The most troubled Italian lender will be privatized by the government after it admitted that it could not attract €5 billion of fresh capital that the bank needed to stay alive.
The Italian government announced today that it was ready to bail out the third biggest Italian bank as it failed to raise enough funds. Earlier this week, the government said it prepared a €20 billion emergency fund that it would use as a buffer to rescue troubled Italian banks, Monte dei Paschi included. As it turned out, Monte dei Paschi needed the government's support sooner than everyone thought.
Last summer, the European Central Bank demanded that the Italian lender got rid of €28 billion of its bad loans after the "stress test" found out that Monte dei Paschi was the most vulnerable European bank in the situation of an economic slowdown. However, the bank previously said that without fresh capital in the amount of at least €5 billion, it would not be able to shed all €28 billion of the non-performing loans.
The government's decision to privatize Monte dei Paschi is effective from today, with the bank's shares being already suspended from the Milan Stock Exchange. According to the decree, the bank will receive a temporary help from the government in the form of "precautionary recapitalization", as agreed with the European Commission. This means that the government ensures that the lender stays solvent on a condition to pay the rescue funds back later. Although, it is still unclear how much capital the government will need to pump into the troubled lender to sustain it.
"States have intervened to recapitalise banks in several countries. So it's no wonder that even Italy has decided to go down this route. What's rather surprising is that nationalisation hasn't been carried out before, at least after 2011, instead of waiting for emergency situations to arise such as Monte dei Paschi di Siena and in advance of new EU rules on bank bailouts. The return of the state to the world of credit is to be welcomed, because it serves as a buffer for some emergency cases," Alessandro Graziani wrote in the Italy's Il Sole 24 Ore, as reported by BBC.
The Italian banking sector is in a very difficult situation at the moment, which was further aggravated by the political uncertainty around the constitutional referendum and resignation of the Prime Minister Renzi. Italian banks are weighed down by €360 billion of bad loans and it is not clear whether the €20 billion prepared by the government as an emergency measure would be enough if more banks fail to stay solvent on their own.