Monti Says Monte Paschi Bailout Hinges on Bank of Italy

Monti Says Monte Paschi Bailout Hinges on Bank of Italy
Monte Paschi shareholders are voting on a capital increase today to pave the way for the emergency government loans. Photographer: Alessia Pierdomenico/Bloomberg

Banca Monte dei Paschi di Siena SpA’s 3.9 billion-euro ($5.2 billion) government bailout may face a delay after Prime Minister Mario Monti called for a further review of the bank’s accounts.

Monti said the Bank of Italy will take another look at the bank’s books after the company disclosed this week it may face more than 700 million euros of losses related to structured finance transactions hidden from regulators. Monte Paschi shareholders are voting on a capital increase today to pave the way for the emergency government loans.

“The subscriptions of those financial tools hasn’t happened yet, among other reasons because the needed conditions for the operation to be completed haven’t been met yet,” Monti, 69, said at a press conference in Davos, Switzerland, yesterday.

Monti announced the increased oversight as he tries to limit the political fallout from Monte Paschi on his bid for a second term in elections next month. Former Prime Minister Silvio Berlusconi has stepped up attacks against Monti for the state-aid plan and frontrunner Democratic Party Leader Pier Luigi Bersani for his party’s ties to the bank.

“At this stage I expect that they will wait until there is a new government to avoid having to deal with such a hot potato,” said Fabrizio Bernardi, a Milan-based analyst at Fidentiis Equities, who has a sell rating on the bank. According to the decree approved by Monti’s Cabinet in December, the state aid is set to be completed by March 1.

‘Under Control’

Monte Paschi Chairman Alessandro Profumo said at today’s meeting that the “situation is under control” at the bank, Italy’s No. 3 lender. Monte Paschi said on Jan. 17 it will review its accounts after Bloomberg News reported the lender engaged in a derivative with Deutsche Bank AG in 2008, dubbed “Project Santorini,” that obscured losses before it sought a government bailout the next year. The Siena-based bank said in a Jan. 23 statement it’s reviewing three money-losing derivative deals, dubbed Santorini, Alexandria and Nota Italia, which led to losses for the bank.

Monte Paschi shares rebounded as much as 5.9 percent today to 24.7 cents, after falling 21 percent in Milan during the past five trading sessions. The bank said in a statement late yesterday that public figures and politicians are exploiting reports about the structured transactions with unfounded speculation of the bank failing.

Democrat Party

The bank is prepared to take additional action if necessary, Profumo told shareholders, without elaborating.

Bersani’s Democratic Party runs the local government in Siena where Monte Paschi is based and controls the banking foundation that is the lender’s biggest shareholder. Berlusconi and his allies have slammed Monti over the bailout by linking the aid to an unpopular real estate levy on first homes, known as the IMU, which raised from Italian taxpayers an amount similar to the emergency loans designated for Monte Paschi.

“We paid the IMU to Monti so that he could save the bank” of the Democratic Party, read yesterday’s front-page headline in newspaper Il Giornale, owned by Berlusconi’s brother Paolo. “What has been said about interventions and comparisons between the amount used for aid and the revenue from taxes is a complete fantasy,” Monti said.

Monti said today in an Italian radio interview that the election campaign shouldn’t affect the bailout timing because it’s being carried out under European rules. Still, he acknowledged that the Monte Paschi case “has a lot to do with the ugly beast of mixing banks and politics.”

Parliament Testimony

Monti said that Finance Minister Vittorio Grilli will be available to testify in Parliament on the Monte Paschi situation.

Monte Paschi, the world’s oldest bank, received a first bailout from Berlusconi’s government in 2009, and has now added 500 million euros to its aid request to cover potential losses linked to the structured-finance deals, bringing the total cost of the rescue to 3.9 billion euros.

The three transactions at the center of the case were approved by the bank between 2006 and 2009 and may lead to 720 million euro of losses, Chief Executive Officer Fabrizio Viola said in an interview with newspaper Il Messaggero published yesterday. Viola became CEO in January 2012.

The lender is expected to post a 1.78 billion-euro loss for 2012, based on the average estimate of 16 analysts surveyed by Bloomberg.

The Truth

“We want to know the truth, we’re tired of being taken advantage of,” said shareholder Gianni Acciughi, 60, who took early retirement from Monte Paschi in 2009. “How is possible that nobody knew anything about this? If that’s the case, then legal action has to be taken immediately against those responsible.”

Members of the Northern League party, a partner in Berlusconi’s previous government, demonstrated at today’s investor meeting. They distributed leaflets criticizing Mussari’s management and his ties to the Democratic Party. Beppe Grillo, the leader of the 5 Star Movement running in the campaign, said the bank’s case will turn into a scandal worse than the collapse of food company Parmalat SpA in 2003.

The three deals were uncovered by the bank’s new management last year, Monte Paschi said. The lender’s former leadership hid documents related to the deals from regulators, the Italian central bank said in a Jan. 23 statement, adding that transactions are now being reviewed by the central bank’s oversight division as well as judicial authorities.

Deutsche Bank designed “Project Santorini” at the height of the financial crisis, providing Monte Paschi a 1.5 billion-euro loan that helped it mitigate a 367 million-euro loss from an older derivative with the Frankfurt-based bank, Bloomberg News reported.

‘Troubled Deals’

Deutsche Bank reaped about 60 million euros in profit in the first two weeks of December 2008 through the loan, according to more than 70 pages of documents obtained by Bloomberg News detailing the deal. As part of that trade, the Italian lender made a losing bet on the value of the country’s government bonds, according to six derivatives specialists who reviewed the files. Monte Paschi never disclosed the effect of the 2008 trade in its annual reports.

Former managers also signed a derivative with Nomura Holdings Inc. in 2009 that cut earnings by 220 million euros in 2012, Il Fatto Quotidiano reported on Jan. 22.

“Monte Paschi is focusing on three products exclusively, which may mean that there may be other troubled deals leading to additional losses,” Fidentiis analyst Bernardi said.

Former Monte Paschi Chairman Giuseppe Mussari quit as head of the Italian Banking Association lobby group on Jan. 22 as scrutiny of the lender’s use of derivatives deepened. Mussari, in his letter of resignation, said he always acted according to the law.

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