Monte Paschi Crashes To All Time Low, Rebounds After Government Agrees To Fund Bank Bailouts

In early European trading, shares of Italy's third largest and most troubled bank were halted after crashing 17%, dropping to fresh all time lows, after the bank warned it is not only insolvent, but its liquidity could run out far sooner than expected.

BMPS shares initially dropped following yesterday's news that the €5 billion private sector rescue plan appeared to be a dead end, after only €500 million in new capital was said to have been lined up, coming far short of the targeted bogey. An analysis by Swedbank said that adverse reports about Paschi’s efforts to find private capital are “quite discouraging" and added that “it seems as if a government intervention comes closer by the day.” It also noted that that government intervention that also abides by BRRD (Bank Recovery and Resolution Directive) rules will punish equity and junior bond holders, which is a major concern.

This was, however, compounded after Monte Paschi warned it expects to burn through around €11 billion euros of liquidity more quickly than previously forecast, according to a revised prospectus on the bank's website.

The world's oldest bank said it now expected its net liquidity position, currently standing at €10.6 billion, to turn negative after four months. This was a sharp deterioration from the most recent liquidity update just three days prior, when on Sunday the bank had forecast that a current net liquidity position would turn negative after 11 months under a number of assumptions. It said on Wednesday the position would be negative for 15 million euros on the 5th month and could worsen further to minus 740 million euros by the 12th month. This compares with the minus 100 million-euro level it forecast on Sunday for the 12th month.

The bank also noted that it had lost 11%, or €14 billion, of its total deposits from January to September 2016, and added that its liquidity levels would fall under the required level should it suffer another €10bn of deposit outflows under a “stress” scenario calculated by the European Central Bank. From the prospectus, as quoted by the FT:

The situation of the liquidity of the bank had progressively deteriorated until it reached, following the constitutional referendum of December 4, a time horizon of 29 days before which the bank would not be able to meet its liquidity requirements without seeking help from new interventions. That time horizon was calculated applying a stress situation where the bank saw an outflow of €10.3bn in a month.

However, just as the situation appeared terminally grim for the twice-bailed out bank, its shares soared briefly recovering all losses when moments ago Italy's upper house of parliament approved a government request to borrow up to €20 billion in new public debt to underwrite bailouts of the country's various troubled banks. The vote came just minutes after the lower house had also given its authorization for a hike in the national debt to cover an eventual intervention.

The twin votes clear the way for government action, possibly this week, and the result was a bout of optimism that Italy may just have kicked the can one more time, on expectations Monte Paschi would quickly request state funds to prevent it from collapse.

Amusingly, earlier in the day, Italy's Finance Minister Padon told lawmakers that the "Italian banking system was solid." Maybe it is for the next few months, and all it will cost taxpayers is another €20 billion in public debt.

We now await Germany's statement on what appears to be yet another government bailout of insolvent European banks.