It’s Official: Italy Will Nationalize Monte Paschi

So far, so expected. After earlier announcing the failure to attract any anchor investors for a private capital raise, Monte Paschi has announced that it will officially ask the Italian government for a “precuationary capital increase” – in other words a bailout. The funds will come from the newly decreed EUR20 billion bailout fund, and as Bloomberg reports will not trigger a “bail-in.”

This is the third bailout in three years and reportedly the biggest nationalization in Italian history.

As Bloomberg reports, Italy will plow as much as 20 billion euros ($21 billion) into the country’s banks after Banca Monte dei Paschi di Siena SpA failed to secure its future by raising funds from investors, and other lenders could follow.

Finance Minister Pier Carlo Padoan told reporters after a cabinet meeting in Rome that he expected Monte Paschi to ask for aid.

“We will see if other banks ask for aid,” Padoan said at the press conference. Italian Prime Minister Paolo Gentiloni said EU officials agreed with Italy’s plan to provide support to the country’s banking system.

And sure enough, once the bailout decree was approved, Monte Paschi, the world’s oldest lender, late Thursday abandoned plans to raise 5 billion euros from the market.

The bank said it was scrapping the entire capital plan, including the sale of bad loans and the debt for equity swap, and confirmed in a statement that it will ask Italy for a “precautionary capital increase.”

The FT notes that Italian officials hope government intervention will put an end to MPS’s woes and restore confidence in other struggling financial institutions.

Due to EU rules designed to limit the hit to taxpayers, the government rescue will impose losses on MPS shareholders and junior bondholders, making them share some of the financial burden. As Bloomberg confirms:

• *ITALY GOVT SAYS PRECAUTIONARY RECAP DOESN’T TRIGGER BAIL IN
• *PASCHI TIER 1 BOND CONVERSION AT 75% OF NOMINAL VALUE
• *PASCHI TIER 2 BOND CONVERSION AT 100% OF NOMINAL VALUE

With Junior bonds already trading at extreme distress the modest-to-nothing haircuts imposed are likely a relief to some as Italy noted “the burden-sharing principle will be respected but we will try to limit the damage to savers as much as possible.”

“A nationalization should have been done five years ago,” said Francesco Confuorti, the CEO of Advantage Financial SA, a Milan-based investment firm. “The bank lost time, money and credibility seeking to keep the patient on life support when he was in an irreversible coma.”

The bigger problem now for Monte Paschi, as we detailed earlier, is the recent plunge in deposits, which as reported yesterday has suffered a €14bn rush of deposit outflows in the nine months from January to September this year – 11 per cent of its total deposits, as shown in the following FT chart.

Should the nationalization fail to stem the bank run, either at Monte Paschi, or other Italian banks, more bailouts are imminent.

And finally, as The FT points out, there is always Germany to mess up these plans…

One of the big concerns associated with Italy’s banking rescue is that it will worsen the country’s fiscal outlook at a time when it already has one of the highest ratios of debt to gross domestic product in Europe, at 133 per cent.

Assuming all of the €20bn is used during the coming year, that would amount to about 1.2 per cent of GDP, making it highly unlikely that Italy could meet its commitments on managing its debt under EU budget rules.

Italian officials have insisted that the rescue would be a “one-time” effort, which was temporary and therefore would not impact the structural balance, which is one of the key fiscal measures used by the EU.

The European Commission said it “takes note” of the changes to some public finance targets.

And by “take note” we pre-suppose they mean extract some pint of blood from some unsuspecting taxpaying public.