Bundesbank’s Weidmann Warns of Hasty Rescue for Monte Paschi

Bundesbank President Jens Weidmann said the bar should be high for government funds being used in a rescue of Italian lender Banca Monte dei Paschi di Siena SpA.

Government funds are intended as a “last resort,” Weidmann said in an interview with German newspaper Bild, with the banker adding that planned measures by the Italian government should only be directed to banks that are healthy at “their core.” If government funds are used, there should be matching public funding because of high government debt, he said.

The European Central Bank today sent letters saying Monte Paschi may need a capital increase of as much as $8.8 billion euros ($9.2 billion), based on results of a recent stress test, the bank said in a statement.

The Italian government wants to short-circuit a system European Union lawmakers spent years building to ensure that investors, not taxpayers, foot the bill for failing banks. The outlines of a rescue for Monte Paschi were announced on Dec. 22, and while some aspects remain hazy, the challenge to the EU’s efforts to sever the link between banks and states is clear.

"In principle, we have agreed on new rules,” Weidmann told the newspaper. “These should especially protect tax payers and hold investors responsible. Government funds are only provided as last resort, therefore the bar is set accordingly high."

European Union governments used nearly 2 trillion euros ($2.1 trillion) in state aid to rescue the financial sector from 2008 to 2014. New rules enacted since the crisis make it much harder for states to step in, especially to shore up viable lenders.

Italy bailed Monte Paschi out twice after the crisis when the lender failed stress tests, posted billions of euros of losses and creaked under a mountain of bad loans.

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