Financial Services

Italy set to bail out Monte dei Paschi di Siena

State had long resisted aiding bank but private sector initiative is not working out

Shares in MPS were suspended after the bank, Italy’s third largest lender by assets, warned that its liquidity levels were deteriorating rapidly

Wed Dec 21 2016 - 17:29

Monte dei Paschi di Siena (MPS) is to be rescued by the Italian state using a new €20 billion bailout package as a last-gasp private sector rescue plan for the world’s oldest bank looked set to fail, forcing losses on bondholders.

The government rescue, which had long been resisted in Rome, is designed to draw a line under the slow-burn crisis in Italian banking that has alarmed investors and become the main source of concern for European financial regulators.

The woes of Italy’s banking sector have also spilled over into the political sphere, contributing to the government’s defeat in this month’s constitutional referendum.

A private €5 billion recapitalisation plan led by JPMorgan collapsed on Wednesday after MPS failed to find an anchor investor, a crucial plank of the deal, said four people close to the dossier.

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With MPS also failing to raise sufficient money from a debt-for-equity offer – another part of the private sector rescue – by a deadline of Wednesday, the government is expected to inject capital, taking its stake in the bank much above the current 4 per cent. Rome could even take a majority stake, according to people close to the bank.

Bankers said the debt-for-equity swap was on track to raise €1.7 billion, far short of the overall amount needed.

Fragile banks

The state funds to rescue the bank would come from a €20 billion package approved by both houses of parliament on Wednesday that could be used to bail out several of the country’s most fragile banks.

Shares in MPS were suspended on Wednesday morning after the bank, Italy’s third largest lender by assets, warned that its liquidity levels were deteriorating rapidly.

People close to the bank said small and mid-sized companies had been pulling deposits.

Speaking in parliament on Wednesday, Pier Carlo Padoan, Italy's finance minister, said government-backed recapitalisation would be conditional on the willingness of banks to bring forward restructuring plans allowing them "to travel on their own legs, be profitable, and finance the economy".

Savings

Mr Padoan insisted that apart from a few “critical” situations, Italy’s banking system was “solid and healthy”. He vowed to “minimise, if not erase” any impact of the public intervention on the savings of ordinary citizens.

MPS shares have fallen 86 per cent in the past year, while Italian banks on average have halved in value. Italy is readying to pump more funds into other midsized banks in Veneto and Genoa in need of capital amid expectations they will also fail to find private support.

The state rescue caps a dramatic decade-old collapse in the fortunes of MPS, a lender founded in 1472 to support Tuscan farmers which became a crucial seat of power in Italy with ties to the country's political left. However, its fortunes have declined since an ill-timed €9 billion cash acquisition of its local rival Banca Antonveneta on the cusp of the financial crisis.

Rome and Brussels have been in talks on ways to structure the bailout of the bank in a way that compensation could be offered to an estimated 40,000 retail holders of junior debt which may suffer losses based on new EU rules.

Regulators

A sale of €28 billion in bad loans demanded by regulators is also in doubt and may need to be renegotiated, said two people involved.

MPS, which has already burnt through €8 billion in new capital since the financial crisis, is expected to receive the state funds under a “precautionary recapitalisation” agreed with EU regulators under its new banking rules.

Support for the bank bailout bill was led by Italy's ruling centre-left Democratic Party, but members of the centre-right opposition also agreed to vote in favour after Silvio Berlusconi, the leader of Forza Italia, announced his backing.

The Five Star Movement, the main anti-establishment opposition party led by comedian Beppe Grillo, opposed the measure, calling for a full nationalisation of struggling banks.

A backlash against a taxpayer-funded bailout of Italy's weakest lenders has already begun. Codacons, a consumer lobby group, estimated €20 billion ploughed into Italy's failing lenders would cost each Italian family €833. – Copyright The Financial Times Limited 2016

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