After Monte Paschi, Italy's Other Troubled Banks Are in View

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  • Italian finance minister, EU agree on plan for Monte Paschi
  • Fate of lenders including Veneto banks is still uncertain

Italy may have no time to rest on its laurels after brokering a deal to keep Banca Monte dei Paschi di Siena SpA in business.

While an “in principle” agreement between Finance Minister Pier Carlo Padoan and European Union Competition Commissioner Margrethe Vestager will help save the world’s oldest bank through paving the way for a precautionary recapitalization, the fate of two regional lenders in one of the country’s wealthiest regions and a third smaller bank has yet to be decided.

The government -- seeking to save Banca Popolare di Vicenza SpA and Veneto Banca SpA -- plans to contact businessmen in the Veneto region where they’re based to help fund a rescue, appealing to local loyalties to avert winding them down. That came after the EU rejected the banks’ request to reduce the 1 billion euros ($1.1 billion) of private capital it’s requiring them to raise to get approval for a bailout, people with knowledge of the matter have said.

“European rules must be respected and aid is only given to banks that can be profitable in the long-term and can carry out an in-depth restructuring,” said Carlo Alberto Carnevale Maffe, a professor of business strategy at Milan’s Bocconi University. “This is a good news for Paschi, less good for Veneto banks that are still far from being aligned to EU requests.”

The two banks are fighting for survival after failing to raise money from private investors last year and are trying to win approval for a state-backed recapitalization of 6.4 billion euros - which can only be given if they raise additional money from private investors. Finance Undersecretary Pier Paolo Baretta said earlier this week that the government would look to “businessmen from the Veneto area who would benefit the most from the banks’ survival and conversely would be the most damaged by their failure.”

Banca Carige

In addition, the market value of a third lender -- Banca Carige SpA -- has been sinking after in recent days after the bank’s top investor criticized Chief Executive Officer Guido Bastianini and the lender’s chief financial officer for their management. The bank has already said it’s seeking to replenish capital through a 450 million-euro stock sale and reduce bad loans to stay afloat.

Monte Paschi was forced to turn to Italy for aid after it failed to raise extra capital from investors in December. The European Central Bank said then it needed to secure 8.8 billion euros to bolster its balance sheet. The government would contribute about 6.6 billion euros, according to a Bank of Italy calculation, with the rest covered by creditors.

The Monte Paschi agreement sets a precedent in how governments can help struggling financial institutions without triggering bank resolution rules forged after the financial crisis. EU law stipulates that the need for “extraordinary public financial support” normally means a bank is failing and should be wound down. An exception is made for temporary state aid to address a capital shortfall identified in a stress test if a number of conditions are met.

‘Deep Restructuring’

The bank “will undergo deep restructuring to ensure its viability, including by cleaning its balance sheet from non-performing loans,” Vestager said in a statement Thursday. “I hope this will enable MPS to focus on lending to the Italian businesses and support the Italian economy." The EU said it expects to complete the accord in coming weeks.

Before Monte Paschi can receive the rescue, the ECB must confirm that the bank is solvent and meets capital requirements and Italy must get confirmation from private investors that they will purchase the non-performing loans portfolio. At the same time, they’ll keep working towards a solution for the Veneto banks.

While subordinated bondholders will have to contribute to the cost of the restructuring, Monte Paschi will compensate retail junior bondholders who weren’t properly informed of the risk they were taking that bonds might be converted to equity, according to the statement. The bank will buy the converted equity from those investors and pay them in “more secure senior instruments."

The Monte Paschi agreement “does not mean the situation is solved, since it is not the first time the bank is saved by the Italian Treasury and we know that previous bailouts all failed,” said Emanuele Canegrati, Chief Economist at BlackPearlFX, a London-based ForEx broker. “We have to wait until the restructuring plan is published in order to formulate a more precise judgement. Certainly, we expect a very painful plan.”

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