Monte dei Paschi’s independence looks shaky

December 5, 2011

By George Hay and Peter Thal Larsen
The authors are Reuters Breakingviews columnists. The opinions expressesed are their own.

Monte dei Paschi is in a real fix. To survive the euro zone meltdown, lenders need two things: sufficient capital, and a solid base of solvent shareholders that can put up more cash if needed. Italy’s third-largest bank has neither.

The Fondazione Monte dei Paschi di Siena, which owns half of the 539-year-old lender, is hard up. It has borrowed a total of 1.1 billion euros from global investment banks so that it could support MPS when it raised fresh capital in 2008 and earlier this year.

Unwisely, these loans were secured against the foundation’s MPS shares. Since February, the value of the stake has dropped by 70 percent, and the foundation is now in danger of breaching its covenants. Banks including Credit Suisse look inclined to give the foundation more time to pay down debt. But they ultimately need to decide whether to seize the collateral.

The foundation could solve its problem by reducing its stake in MPS to 10 percent. But Italy’s debt crisis means buyers of bank shares are thin on the ground. Moreover, Siena’s politicians, who have controlled the bank since the Renaissance, would erupt. The foundation could sell its remaining 1 percent stake in Mediobanca, as well as private equity investments and some real estate, but this might only raise about 300 million euros.

Meanwhile, MPS faces a bigger headache. Although the European Banking Authority has yet to conclusively report the results of its recent capital exercise, the regulator’s interim judgement was that MPS needs another 3.1 billion euros in capital – more than its current market capitalisation. With the foundation hamstrung, another rights issue is out of the question.

MPS does have a plan B. Converting hybrids into EBA-eligible equity should reduce MPS’s shortfall to 2.4 billion euros. In the best-case scenario, reforms to the way it calculates risk-weighted assets, deconsolidating its consumer credit arm and retaining earnings could raise over half its target. But to be sure of getting over the finishing line, the bank probably needs to persuade regulators that 1.7 billion euros of its capital requirement should be waived because it reflects a mark-to-market loss on interest-rate swaps, not Italian sovereign bonds.

If plan B fails, MPS may have to find a merger partner or seek state support. Though the bank has weathered many crises, its centuries-old independence is looking shaky.

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