What’s Next for Monte Paschi as Italy, EU Work on Rescue

  • Troubled bank needs to submit a new business plan to ECB, EU
  • Italy, Paschi must show how taxpayers will get money back

Bank of Italy: Paschi Rescue to Cost 6.6 Billion Euros

Banca Monte dei Paschi di Siena SpA is set to become Italy’s biggest nationalized bank since the 1930s after its failure to raise funds on the market set a state rescue in motion. Talks are underway between the Italian Treasury and the lender on developing a new business plan.

The European Central Bank directed Monte Paschi to raise 8.8 billion euros ($9.3 billion) to bolster its balance sheet under a precautionary recapitalization plan requested by the Italian lender. The government will contribute about 6.6 billion euros, according to a Bank of Italy calculation, while the remainder will be covered by the bank’s creditors. Italy will take about 2 billion euros of shares that had been intended for retail bondholders and will compensate holders for losses incurred with Monte Paschi senior bonds. The bank’s shares and bonds have been suspended from trading since Dec. 22.

European rules restrict aid to banks. Italy will be able to inject money into Monte Paschi provided it meets conditions set by the European Commission. These are the next steps needed to complete the precautionary recapitalization.

* Paschi, Treasury need to submit new plan to ECB, EU

Monte Paschi, jointly with the Treasury, must prepare a new business plan that complies with EU regulations. They will review the strategy submitted by the bank in October and are likely to seek a larger reduction of risk. The plan will probably be submitted to European authorities by the end of this month, according to people with knowledge of the matter. Monte Paschi also must find a new way to manage and reduce its pile of bad loans after the private capital raising failed. Chief Executive Officer Marco Morelli and Chairman Alessandro Falciai have started discussions on the plan with Italian Economy Minister Pier Carlo Padoan and his staff. The plan will include a precautionary recapitalization under the European rules, the Treasury said in a statement.

* Paschi’s plan needs approval from EU Competition Commission

The EU Competition Commission led by Margrethe Vestager needs to approve the precautionary recapitalization, ensuring that the new money is used to address the capital gap indicated under an adverse scenario in a stress test and that the measures don’t breach state-aid rules. Separately the ECB has to review the bank’s capital structure emerging from the plan, ensuring its adequate for the lender.

* Treasury and EU must agree on length and course of action

European law designed to protect taxpayers says that precautionary aid must be temporary, so the state has to define when it will sell its shares in the bank or otherwise be reimbursed. Technicalities on how the state will provide the capital and dilution for other shareholders also need to be agreed to with authorities.

* Bank decree must be approved by Parliament

The plan to support Monte Paschi and other troubled Italian lenders with as much as 20 billion euros in liquidity was set out in a decree approved by Prime Minister Paolo Gentiloni’s cabinet on Dec. 22. The Senate is currently reviewing the decree, which must be approved by both houses of Parliament within 60 days of its creation. Both houses of Parliament can amend the existing decree.

* Paschi will increase liquidity using state guarantee program

Monte Paschi has asked the Treasury for permission to access the Italian bank guarantee program, which will allow the lender to increase liquidity by issuing additional state-guaranteed liabilities. The request is expected to be approved this week, allowing Paschi to issue as much as 2 billion bonds next week, Il Sole 24 Ore reported. On Dec. 29 the European Commission authorized the extension of the guarantee programs to June 30.

The Reference Shelf

  • A Bloomberg Intelligence analysis of what’s ahead for Italy’s banks.
  • A Bloomberg View editorial says Italy’s banking crisis creates an opportunity.
  • More on the impact of the referendum on banks.
  • The latest news on the post-referendum political landscape.
  • A QuickTake Q&A on Italy’s banking problem.
  • The International Monetary Fund in an August paper took a look at the challenges weighing on the profitability of Italian banks.

— With assistance by Alessandro Speciale, Lorenzo Totaro, and Dan Liefgreen

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