Italian Bank Monte dei Paschi di Siena To Get Government Bailout

The Italian government has agreed to approve a bailout package for the country’s and world’s oldest bank, Monte dei Paschi di Siena (MPS) after the bank acknowledged its inability to raise funds from private investors to shore up its capital.

Italy’s banking system is currently weighed down by mountainous levels of debt.

MPS was the worst performer in the stress tests conducted by the European Central Bank and was given until the end of December to raise €5 billion ($5.2 billion).

The bank’s attempt to sell new shares in a bid to bring in funds has however failed to interest investors, putting its recapitalization efforts in jeopardy. A notice put on its website recently showed that with €11 billion available, its liquidity would hold for four more months. On Dec 22 the bank finally admitted that it has been unable to raise additional funds.

euronews (in English)

Paolo Gentiloni, Italy’s new interim prime minister immediately convened his cabinet to approve a state bailout. The funds would be sourced from the €20 billion set aside earlier by the parliament for saving MPS. According to the finance minister Pier Carlo Padoan, the funds would suffice to save the bank, but he however did not specify how much the bailout would cost the taxpayer.

In a statement, Padoan said.

This will secure MPS’s capital needs and allow the bank to continue its industrial plan. Italy’s third largest bank will finally return with force to operate in support of the Italian economy and in a contest of full tranquillity for its savers and its employees

The bank’s junior bondholders are likely to see a hit since new EU rules require bondholders to bear the consequences before tax payers are burdened. With €2 billion-worth of bonds being held by local investors, the government is making arrangements to protect bondholders. It has said that their bonds would be converted to shares which then will be converted to senior debt.

MPS’ bailout is expected to trigger demands for government support from other Italian banks as well. Analysts from Barclays have pointed out that the bailouts might not be enough to restore the health of the Italian banking system. The six biggest banks in the country many need at the minimum €30 billion to sort out their balance sheets.

The bailout will possibly have a political impact as well. The treatment of the junior bondholders is likely to have a bearing on the fortunes of Italy’s ruling Democratic party as well as on Matteo Renzi who recently stepped down as Prime Minister after losing a referendum. The country is expected to go to polls next year.

Charlie Harrison

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