Italy’s New Government Embarks on Toxic Road to Rescue Banks

  • Parliament to authorize up to $21 billion to prop up lenders
  • Government to act if Monte Paschi’s fundraising bid fails

The Lingering Problem of Monte Paschi and Italian Banks

By taking the first step toward the financial rescue of Italy’s oldest bank, Prime Minister Paolo Gentiloni has taken on a mission impossible.

On his second week in the job, he chaired a cabinet meeting which agreed to ask parliament for a 20 billion euros ($21 billion) increase in public debt as a “precautionary” measure to potentially save the country’s lenders if the recapitalization of Banca Monte dei Paschi di Siena SpA fails. It was, the 62-year-old former foreign minister said, “our duty.”

Paolo Gentiloni

Photographer: Jasper Juinen/Bloomberg

“Gentiloni has to take a necessary but rather dangerous path,” said Carlo Alberto Carnevale Maffe, a professor of business strategy at Milan’s Bocconi University. “He has to find a balance between domestic pressure, including from within his Democratic Party, not to make taxpayers pay for rescuing banks, and sticking by European Union rules.”

For the new premier, it’s a case of damned if you do and damned if you don’t.

Even before a Dec. 4 constitutional referendum -- which led to the resignation of his predecessor -- no one wanted to touch Monte Paschi’s problems because it was such “a political hot potato,” according to Maffe. The thankless task has fallen on Gentiloni, who must also manage a stagnant economy and fend off as best he can efforts by the anti-establishment Five Star Movement to come to power and call a referendum on Italy’s membership of the euro area.

‘Protecting Savers’

The issue could not be left to fester as Monte Paschi is racing to complete its recapitalization plan by Dec. 31 to avoid a government rescue that would impose losses on bondholders, thousands of whom are ordinary rather than institutional investors. Both houses of parliament will discuss the government’s debt request on Wednesday, newswire Ansa said.

By laying the groundwork for a state-sponsored cash injection, with the possible sale of bonds, the government took measures “aimed at protecting savers,” Gentiloni’s office said in a statement. Finance Minister Pier Carlo Padoan said the debt boost will be a “one-off, temporary” and not in breach of European Union rules. He also rebuffed suggestions it would fall on taxpayers.

Not everyone is convinced. Monte Paschi’s restructuring “should be achieved under the agreed rules, meaning the creditors must contribute to its rescue, not the taxpayers,” Christoph Schmidt, head of German Chancellor Angela Merkel’s council of independent economic advisers, told the Westdeutsche Allgemeine Zeitung.

A primer here on Monte dei Paschi’s woes and why it may need state aid.

If the Monte Paschi plan fails, a government decree would earmark resources for intervention in other bank recapitalizations, which may be applied to lenders including Veneto Banca SpA, Banca Popolare di Vicenza and Banca Carige SpA, according to a person with knowledge of the matter. Ministers may review the decree on Friday, according to a government official who declined to be identified before it is submitted to cabinet.

Monte Paschi’s share offer ends on Wednesday for retail investors and Thursday for institutions. The bank is also looking for a possible anchor investor to take a large chunk of the shares being offered. Late on Monday, it got the last-minute backing of Quaestio Capital Management, which runs the Atlante bank-rescue fund, for a bridge loan.

“The challenge for the government will be not just finding the right amount of support, but also the right mechanism,” Maffe said. “I expect any decision will be taken in complete accord with the EU, so that the government can say it has no choice.”

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