All Eyes On Monte Paschi, Whose Bailout Is Now In Doubt, And Italian Bank Sector Contagion

As we noted last night, when we previewed the virtually assured "No" vote, we said that "a strong “No” vote will cause Prime Minister Renzi to resign, leading to political instability in Italy. Furthermore, a "No" vote is expected to kill a long-running attempt to rescue Italy's third largest and oldest bank, Monte dei Paschi, which has been desperate for a private sector bailout ever since it failed this summer's ECB stress test to avoid broader banking sector contagion; a failure of Monte Paschi will likely spark a fresh eurozone banking crisis, and prompt the ECB to get involved again (as it warned it would do), in a redux of what happened after the Brexit vote."

Sure enough, as the WSJ wrote moments ago, "when markets open Monday morning, all eyes will be on Banca Monte dei Paschi di Siena, Italy's troubled No. 3 lender, which is considered particularly vulnerable to fallout from a 'no' vote, which could complicate its plans to raise capital. Investors will be watching closely for any signs of a run on the bank, a situation that could force the government to move quickly with emergency measures."

For those who have not been following the seeming endless bailout saga, and growing crisis, at Italy's third largest - and most insolvent - bank, here is the quick rundown:

  • 2007:  Monte dei Paschi buys Banca Antonveneta for EUR9.3 Billion
  • 2011:  European stress test finds the bank has a capital hole of EUR3.3 billion
  • 2012:  MPS's chairman and top management are replaced
  • 2013:  The lender borrows EUR4 billion from the government to stay afloat
  • June 2014: MPS raises EUR5 billion in fresh capital and pays back EUR3 billion of the government loan
  • Nov. 2014:  New stress tests find the bank the worst capitalized lender in Europe. The ECB takes over as its supervisor. The bank is officially declared up for sale
  • 2015:  MPS raises EUR3 billion in fresh capital and pays back the rest of the government loan
  • 2016:  Announces plan to raise EUR5 billion and sell EUR28 billion in bad loans

Moments ago, the FT reported what we said yesterday in an article according to which the "rescue for the world’s oldest surviving bank Monte dei Paschi di Siena has been thrown into doubt after reformist prime minister Matteo Renzi decisively lost a referendum on constitutional reform on Sunday."

Monte Paschi and advisers JP Morgan and Mediobanca will meet as early as Monday morning to decide whether to pull a plan to go ahead with a E5bn recapitalisation, according to people informed of the plan, Rachel Sanderson in Milan reports.


Senior bankers will decide whether to pursue their underwriting commitment or exercise their right to exit the transaction due to adverse market conditions, these people said. In the event the banks drop the capital plan, the Italian state is expect to nationalise the bank, say senior bankers.

The FT also adds that if Monte Paschi’s private recapitalisation plan fails, Italy is expected to undertake a precautionary recapitalisation of the bank to avoid it being wound down under new EU rules, say people informed of the plan."One big Monte Paschi investor said the extent of Mr Renzi’s loss was “a really bad result”. This person said they expected the private recapitalisation would be pulled and the Italian state would pump funds into the bank."

A precautionary recapitalisation, also known as a dreaded bail-in, would involve burden sharing by junior bondholders but with indemnification for investors up to a maximum of €100,000, said three people.

The FT cites officials and bankers who want to head off the risk of a deposit flight from Monte Paschi which has seen its deposits falls by 10 per cent so far this year as concerns about its viability have mounted; alas it is difficult to see how a bailin would achieve that, especially if depositors are impaired. 

* * *

Officials also want to prevent contagion from Monte Paschi hitting Italy’s wider banking sector which is already weighed down by €360n of soured loans, low profitability and more bank branches than pizzerias.

Here, as the WSJ adds, should Monte Paschi's third bailout attempt fail, the contagion could be swift, "with Italy’s troubled banks among the biggest victims of Italy's rejection of Matteo Renzi’s proposal to make key changes to the country’s constitution."

Mr. Renzi's resignation could bring an abrupt end to the government’s efforts to clean up the banking sector, which is suffering from a double whammy of low profitability and huge bad loans.


The prospect of political instability has created volatility in financial markets for weeks and Italian banks have markedly underperformed the rest of the Italian stock market this year. In the case of a ‘no’ vote, which now looks all but nailed on, investors are expected to sell off banking stocks in Italy–and possibly other European countries over contagion fears–when trading opens Monday morning.

It's not just Monte Pashi: The vote could also affect plans by UniCredit SpA, Italy’s largest bank, to raise as much as EUR13 billion. The bank is far healthier than Monte dei Paschi and less exposed to the fallout from the 'no' vote, since it could wait for calm to return to the markets before asking shareholders for capital. News could emerge from a Dec. 13 presentation by UniCredit’s top management in London, where they will unveil a new strategy.

There is, of course, the ECB, which warned last week it is prepared to step in and "temporarily step up purchases of Italian government bonds" if tomorrow's banking sector contagion were to "sharply drive up borrowing costs for the euro zone's largest debtor."


No comments yet! Be the first to add yours.