EU clears €5.4bn Monte dei Paschi state bailout

The European Commission gave its blessing to a state bailout of Italy’s Banca Monte dei Paschi di Siena on Tuesday, paving the way for a deep restructure of the troubled lender.

In a statement, EU state aid regulators said Rome could inject €5.4 billion after Monte dei Paschi agreed to a drastic overhaul, including the transfer of bad loans to a special vehicle and a salary cap for senior managers.

The world’s oldest bank and Italy’s fourth biggest lender has been embroiled in a prolonged state rescue after failing to raise €5 billion on the market to shore up its capital.

The commission, which last month gave its preliminary approval to the bank’s state bailout, said the five-year restructuring would ensure the bank’s long-term viability.

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As part of the overhaul, Monte Paschi will transfer €26.1 billion to a privately funded special vehicle on market terms, with the operation partially funded by Italian bank rescue fund Atlante II.

It will also change its business model to focus on retail customers, and small- and medium-sized companies.

Monte dei Paschi said it would be seeking a “precautionary recapitalisation” under EU state-aid rules late last year after its attempt to raise capital from private investors failed.

Bondholders

"This capital injection could only be approved after junior bondholders and shareholders have contributed to the costs of restructuring, in line with "burden-sharing" requirements under EU state aid rules," said EU competition commissioner Margrethe Vestager.

Besides the state capital injection junior bondholders and shareholders will contribute €4.3 billion from the conversion of junior bonds into equity, the EU said.

At the same time Monte dei Paschi has earmarked €1.5 billion to compensate retail junior bondholders who are the victims of mis-selling, it added.

Burdened by bad loans and a mismanagement scandal, Monte dei Paschi has been at the forefront of Italy’s slow-moving banking crisis. It emerged as Europe’s weakest lender in stress tests last July.

Rome is under the spotlight for taking advantage of exceptions in EU rules designed to stop the use of taxpayer money to deal with bank crises.

Last month Italy started to wind up two failed banks in the Veneto region in a deal that could cost the state up to €17 billion .

– (Reuters)