Italy seeks to borrow 20bn euros to help banking sector

The Italian government decided yesterday to seek parliamentary approval to borrow 20 billion euros to underwrite the stability of its wobbly banking sector, starting with a likely bail-out of No 3 lender, Monte dei Paschi di Siena, as early as this week.

Monte dei Paschi, recently judged the weakest of the European Union’s major banks, needs to dispose of a mountain of bad loans and raise 5 billion euros in capital by the end of this month or else face the risk of being wound down by the European Central Bank. Italy’s Economy minister said on Monday the money it was seeking could be used to guarantee adequate liquidity in the banking system. “These resources could also be used as part of a program to boost capital at banks,” he said in a press conference.

A government bailout could come as early as this week, if Monte dei Paschi fails to pull off its own privately funded rescue plan. But it could prove to be politically explosive for the week-old administration of Prime Minister Paolo Gentiloni, given that investors are required to bear losses under EU bailout rules.

Earlier on Monday, however, the bank received some rare good news in relation to its faltering rescue plan. A key investor that was reconsidering its commitment to the plan issued a statement saying that its concerns had been resolved. “(Quaestio)... has agreed to approve the Term Sheet for the senior bridge loan as agreed with the financing banks,” the investor, private bank rescue fund Atlante, said.

Atlante has committed to spending 1.5 billion euros to buy some of Monte dei Paschi’s bad loans, despite having expressed “deep reservations” in a Dec. 17 letter over the terms of a bridge loan that Monte dei Paschi had secured as part of the sale of bad loans. Even with Atlante’s commitment to participate in the private rescue bid, Monte dei Paschi is still not assured to raise enough money to avoid the need of a state bailout.

Its 5 billion euros cash call is meant to conclude on Thursday, but is not underwritten by a consortium of investment banks. Monte dei Paschi shares closed before both Atlante’s statement and the government’s announcement, having lost 11 percent and wiped out a week’s gains. — Reuters