Italy paves way for €20 billion aid plan for ailing banks

The Italian government moved closer to a potential rescue of lenders including Banca Monte dei Paschi di Siena SpA by seeking permission from parliament to increase the nation's public debt by as much as €20 billion.

The plan is aimed at providing a backstop to the banking system “through public guarantees in order to restore theirshort- and medium-term lending ability,” finance minister Pier Carlo Padoan said following a cabinet meeting on Monday night.

The funds could also be used “for capital-strengthening programs of banks within recapitalisations that include the sale of shares”, he added.

Monte Paschi chief executive Marco Morelli is scampering to find investors to back a private €5 billion capital increase by the end of this year. Should his efforts fail, prime minister Paolo Gentiloni’s cabinet has laid the groundwork for a state-sponsored cash injection with the possible sale of government bonds.

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Gentiloni, who took the job this month, was at pains to describe the steps toward state aid as “precautionary” measures after the cabinet meeting in Rome. At €2.23 trillion, Italy’s public debt is already the second-biggest in Europe after Greece as a percentage of gross domestic product and the fragility of the country’s lenders, coupled with recent political instability, has put financial markets on edge.

‘Perplexed’

Padoan , who kept his job after Matteo Renzi resigned as premier, said the impact on the debt would a “one-off, temporary” and said he was “frankly perplexed” by criticism that the burden would fall on taxpayers.

Monte Paschi gained as much as 4.7 per cent and was up 1 per cent at €18.82 as of 9:15 a.m. The stock has lost 83 per cent this year, cutting the company’s market value to €569 million.

A failure of Monte Paschi’s recapitalisation would be a blow to Italy’s stuttering efforts to revive a banking industry that’s burdened with about €360 billion in troubled loans, dragging down the economy by limiting lending.

A state intervention to save yet another Italian bank would follow the rescues of Veneto Banca SpA and Banca Popolare di Vicenza SpA following their failed initial public offerings.

The government must decide whether to pour yet more money into a company that has received €4 billion in taxpayer-funded bailouts and €8 billion from investors since 2009.

The hit taken by bondholders will also be politically sensitive because thousands of them are ordinary Monte Paschi savers.

Quaestio Capital Management, which runs the Atlante bank-rescue fund, planned to take part in the securitisation of €28 billion of troubled loans as part of Monte dei Paschi’s three-stage recapitalisation and agreed late on Monday to the terms for the related bridge loan. Earlier, Quaestio had expressed “strong reservations” regarding the loan conditions.

(Bloomberg)