Financial Services

Monte dei Paschi to officially request €20bn Italian government rescue

Bank has raised just half of the €5bn it needed to survive

The Italian cabinet will meet to approve the bailout of MPS late on Thursday or early on Friday. Photograph: Reuters

Thu Dec 22 2016 - 15:42

The board of Monte dei Paschi di Siena is preparing to meet late on Thursday to request a government-led rescue after the Italian bank failed to raise enough from a last-ditch attempt to bring in private capital.

MPS said on Thursday it had raised just €2.5 billion in private funds from retail and institutional investors, short of the €5 billion in capital that the bank wanted.

The Italian parliament this week voted to approve a €20billion bailout package to recapitalise and provide emergency liquidity to fragile banks. Part of those funds will be used in the near term to rescue MPS, though Italian officials would not provide a precise figure.

According to people close to the matter, the Italian cabinet will meet to approve the bailout of MPS late on Thursday or early on Friday, after the MPS board has requested help.

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The MPS board was not expected to make any statement until after the end of trading on Thursday, those people said.

World’s oldest bank

The expected state bailout of the world's oldest bank comes as Italy is experiencing a sluggish recovery from a lengthy recession. The euro zone's third-largest economy is also grappling with political uncertainty following the collapse of Matteo Renzi's government.

Italian officials hope government intervention will put an end to MPS’s woes and restore confidence in other struggling financial institutions.

Due to EU rules designed to limit the hit to taxpayers, the government rescue will impose losses on MPS shareholders and junior bondholders, making them share some of the financial burden.

Italian officials said that they would move to compensate some of the 40,000 MPS retail bondholders who might take a hit, though institutional investors would not be spared.

“The scheme is ready”, said one senior Italian official. ”The burden-sharing principle will be respected but we will try to limit the damage to savers as much as possible.”

Rahul Kalia, a fund manager at Aberdeen Asset Management, said the success of the reimbursement scheme could be pivotal.

Popular resentment

“It’s important that retail investors are compensated properly because any failure to do so will not only stoke Italy’s popular resentment with the country’s political status quo but also risk system-wide deposit flight,” he said in a note.

A model for the compensation of retail bondholders could be what Italy did after it stepped in more than a year ago to help four small banks. Junior bondholders were automatically awarded 80 per cent of the value of their losses as long as they could prove they had low income or scant assets. Otherwise, they had to go through an arbitration process to show that they had been the victims of mis-selling - a more cumbersome path.

Orchestrating the rescue of MPS is Pier Carlo Padoan, Italy’s finance minister, who stayed in his role after this month’s collapse of Mr Renzi’s government in the wake of a heavy defeat in a referendum on constitutional reforms. Mr Renzi was replaced last week by Paolo Gentiloni, the former foreign minister.

“After such a long delay and a never-ending soap opera, I really believe Italian banks are now turning the corner,” wrote Lorenzo Codogno, founder and chief economist of LC Macro Advisors.

“So, my perception is that the government backstop will be welcomed by financial markets and it will be a plus for the economy as well.”

Fiscal outlook

One of the big concerns associated with Italy’s banking rescue is that it will worsen the country’s fiscal outlook at a time when it already has one of the highest ratios of debt to gross domestic product in Europe, at 133 per cent.

Assuming all of the €20billion is used during the coming year, that would amount to about 1.2 per cent of GDP, making it highly unlikely that Italy could meet its commitments on managing its debt under EU budget rules.

Italian officials have insisted that the rescue would be a ”one-time” effort, which was temporary and therefore would not impact the structural balance, which is one of the key fiscal measures used by the EU.

-(Copyright The Financial Times Limited 2016)

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