Shares in troubled Italian bank plunge amid bailout fears

Monte dei Paschi is trying to arrange a €5 billion ($5.4 billion) capital infusion, but political uncertainty triggered by the resignation of Italian Prime Minister Matteo Renzi has made securing the funds more tricky.

According to a 2010 report by financial regulator Consob, Italians have the highest share of household wealth invested in bank bonds in the developed world.

Italian government bond yields fell, narrowing the premium investors demand to hold them rather than benchmark German debt to its tightest for about a month. Those bonds trade at a substantial discount to face value.

As first reported by POLITICO on Tuesday, the Tuscan lender’s top executives traveled to Frankfurt to ask the European Central Bank for a two- to five-week extension of the December 31 deadline to raise €5 billion from the market in the hope that the extra time would help private investors to make up their minds.

But a too hawkish approach at a politically sensitive time, with euroskeptic parties gaining ground, could have bad knock-on effects too if it leads to a system-wide loss of investor or depositor confidence.

Failure to find a private-sector solution could trigger a European bailout or outright nationalization, both highly costly scenarios. Investors are concerned that further weakness in the Italian economy could ripple across the eurozone.

It means only a modest bail-in or write down in the value of a bank’s bonds is likely, though the Italian government can buy shares or bonds in Monte dei Paschi only on market terms endorsed by European Union state aid officials in Brussels.

So, Italian Prime Minister Renzi didn’t get to resign as he had planned to on Monday. Five Star and the Democratic Party are polling roughly equally, at 30 per cent.

Shares were down 3 percent Tuesday though the bank said it had achieved one part of a turnaround program.

For more than a year bankers and officials have been working on a bail-out plan for Monte dei Paschi, involving a €5 billion (Dh19.55bn) recapitalisation and on Monday its advisers, JP Morgan and Mediobanca, were in desperate meetings to pull it out of the fire. As we have said before, Europe would be mad to let Italy’s banks go to the wall, but that doesn’t mean that it needs to shut down some banks.

The volatility came as Italian President Sergio Mattarella continued sounding out political leaders about prospects for forming a new government.

They are now estimated to need as much money to cut impaired loans totaling 17 billion euros before looking for a potential buyer or being allowed to merge – a move they are considering. But the bank lowered some profit targets (http://www.marketwatch.com/story/credit-suisse-cuts-targets-says-revamp-is-working-2016-12-07) that it set a year ago, while holding to the goals it set for wealth management units. But all bets are off for the remaining four billion.

With Italy headed for a period of government instability, global investors spearheaded by Qatar Investment Authority backed out of MPS’s capital-raising plan. The ESM was used to support Spanish banks during the height of the financial crisis.

“This would happen if investors, in particular foreigners, chose to pull out of an upcoming capital increase due to lack of clarity on the country’s political future”.

More than 200,000 small investors in two former cooperative banks, Veneto Banca and Banca Popolare di Vicenza, have gotten cash injections and taken over by a government-organized fund after small investors lost between 11 billion euros and 12.4 billion euros past year.

What are the consequences for MPS if it fails?