Monte dei Paschi di Siena’s move to swap debt for shares, pushing losses onto investors, could help Rome resurrect a bid to help the troubled Italian bank, European officials believe.
The threat of political and market turmoil from a December 4 referendum on constitutional reform, expected to go against Italian Prime Minister Matteo Renzi, has cast further doubt over the world’s oldest bank and its bid for €5bn ($5.3bn) of fresh capital. The wider threat to Italy’s banks and economy, the eurozone’s third largest, has prompted Italy and European regulators to prepare a fall-back plan – possibly taking a softer stance on imposing losses on all bondholders, allowing the state to help, said the sources.
“There is flexibility in the rules,” said one official of the procedure of asking for European Union approval for state support, which first requires such bondholders to take losses.
Earlier this year, Rome sought approval from Brussels to support Monte dei Paschi, but the EU’s antitrust chief Margrethe Vestager wanted investors to share the cost, in keeping with stricter post financial crisis rules known as ‘bail-in’.
Rome refused, arguing that Italian pensioners would be hit and investors would shun the country’s debt, and Monte dei Paschi was forced to launch its third recapitalisation in as many years – planned for immediately after the referendum.
Italy’s third biggest bank, which emerged as Europe’s weakest lender in regional stress tests this summer, is trying to fill a €5bn capital hole.
That begins with a ‘voluntary’ debt swap, which analysts estimate could raise €1bn to €1.5bn, and continues with a share sale.
In practice, with the bank in a fragile state, they have little choice but to accept. Now European officials believe the debt-for-equity swap later this month could unlock the earlier impasse over state aid, if the bid for investor cash fails. Uncertainties remain, including whether Italy would offer guarantees to underpin the bank or inject capital.
It is unclear what would happen to retail investors who are the main owners of €2.1bn of the bank’s subordinated bonds and whose vulnerability is a key concern for the Italian government.
“If Monte dei Paschi needs state aid, its junior bondholders will be hit before the state puts public funds in the bank,” said one official with knowledge of the bank’s plans. “The hit will surely target institutional bondholders, while there is a chance that retail bondholders could be spared to avoid perverse effects on the other banks and shield small investors,” the official added.
Italy, the European Commission, and Germany, which has argued for strict enforcement of bank rescue rules, may ultimately fail to agree.
Nevertheless, the debt-for-shares swap offers a first route to a rapprochement and one of the potential “answers” that Bank of Italy Governor Ignazio Visco said yesterday would be found if banks struggled to raise fresh capital.
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