Brussels partly detoxifies Monte dei Paschi rescue
By Neil Unmack
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
The worldās oldest bank is being dragged into the modern era. For some time, Banca Monte dei Paschi di Sienaās shareholder-friendly bailout has sat oddly with Brusselsā new burden-sharing regime. A tough stance from the European Commission now means the disparity is less glaring.
In August the Commission established new ground rules for bank rescues: shareholders and bondholders should suffer before governments inject capital. MPSās existing 4 billion euro bailout doesnāt do this. The state injected subordinated debt, leaving the bankās majority shareholders – the charitable foundation of Siena – with a 33 percent stake. And the rescue didnāt address MPSās gargantuan 26 billion euros of Italian government debt, which created the bankās capital hole when yields spiraled in 2011.
The Commission hasnāt rejected this deal, but its stance unpicks much of it. The bank must now raise an additional 2.5 billion euros from private sources in the next year, not the 1 billion euros already pencilled in. And it must repay an as yet unspecified part of the state bonds, which were not due until 2019, and reduce its sovereign exposure.
MPS accordingly has one last chance to dodge full nationalisation. If the foundation canāt provide the capital, its stake will fall to around 10 percent. The question is whether rival banks or other investors will step in while the Italian economy is sickly, and the government shaky. If not, nationalisation looms, creating a political headache for the government, which itself is trying to deleverage.
Time, however, could be valuable. A lot depends on the evolution of the Italian and euro zone economy. The sovereign portfolio as of June left the bank with a 1.8 billion euro potential capital shortfall. If the Italian economy recovers, the spread will fall, reducing the capital need. Any increase in euro zone rates would also help, as some of the exposure is a bet on rising rates.
Lastly, the threat of nationalisation may be a secret weapon in itself. Holders of the bankās 3.7 billion euros of subordinated debt know that a shareholder wipeout could allow the government to force substantial losses on them, as happened in Ireland. That gives the bank – and Italy – a potentially useful stick to enforce a belated bail-in.