Photographer: Chris Ratcliffe/Bloomberg

Italy Said to Weigh Boosting Public Debt to Prepare Bank Aid

Updated on
  • Plan may apply to Monte Paschi, others, state official says
  • Backer of Paschi recapitalization had earlier voiced concerns

Italy’s cabinet is seeking authorization from parliament this evening to increase the nation’s public debt to fund potential investments in the country’s banks, an official said.

The plan would apply to a number of lenders, which may include Banca Monte dei Paschi di Siena SpA, according to the official, who asked not to be identified before the meeting was held. The cabinet started meeting just before 8 p.m. in Rome.

The Italian government, led by newly sworn-in Prime Minister Paolo Gentiloni, is preparing a plan to inject as much as 15 billion euros ($15.7 billion) into Italian banks should Monte Paschi’s fundraising fail, a person with knowledge of the matter said earlier on Monday. Also earlier Monday, a key backer of Monte Paschi’s recapitalization voiced serious concerns about some of the terms, possibly jeopardizing the bank’s plan to raise funds from private investors.

A failure of the 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. If the state intervenes to save yet another Italian bank, it will follow the rescues of Veneto Banca and Banca Popolare di Vicenza following their failed initial public offerings.

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

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 Paschi’s three-stage recapitalization. Quaestio expressed “strong reservations” regarding the terms of a senior bridge loan that’s part of the transaction, the Siena, Italy-based bank said Monday, adding that it if it can’t resolve the matter, the capital increase can’t be completed under the terms agreed to with the European Central Bank.

Monte dei Paschi Chief Executive Officer Marco Morelli has crisscrossed the globe looking for investors to back the private 5 billion-euro capital increase, which also includes a share sale and a debt-for-equity swap.

The government is grappling with 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.

At 2.23 trillion euros, Italy’s public debt is the euro region’s largest in absolute terms and the second-biggest after Greece as a percentage of gross domestic product.

(Adds Paschi, Quaestio background from third paragraph.)
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