The Strategist

Monte dei Paschi gets the go-ahead for bailout

12/23/2016 - 15:35

Italian parliament allocates € 20 billion to save Monte dei Paschi. The funds will be received from a newly formed rescue fund, which was approved this week. The country’s Finance Minister Pier Carlo Padoan did not specify what proportion of these funds will be allocated to Monte dei Paschi, saying only that "the amount will be sufficient to meet needs identified by the stress tests." He added that the rescue fund was created to help troubled Italian banks.

Petar Milošević
Petar Milošević
Thus, the authorities have prepared a way for salvation of Banca Monte dei Paschi di Siena SpA, the country’s third bank in terms of assets, which was unable to raise capital by private investors to the extent needed.

Earlier on Friday, officials of Monte Paschi, the oldest bank in the world, said the organization will seek help from the created foundation to support its balance sheet. The night before, the bank said that urgent actions, such as placement of shares or exchange of subordinated bonds for shares, failed to attract required 5 billion euros. Monte Paschi managed to exchange bonds for shares of a nominal value of 2.45 billion euros. Demand for shares to-be-placed was not sufficient. 

Without attracting new capital, the bank will not be able to cope with "bad" debts, which amount to about 28 billion euros. Solution to this problem is a key point of his rehabilitation plan.

The Italian government pointed out that if Monte Paschi uses money from the bailout fund, subordinated bank bonds will be compulsorily converted into shares. European bank rescue rules stipulate that part of losses should be borne by the investor, yet investors’ losses will be limited in this particular case.

Holders of subordinated bonds Monte Paschi are mainly institutional investors. They will lose about 25% of the nominal value of bonds when they are converted into shares if the bank takes advantage of the fund. Retail investors – owners of Monte Paschi’s bonds will not incur losses since their papers will be converted into the bank’s shares on the basis of their nominal value.

In total, volume of bad loans on balance sheets of Italian banks is around 360 billion euros. In addition to Monte Paschi, the fund would assist banks such as Veneto Banca SpA and Banca Popolare di Vicenza.

Meanwhile, Italy is slowly recovering after a prolonged recession. The third-largest euro zone economy is now grappling with political uncertainty after departure of Matteo Renzi from the post of Prime Minister.

Since the EU rules are aimed at limiting pressure on taxpayers, the government’s bailout for Monte dei Paschi would mean a loss for the bank's shareholders and holders of subordinated bonds, forcing them to share some of the financial burden.

On Friday, the Italian Government announced that the scheme would allow holders of subordinated bonds to get compensation for "senior" debt, which has the advantage of redemption, the same amount as that of subordinated bonds.