Italy Seeks Authorization to Raise National Debt to Fund Bank Bailouts, as BMPS Rescue Plan in Jeopardy

While Italy scrambles to conclude a private sector rescue of ailing Monte Paschi, which hopes to raise €5 billion in the form a share sale to anchor and retail investors, while at the same time the bank is underoing a debt for equity swap, moments ago Reuters reported that Italy’s cabinet will meet later on Monday to authorise an increase to the national debt to cover the cost of saving Monte dei Paschi di Siena, should a public bailout be unavoidable, as well as other ailing banks, government sources said cited by Reuters.

As reported yesterday, Monte dei Paschi has launched a 5-billion-euro (4.2 billion pounds) capital increase and must raise the money by the end of the year or face being wound down. If it cannot find takers in the private sector, the government will be forced to step in.

Sources told Reuters last week that the government was ready to pump €15 billion euros – just under one percentage point of gross domestic product – into Monte dei Paschi and other ailing banks. Before it can do that, it needs authorisation to lift national debt levels, which it will do tonight at 7:30pm CET when the cabinet will meet with the Italian parliament to discuss increasing Italy’s public debt to fund bank bailouts.

Meanwhile, after having soared in the early part of December following the failed Renzi referendum, Italian banks slid today on concerns over the successful conclusion of the Monte Paschi bailout.

The reason for today’s selloff may be that, as Reuters also reports in a separate note, Monte Paschi is trying to resolve differences with a key investor over the 5 billion euro rescue plan.  Monte dei Paschi has failed to find buyers for its shares so far Reuters notes, adding that on Monday, it shook the market again with a warning that Italian bank industry bailout fund Atlante was rethinking its 1.5 billion euro purchase of bad loans from the lender.

Atlante had expressed “deep reservations” in a Dec. 17 letter over the terms of a bridge loan that Monte dei Paschi had secured as part of the sale of bad loans, the bank said. Monte dei Paschi shares extended losses on the news, erasing a week’s gains to trade down 7.7 percent at 19.3 euros each.

“If issues raised by (Atlante’s manager) Quaestio cannot be solved, the operation could not be concluded by Dec. 31, 2016 as requested by the European Central Bank,” the bank said in a statement.

However, Carlo Messina, chief executive of Intesa Sanpaolo one of Atlante’s top contributors, said he believed the investment fund should go ahead with the deal and that it would reach a decision by Tuesday at the latest.

What makes the rescue problematic is that there are many moving parts, including not only the share sale and the debt-for-equity swap, but also a successfully executed bridge loan as well as the securitization, and sale of its nonperforming loans to third party investors.

As part of its own faltering rescue plan, Monte dei Paschi has taken out a 4.7 billion euro bridge loan with JPMorgan, Mediobanca (MDBI.MI), Credit Suisse and HSBC.

JPMorgan and Mediobanca have been working on the bank’s rescue plan and have already come under fire from opposition politicians who object to them earning fees in the event of a state bailout, especially fees accruing on the bridge loan. Monte dei Paschi needs the loan to help complete the sale of bad debts, which are to be repackaged as debt securities worth 9 billion euros. The loan is worth around half of that, but it is secured against all the securities — which is the source of concern for Atlante, said a source familiar with the matter.

Atlante, whose shareholders include Italy’s top banks and insurers as well as state-owned entities, is due to buy a 1.5 billion euro tranche of the securities. It could see its notes claimed by the four banks if the bridge loan is not repaid.

A worst case scenario, should the private bailout fail, a state rescue would require many investors, including ordinary Italians, to bear losses and would risk provoking a political backlash.