Italy will plow as much as 20 billion euros (US$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. More lenders may seek lifelines soon.
Monte Paschi, the world’s oldest lender, said in a statement it will ask the government for a “precautionary” capital increase.
“We will see if other banks ask for aid,” Italian Finance Minister Pier Carlo Padoan told reporters after a Cabinet meeting in Rome.
Italy’s banks are struggling under the weight of a 360 billion-euro mountain of bad loans, a plight that has eroded profitability and undermined investor confidence. A nationalization of Monte Paschi, the biggest in Italy since the 1930s, could be followed by rescues for lenders including Veneto Banca SpA and Banca Popolare di Vicenza as part of the government package.
Italian Prime Minister Paolo Gentiloni said EU officials agreed with Italy’s plan to provide support to the country’s banking system.
The 20 billion euros pledged by the government will provide both emergency liquidity guarantees and capital injections. Banks will be able to request precautionary recapitalizations that would see some bondholders taking a hit, the government said.
Holders of Tier 1 securities will get stock that represents 75 percent of the nominal value of the bonds, while Tier 2 bonds will be converted at 100 percent of nominal value. Individuals who were mis-sold subordinated bonds will be able to swap for fresh non-subordinated debt.
Monte Paschi late on Thursday abandoned plans to raise 5 billion euros from the market. The bank said it was scrapping the entire capital program, including a sale of bad loans and a debt-for-equity swap.
The bank’s stock has plunged 87 percent this year, closing at 15.08 euros in Milan on Thursday, the lowest since it began trading in 1999. That left the company with a market value of about 442 million euros.
Monte Paschi was deemed Europe’s weakest major bank in July stress tests and told by the European Central Bank to clean up its balance sheet. The firm was supposed to raise 5 billion euros of fresh funds by the end of the year to cover losses while disposing of bad loans.
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