Photographer: Alessia Pierdomenico/Bloomberg

Monte Paschi Wins EU Backing for $6.1 Billion in State Aid

  • European Commission approves Italy’s capital injection
  • Burden sharing to involve shareholders, junior creditors

Banca Monte dei Paschi di Siena SpA won formal European Union approval to receive 5.4 billion euros ($6.1 billion) in aid from Italy’s government, removing a further source of turmoil from the country’s financial system.

After months of negotiations, the European Commission cleared the so-called precautionary recapitalization of a lender that needs state support to survive even though regulators have declared it solvent. Monte Paschi turned to Italy for help after it failed to raise funding from investors in December.

Italy is struggling to fix a crisis-era legacy of about 313 billion euros of soured loans that’s holding back credit and weighing on its weak recovery. The government approved a law last year to plow as much as 20 billion euros into troubled lenders as part of its efforts to revamp its banking industry and break a slump in lending. Last month the government committed as much as 17 billion euros to wind down Banca Popolare di Vicenza SpA and Veneto Banca SpA after trying for months to find a way to keep the regional banks afloat.

The recapitalization of Monte Paschi “should ensure a turnaround for the lender and should help the whole Italian banking industry,”said Fabrizio Spagna, managing director at Axia Financial Research in Padua, Italy. 

In return for the state aid, Monte Paschi agreed to a five-year restructuring plan that includes changes in its business model and steps to improve efficiency and management of credit risk. It must also sell about 26 billion euros of bad loans packaged into securities, and impose a salary cap on senior managers. Further details of the plan will be presented during an analyst conference call at 8:30 a.m. local time on Wednesday.

Effective Restructuring

Italy’s request to support the bank was approved “on the basis of an effective restructuring plan,” the Commission said in a statement. “This will help ensure the bank’s long-term viability, whilst limiting competition distortions.”

The commission agreed to the capital injection only after shareholders and junior creditors contributed 4.3 billion euros to Monte Paschi’s rescue, as required by European Union rules to minimize the costs of bailouts for taxpayers. In all, Monte Paschi will receive 8.1 billion euros of fresh equity. Once the operation is complete, Italy will hold 70 percent of the bank, Finance Minister Pier Carlo Padoan said at a press conference in Rome on Tuesday.

“The outcome is what the bank needs to look forward," Paschi CEO Marco Morelli said in a Bloomberg television interview in Rome. He said Monte Paschi will return to trading after the recapitalization and the government will exit by 2021.

The plan is sustainable and based on conservative estimates, Padoan said. With the Veneto banks sold and Monte Paschi’s revival in sight, Italy’s lenders are on the road to recovery and no more last-minute interventions by the state will be required, he said.

The state intervention is the biggest since Benito Mussolini seized banks in 1933 -- including Paschi -- as part of his wholesale nationalization of the private sector.

Monte Paschi, undermined by derivatives deals that backfired and defunct loans, has received 4 billion euros in taxpayer-funded bailouts -- which it has repaid -- and 8 billion euros from investors since 2009. The bank lost 87 percent of its market value in 2016 before the shares were suspended on Dec. 23.

— With assistance by Alexander Weber, Lorenzo Totaro, and Flavia Rotondi

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