Bank of Italy Authorizes Paschi Aid, Passing Buck to Monti

The Bank of Italy approved 3.9 billion euros ($5.3 billion) in emergency loans for Banca Monte dei Paschi di Siena SpA, meaning Prime Minister Mario Monti may have to push ahead with the unpopular bailout before elections next month.

The decision comes amid a political firestorm over rescuing the world’s oldest bank after revelations the lender’s former management hid details of structured-finance transactions from regulators that may produce hundreds of millions of euros in losses. The Bank of Italy made its announcement late yesterday, a day after Monte Paschi shareholders approved 6.5 billion euros in capital increases needed to secure the loans.

“The situation is under control” and the bank is prepared to take additional action if necessary, Monte Paschi Chairman Alessandro Profumo said at the Jan. 25 shareholder meeting.

The revelations of the hidden losses came in the final weeks of campaigning for Feb. 24 to Feb. 25 elections. Former Prime Minister Silvio Berlusconi has seized on the story to attack both Monti and the front-runner, Democratic Party leader Pier Luigi Bersani. Berlusconi has tried to link funds collected from Monti’s unpopular property tax to the Paschi aid, while tarring Bersani for his party’s political ties to the bank.

Monti Bonds

Under the bailout plan, Monte Paschi will sell securities dubbed “Monti bonds” to the government with a 9 percent coupon that may rise to as much as 15 percent. Monte Paschi is seeking state help to bolster its balance sheet after the bank failed to meet the capital requirements set by the European Banking Authority. The bank is also selling assets and reducing risk and costs in a three-year plan to restore liquidity.

The bank plans to issue the bonds by the end of February, Profumo said in an interview today in newspaper Il Sole 24-Ore. The bank also plans to put out a report on the extent of the losses caused by the transactions by mid-February, which means it could come within days of the election.

Monte Paschi shares rose 11 percent to 26 cents on Jan. 25, after falling 21 percent in Milan during the previous five sessions. That gave the bank a market value of 3 billion euros.

Project Santorini

The company 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, dubbed Santorini, Alexandria and Nota Italia, uncovered by newly appointed executives.

Prosecutors are investigating the actions of former management for possible criminal violation and the Bank of Italy said this month that executives withheld key aspects of the transactions from regulators.

The criminal probe is focusing on Monte Paschi’s 2007 agreement to buy Banca Antonveneta for 9 billion euros. Banco Santander SA had valued the lender at 6.6 billion euros when it purchased ABN Amro Holding NV’s Italian assets two months earlier, Il Sole 24-Ore and la Repubblica reported today. Prosecutors are also trying to figure out why Monte Paschi assumed ABN Amro’s place in a 7.5 billion-euro credit line to Antonveneta as part of the purchase, Il Sole said.

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