Italy set to rescue troubled bank

THE Italian government is likely to put in about billion (R95billion) to rescue the country’s third biggest lender Monte dei Paschi di Siena, more than initially expected, sources close to the matter said yesterday.

The higher cost of the state rescue is due to the fact that the European Central Bank has revised the bank’s capital shortfall to billion (R128-billion) from a previous estimate of billion.

The bank requested government support – in the form of a precautionary recapitalisation by the state – last week after its plan to raise billion (R73-billion) from private investors flopped.

A billion capital injection would give the Italian government a stake of about 70% in the lender.

The remaining billion (R76-billion) should come from the conversion into shares of subordinated bonds held by institutional investors, as required by new European rules for dealing with bank crises.

Under the scheme proposed by Italy, the government will compensate the 40 000 or so retail investors holding about billion of the bank’s junior debt, who will convert their notes into shares.

The retail investors will be able to swap those shares for senior bonds, with the state buying back the shares from the bank.

The scheme needs EU approval, which could take two to three months.

The ECB took a harsher stance on its capital shortfall to be on the safe side and help restore confidence in the bank, one of the sources said. — Reuters