By Nicole Encalada, International Business Writer
Italy is in the midst of preparing a bailout funded by taxpayers for Monte Dei Paschi di Siena, the third-largest lending bank in Italy and the oldest bank in the world. Senior bankers are fearful that this could harm investor confidence in Italy’s banking sector.
Advisors of Monte Dei Paschi, JPMorgan Chase and Mediobanca, have been in talks with Italian Finance Minister, Pier Carlo Padoan, over a potential investment. Additionally, there have been plans to prompt the Qatar Investment Authority to drive much needed capital into the bank.
Political uncertainty in the European country has risen due to the recent referendum in which the Prime Minister of Italy, Matteo Renzi, fell short. The Prime Minister resigned from his position after his constitutional reforms, designed to alleviate gridlock in the government, were rebuffed by voters.
The political uncertainty has made the potential Qatar investment more unlikely, which is concerning for the solvency of the bank. A collapse of the bank is more likely without the Qatar investment. Even more unfortunate, the referendum has made investors far more hesitant to forgo any cash to the bank.
The bank is currently has $21.4 billion of outstanding debt, and their stock value has fallen a startling 85 percent since the beginning of the year. This has left the bank with a market value of $570 million. According to Reuters, the bank must raise $5.4 billion by the end of the year to avoid going under.
The Italian government is likely to intervene to rescue the bank. This may call for a recapitalization. Essentially, the government, as well as private investors, will have to provide funding for the bank to stay afloat. The goal in this scenario is to prevent the bank from failing which could potentially spark a greater banking crisis throughout the eurozone. However, this would inevitably result in hefty losses for stockholders and even some bondholders.
The European Union may protect the bank’s smaller investors who hold $250 billion worth in bonds. If the bank failed to explain the risks to its investors’, they then have a right to be protected by the EU.
Although the bank has not commented, Monte Dei Paschi’s CEO, Marco Morelli, met with European Central Bank officials in Frankfurt to discuss further options.
As of now, the bank has only raised 1 billion euros through a private funding plan which entails the conversion of subordinated bonds into riskier equity.
The bank currently has no clear direction in terms of how it will finance the necessary $5.4 billion, prompting them to ask the European Central Bank for an extension on the pending due date. The central bank, as of Friday, has denied the request to extend the date, leaving the bank with more unresolved problems.
The near future of Monte Dei Paschi is up in the air due to political and financial uncertainty. The current downward spiraling of the world’s oldest bank has brought about fears of the general Italian banking sector. For years now, Italian banks have been dealing with low returns and higher costs, meanwhile the country’s economy has failed to grow much in the last decade.
A version of this article appeared in the Tuesday, December 10th print edition.
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