Italy Paves Way for a $21 Billion Aid Plan for Ailing Banks

  • ‘Precautionary’ measure requires approval from lawmakers
  • Government says it may issue bonds to fund any cash injection

The Lingering Problem of Monte Paschi and Italian Banks

The Italian government moved closer to a potential rescue of lenders including Banca Monte dei Paschi di Siena SpA by seeking permission from parliament to increase the nation’s public debt by as much as 20 billion euros ($21 billion).

The plan is aimed at providing a backstop to the banking system “through public guarantees in order to restore their short- and medium-term lending ability,” Finance Minister Pier Carlo Padoan said following a cabinet meeting Monday night. The funds could also be used “for capital-strengthening programs of banks within recapitalizations that include the sale of shares,” he added.

Pier Carlo Padoan

Photographer: Alessia Pierdomenico/Bloomberg

Monte Paschi Chief Executive Officer Marco Morelli is scampering to find investors to back a private 5 billion-euro capital increase by the end of this year. Should his efforts fail, Prime Minister Paolo Gentiloni’s cabinet has laid the groundwork for a state-sponsored cash injection with the possible sale of government bonds.

Gentiloni, who took the job this month, was at pains to describe the steps toward state aid as “precautionary” measures after the cabinet meeting in Rome. At 2.23 trillion euros, Italy’s public debt is already the second-biggest in Europe after Greece as a percentage of gross domestic product and the fragility of the country’s lenders, coupled with recent political instability, has put financial markets on edge.

Padoan, who kept his job after Matteo Renzi resigned as premier, said the impact on the debt would be a “one-off, temporary” and said he was “frankly perplexed” by criticism that the burden would fall on taxpayers.

To read a Q&A about any plan B for Monte Paschi, click here.

Monte Paschi gained as much as 4.7 percent and was up 1 percent at 18.82 euros as of 9:15 a.m. The stock has lost 83 percent this year, cutting the company’s market value to 569 million euros.

A failure of Monte Paschi’s recapitalization would be a blow to Italy’s stuttering efforts to revive a banking industry that’s burdened with about 360 billion euros in troubled loans, dragging down the economy by limiting lending. A state intervention to save yet another Italian bank would follow the rescues of Veneto Banca SpA and Banca Popolare di Vicenza SpA following their failed initial public offerings.

The government must decide whether to pour yet more money into a company that has received 4 billion euros in taxpayer-funded bailouts and 8 billion euros from investors since 2009. The hit taken by bondholders will also be politically sensitive because thousands of them are ordinary Monte Paschi savers.

Quaestio Capital Management, which runs the Atlante bank-rescue fund, planned to take part in the securitization of 28 billion euros of troubled loans as part of Monte dei Paschi’s three-stage recapitalization and agreed late on Monday to the terms for the related bridge loan. Earlier, Quaestio had expressed “strong reservations” regarding the loan conditions.

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