Italy is eyeing a private sector solution to rescue Monte dei Paschi di Siena, Italy’s third-largest bank by assets, in an attempt to sidestep tough EU curbs on bailouts, according to senior bankers and European officials.
Rome’s main options, however, involve the heavy involvement of the state-backed bank Cassa Depositi e Prestiti, raising the risk that the intervention will ultimately run foul of EU curbs on state support. The push comes as Italy prepares for the fallout from critical bank stress tests on July 29 and desperately seeks a way out of a stand-off with Brussels over the use of state money to prop up failing lenders.
Rather than inject state money directly into Monte Paschi as originally planned, Italy is exploring ways to buyout its bad loans at favourable rates with money from private and state-backed institutions. This would use the existing privately backed fund, called Atlante, and would not need preapproval from Brussels. The terms of any intervention, however, would be closely watched by Brussels to ensure it involves no hidden state support. While structures to offload impaired loans are permitted under EU law, any purchases should be market prices, with private investors shouldering the same risks as any public institutions.
The latest attempt at finding a solution, which should conclude before the stress tests at the end of the month, involves increasing the size of the €4.25bn government-sponsored backstop, Atlante, with about €2bn of additional capital coming in part from Treasury-owned bank CDP and state pension funds. The aim is to provide it with the firepower to securitise for sale at least €10bn of Monte Paschi bad loans, say people involved in the talks. The bank would also attempt to raise up to €3.5bn in new capital, something eurozone officials doubt it could raise in markets.
Shares in 544-year old Monte Paschi, the world’s oldest lender which has already received two state bailouts, are trading at 8 per cent of their book value. The stock has plunged about 75 per cent so far this year on concerns about its €50bn gross non-performing loans, worth nearly a third of its total assets of €160bn. Italy’s hopes of a simple recapitalisation were dashed on Wednesday when the EU’s top court backed EU guidelines designed to prevent taxpayers from footing the bill for bailing out stricken lenders.
The court’s decision has strengthened Brussels’ hand in its continuing talks with Rome over the use of state aid which, under EU rules, would involve some bondholders taking the hit. Italy fears overzealous implementation of the rules would hit small investors, with the political consequences being felt in this autumn’s constitutional referendum on which reformist Prime Minister Matteo Renzi has wagered his job. Italian retail investors own €231bn of senior and subordinated debt in Italian banks, according to the IMF.
EU officials say there is nothing to stop Rome introducing a compensation scheme for small investors improperly sold risky bonds, as Spain did when almost 1m retail bondholders were hit during its bank bailout in 2012. Shares in Italian banks fell again on Wednesday on jitters about the stability of the €4tn Italian banking sector which is weighed down with €360bn of bad loans and concern Italy will struggle to push through a solution that does not infringe state aid rules.
One senior banker said: “It is a last ditch privately backed attempt to solve the Monte Paschi problem which has been ongoing for years. It may work. Otherwise they will have to bail in small investors and Renzi does not want to do that.” If Atlante is structured as a private-sector entity, there is no need for Rome to seek preapproval for the intervention from Brussels. However, any changes to investment terms that see CDP accepting disproportionate risks could possibly trigger a state aid investigation, which could force the investments to be unwound.
Atlante could price the NPLs at about 34 cents, says one senior person involved in the talks, closer to their 40 cents book value, than the 20 cents that is currently considered the market price. The hope is the knock-on effect will start a market for Italy’s €360bn of non-performing exposures, equal to a fifth of GDP.
Should Italy admit that some state support would be involved, the commission would play a bigger role in vetting pricing for the transfer of assets. Contacts have been made with investment banks to find private investors to cover any capital gap that would follow the sale of NPLs by Monte Paschi, say people involved in the talks.