschi was staring at a loss of about 360 million euros. That was unfortunate given that its balance sheet was already stretched after the Antonveneta deal.

Monte dei Paschi engaged in two more transactions with Deutsche Bank that had the effect of mitigating its Santorini loss. One was structured so it was likely to generate a profit for Monte dei Paschi; the other so it was likely to generate a profit for the German bank. Monte dei Paschi rapidly unwound the first transaction, helping it counter the loss on the original Santorini deal. But it hung onto the second investment and did not report any immediate loss.

Deutsche Bank’s defense for being involved in the transaction is that it asked for and received representations from Monte dei Paschi’s senior management that its auditors and regulators had been informed of the transaction’s details.

The Alexandria transaction was somewhat similar. In this case, Monte dei Paschi’s original bet was on risky credit derivatives called C.D.O. squareds, which, by 2009, were threatening it with a loss of about 220 million euros.

That is when Monte dei Paschi embarked on another series of side deals, this time with Nomura. One transaction involved the Japanese investment bank buying the C.D.O. squareds from Monte dei Paschi at above their market price, with the result that the Italian bank avoided booking a loss. The other was structured so Nomura would make a profit, but Monte dei Paschi did not acknowledge the countervailing losses upfront.

Nomura says the deal was approved by the Italian bank’s board and its then-chairman, Giuseppe Mussari, as well as being reviewed by the bank’s auditors, KPMG. The Italian bank denies that its board approved the deal. KPMG says it never received the Alexandria documentation. Mr. Mussari denies any wrongdoing.

These complex transactions only came to light when an exchange of letters from Nomura to Monte dei Paschi was found in a hidden safe by the Italian bank’s new management last October. It immediately told the Bank of Italy and the judicial authorities. Snippets of what happened have started to seep out into the press in the last two weeks, forcing Monte dei Paschi to acknowledge that it was sitting on huge losses and prompting the political storm.

But the full facts have not come out. Until they do, it will be impossible to know for sure whether the Bank of Italy, Deutsche Bank and Nomura could have been more vigorous in pursuing hints that things were not quite right or whether they were well and truly hoodwinked by Monte dei Paschi.

Hugo Dixon is co-founder of Breakingviews and editor-at-large at Reuters News. For more independent commentary and analysis, visit breakingviews.com.

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