Italy is set to bail out the world's oldest bank and unlike Ireland, bondholders will be burnt

BMPS is racing against the clock to raise €5 billion or face a government bailout.

By Fora Staff December 22nd 2016 4 min read

STOCK IN BANCA Monte dei Paschi di Siena tumbled again last night, as investors feared the troubled Italian bank’s efforts to find billions of euro quickly are all but doomed.

The world’s oldest bank and Italy’s third-biggest, BMPS is racing against the clock to raise €5 billion or face a government bailout.

It announced late last night that a debt-for-equity swap offer raised slightly over €2 billion.

The stock fell to a record low of €15 in morning Milan trading, before rebounding and then dipping again to finish the day – several hours before the debt-for-equity results were announced – 12.08% lower.

Company directors held a crisis board meeting that ran late into the night.

“Markets wait with bated breath the latest on Monte dei Paschi’s struggling recapitalisation efforts to avoid collapse,” said Michael van Dulken at Accendo Markets.

The bank itself has admitted it has only four months’ worth of liquidity left.

If the bond conversion plan falls short, “an official bailout request for the bank is likely”, Van Dulken said.

The results of the capital increase are to be released today.

But the bank late last night acknowledged that “benchmark investors” had failed to show interest. It had been hoping for a big takeup from Qatari, Chinese or US funds.

“The weak appetite rings the alarm bell as the year-end deadline approaches at a threatening speed,” said Ipek Ozkardeskaya, senior market analyst at LCG.

“Failure to save the bank could aggressively shake up the Italian and the European banking sector.”

Monte dei Paschi di Siena bank CEO Fabrizio Viola.

Source: AP/Press Association Images

Crisis

BMPS is at the heart of an Italian banking crisis which has cost it over 80% of its market capitalisation in the past year, and it posted the worst results in a stress test in July by the European Banking Authority.

Last week it launched a last-ditch attempt to find, through private investors, the funds the ailing lender needs to shore up its balance sheet and stave off a government intervention.

The plan entails selling off €27.6 billion in bad loans.

A first debt swap offer raised over €1 billion.

Monte dei Paschi needs to complete the €5 billion funding drive by the end of December after the European Central Bank refused to grant its request to extend the deadline to mid-January.

New Italian Prime Minister Paolo Gentiloni confirmed last week that the government was prepared to come to its aid if the private rescue fails.

Too many banks

If it came to that, it would use a move known as “precautionary recapitalisation”, meaning shareholders and holders of junior bonds, a risky class of debt, must contribute to saving the bank.

Yesterday, the Italian parliament approved Gentiloni’s plan to set aside €20 billion to help Italy’s ailing banking sector which is buckling under bad loans estimated at a combined €360 billion, around a third of the eurozone’s total.

But analysts said this is not enough to sort out Italy’s banking problems.

“Whatever happens in the next few days, whatever plan is implemented won’t resolve the underlying problem in Italy, which is it has too many banks and too much bad debt, across the entire sector,” said Michael Hewson at CMC Markets.

Data compiled by Bloomberg suggest that Italian banks need at least €52 billion to clean up their balance sheets.

But Finance Minister Carlo Padoan said yesterday that the Italian banking system “is solid, even if there are some crisis situations”.

He said the funds set aside would strengthen the system’s capacity to “consolidate and develop”, in remarks to parliament. The €20 billion are “sufficient”, he said.