Italy lower house approves govt request to hike debt for bank rescue

Head office of Monte dei Paschi di Siena Bank in Siena | Giuseppe Cacace  AFP via Getty Images

Head office of Monte dei Paschi di Siena Bank in Siena | Giuseppe Cacace AFP via Getty Images

The Italian parliament have approved a public sector bailout for struggling bank Monte dei Paschi di Siena, in case it can not scrape together the required funds from private investors.

It also said a key investor in its rescue plan, bank bailout fund Atlante, had set new conditions for its participation.

Monte dei Paschi di Siena (MPS) has just €11billion (£9.27bn) of liquidity left and this will run out in 16 weeks, it revealed today. If Monte dei Paschi can not drum up enough support from investors, Rome will have to step in and bail it out.

Italian Finance Minister Pier Carlo Padoan said Wednesday the government action was part of an "overall plan that takes into account the demands of the country, the needs to protect savers and the system", Il Sole 24 Ore reported. The European Central Bank (ECB) has given the lender until the end of the year to unload a almost €28 billion of non-performing loans and raise €5 billion in fresh capital. The bank has suspended trading in its shares, which fell sharply again on Wednesday to their lowest level since the bank's stock market flotation in 1999. The new swap offer, which the bank estimates could raise 1.8 billion euros including 1 billion euros already tendered by institutional investors in a first phase, ends on Wednesday.

But under European Union rules, any state-led rescue will impose losses on MPS's shareholders and bondholders, many of whom are retail investors.

The bank was instructed to find more capital after it was the weakest in a health check earlier this year on 51 European banks.

Previously it had said it had the funds to stay afloat for 11 months.

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

It said on Wednesday the position would be negative for 15 million euros on the 5th month and could worsen further to minus 740 million euros by the 12th month.

However, the bank has fallen drastically short of raising the €5 billion, raising expectations of a state bailout, maybe by as soon as this week. Executives obtained an extension of June's deadline as they struggle to reach a deal. The Bank of Italy may seek additional contributions from lenders to bolster the country's resolution fund if the sale doesn't generate enough cash to repay creditors, people with knowledge of the matter have said.

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