The last bailout?
The world’s oldest bank is being dragged into the modern era. For some time, Banca Monte dei Paschi di Siena’s shareholder-friendly bailout has sat oddly with Brussels’ 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. MPS’s existing 4 billion euro bailout doesn’t do this. The state injected subordinated debt, leaving the bank’s majority shareholders – the charitable foundation of Siena – with a 33 percent stake. And the rescue didn’t address MPS’s gargantuan 26 billion euros of Italian government debt, which created the bank’s capital hole when yields spiralled in 2011.
The Commission hasn’t 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 can’t 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 bank’s 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.