Banca Monte dei Paschi di Siena SpA’s revelation it had hidden millions of euros of losses weeks before a 3.9 billion-euro bailout ($5.3 billion) is roiling Italy’s election campaign, with the front-runner threatening to shred adversaries trying to politicize the case.
The Democratic Party has suffered the brunt of the attacks of former Prime Minister Silvio Berlusconi and comic-turned-politician Beppe Grillo over its ties with the Siena-based bank. The local government is run by the party and controls the foundation that is Paschi’s biggest shareholder and appoints its management.
“I can confirm that we will tear them apart, we will shred them,” Pier Luigi Bersani, head of the Democratic Party, said in a Jan. 26 speech, referring to his critics.
With elections less than a month away, Bersani is trying to stem a slide in opinion polls that may be aggravated by Monte Paschi as Prime Minister Mario Monti also fends off criticism over his plan to rescue the bank. A further drop in support could make it difficult for Bersani to form a stable government even if he allies with Monti after the vote.
“The risk that a new government will lack a strong majority is confirmed and it now appears to be almost a certainty,” Nicola Marinelli, who oversees $180 million at Glendevon King Asset Management in London, said by e-mail.
The bank said on Jan. 17 it will review its accounts after Bloomberg News reported the lender engaged in a derivative transaction with Deutsche Bank AG in 2008, dubbed “Project Santorini,” that obscured losses before it sought an initial government bailout the next year. The bank said Jan. 23 it’s reviewing three money-losing structured deals uncovered by newly appointed executives.
So far investors haven’t punished the euro-region’s second-biggest biggest debtor for potential political risk. The yield premium demanded to hold the country’s 10-year bonds over comparable German bunds fell 14 basis points last week to 249, the lowest close in more than a year.
Still, Monte Paschi’s share plunged 12 percent in the week after the revelations that the bank’s former management hid details of structured finance deals from regulators that will saddle the bank with hundreds of millions of euros of losses.
The story will remain in the headlines this week with the bank’s chief executive officer, Fabrizio Viola, and Chairman Alessandro Profumo holding a press conference in Milan today. Finance Minister Vittorio Grilli will testify in Parliament tomorrow on the government’s rescue of the bank and the first polls taken after the news on Paschi broke will be released later in the week.
“Monte Paschi will be used by the candidates to turn up the heat in the campaign, even if in the end it may have limited impact on the election results,” Emanuele Vizzini, who manages 1 billion euros of assets as chief investment officer at Milan-based Investitori Sgr.
“My worry is that The Monte Paschi story is shifting the political debate from the candidates’ economic policy to polemics and personal attacks,” he said.
Berlusconi and his allies have slammed Monti over the bailout by linking the aid to an unpopular real estate levy, which raised an amount similar to the emergency loans earmarked for Monte Paschi. The three-time premier has reserved most of his fire for Bersani. In a Jan. 26 interview on state-owned RAI television, he said: “If the Left doesn’t know how to run a bank, imagine what they will do to the country.”
Support for Bersani and his coalition partners was at 33.8 percent in a poll by SWG released on Jan. 25, down from 34.9 percent on Jan. 9. Support for Monti and his allies fell to 12.8 percent from 13.8 percent on Jan. 9, while Berlusconi’s coalition gained 26.6 percent from 25.3 percent.
Even if Bersani wins the race by that margin, it probably won’t be enough to gain a majority in the senate, where seats are doled out based on regional races. Bersani may need the support of Monti in the Senate to reach a majority and risks falling short of Senate control even with Monti’s backing if their support continues to decline.
“Naturally this could hurt Bersani’s party,” said Fabrizio Masia, head of Italian pollster EMG. “At least 1 if not 2 percentage points could be subtracted from the PD.”