Monte dei Paschi bailout accepted with severe restructuring plan

Commissioner for Competition Margrethe Vestager said that the agreement would limit the burden on Italian taxpayers. [European Commission]

The European Commission and Italy agreed on a bailout for embattled bank Monte dei Paschi that would pave the way for the injection of billions of euros.

In return, the bank will implement a “far-reaching restructuring plan” to ensure its viability, the Commission said in a statement today (1 June).

The deal brought to an end a year-and-a-half long discussion to recapitalise the world’s oldest bank. During the last few months, the entity resisted a restructuring plan to save costs but its efforts to raise money in the market failed.

Italian government approves decree to rescue Monte dei Paschi

The Italian government approved a decree early on Friday (23 December) that will open the way for the rescue of Monte dei Paschi di Siena after the world’s oldest bank failed to win backing from investors for a vital capital increase.

Italy did not want to apply in this case new EU rules designed to save banks. The new system imposes losses on shareholders and bondholders (bail-in), in order to avoid spending taxpayers money (bail-out) as it was made in the aftermath of the financial crisis in 2007-2008.

Rome was wary of imposing the cost on small investors such as pensioners that spent all their savings in MDP’s bonds, as they thought they were putting their money in a savings account.

In the end, Brussels will let Rome apply the “precautionary recapitalisation” foreseen in the Bank Recovery and Resolution Directive, which permits the use of public funds but only if the bank is profitable in the long term.

Restructuring plan

To that end, the Commission and the Italian government agreed on an in-depth restructuring plan that would provoke massive layoffs and the closure of dozens of branches. But the figures included in the plan remained confidential.

At the same time, shareholders will lose a major part of their investment, while junior bondholders, who should also contribute to the rescue plan, would be compensated.

The reason is that the Italian government considered that these retail investors were mis-sold when they bought MDP’s debt. They will be paid with more secure senior instruments.

On top of that, the Italian authorities will have to confirm the selling of a pool of non-performing loans at market terms to private investors. The bank already reached a pre-agreement with investors to get rid of this volume of bad loans of around €29 billion.

Senior management would also contribute by getting a salary cap corresponding to 10 times the average salary of an employee.

A €9 billion injection

This plan would allow MDP accessing to a multi-billion injection that would cover its financial gap.

Last December, the European Central Bank detected a capital shortfall in the entity worth €8.8 billion.

The ECB will have to validate now that the bank is solvent and meets the capital requirements, although officials did not expect any setback as the central bank and the Commission worked hand-in-hand on the agreement.

At the same time, Frankfurt and Brussels are waiting for formal confirmation that private investors buy the NPLs before giving the final okay to the capital injection.

“This solution is a positive step forward for MPS and the Italian banking sector,” said Commissioner Margrethe Vestager in the statement announcing the agreement.

“It would allow Italy to inject capital into MPS as a precaution, in line with EU rules, while limiting the burden on Italian taxpayers,” she added.

Italy launches €5 billion fund to help weaker banks

Italian financial institutions have agreed to set up a €5 billion fund to shore up weaker banks, in a state-orchestrated plan to avoid a crisis in the eurozone’s fourth-biggest banking sector.

But Italy’s problems with its financial systems and its high level of ‘bad loans’ are far from over.

According to the data compiled by the European Banking Authority and the ECB, one-quarter of Italian bank loans are NPLs  (around €276 billion).

Meanwhile, some of its banks including Banca Popolare di Vicenza and Veneto Banca still need to be rescued.

“Risks resulting from non-performing loans on banks’ balance sheets need to be addressed urgently,” Commissioner for Economic Affairs Pierre Moscovici said yesterday.

Vice-President Valdis Dombrovskis, in charge of financial stability, said: "I am glad that together with the Italian authorities and following close cooperation with the SSM we found a way forward for MPS while respecting the Banking Union rules to safeguard financial stability and limit costs for taxpayers."

In the 2016 stress test carried out by the EBA and ECB, Monte dei Paschi's capital ratios were deemed sufficiently high under the so-called "baseline scenario", i.e. where the economy and financial situation evolves as expected.

However, the bank had a capital shortfall in the "adverse case scenario", i.e. if economic conditions were to worsen. MPS first attempted to raise private capital on the markets but in December 2016 announced that this private capital raise had failed. The Italian authorities then decided to apply for State aid in the form of a precautionary recapitalisation.

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