Monte dei Paschi’s attempt to raise capital in doubt

A last-ditch attempt by Monte dei Paschi di Siena, the struggling Italian bank, to raise up to €5bn in capital was thrown into doubt after the country’s private bank rescue fund expressed “strong reservations” over the terms of a bridge loan that is key to the deal. 

On Monday, MPS said in a statement that it was “in contact” with Quaestio Capital Management — which manages the Atlante 2 bank rescue fund — “to identify possible solutions” to the disagreement over the bridge loan. 

The Italian bank warned if it failed to reach an agreement with Quaestio it would miss the December 31 deadline for the completion of the planned recapitalisation set by the European Central Bank.

The objections by Quaestio are the latest in a series of hurdles MPS has faced as it attempts to raise €5bn from private investors this week, thereby avoiding a rescue by the Italian government.

The world’s oldest surviving bank has faced an uphill struggle in its efforts to clinch enough commitments from its own investors through a debt-for-equity swap — as well as new funds from other investors, in order to fend off a state bailout.

Shares in Italy’s third-largest bank by assets, which have been very volatile, fell 9 per cent on Monday afternoon to €19.05.

The backing of Quaestio is crucial to the recapitalisation of MPS because the Atlante 2 fund was expected to participate in the securitisation of the bank’s bad loan portfolio, which is at the root of its financial weakness. Atlante 2 was set up this year to collect funds from a number of Italian financial institutions to prop up the banking system. 

 Italy’s centre-left government — first led by Matteo Renzi, and now by Paolo Gentiloni — has long tried to avoid injecting public funds into MPS, for fear of the toxic political ramifications, since any intervention would be likely to involve a hit to private investors under new EU rules. But Mr Gentiloni last week said that Italy was “ready to intervene” if necessary. 

Bankers fear any rescue of MPS by the government could have a knock-on effect on up to seven other struggling Italian financial institutions, which could require further state intervention.

Italian officials have indicated they are working on a scheme to compensate retail investors for any losses they might incur, though negotiations with the EU on the terms of such a mechanism are continuing. 

Even if a compensation scheme is set up for retail investors, the prospect of a state bailout of MPS could inflict further damage to the government, which is already reeling from a big defeat in the constitutional reform referendum. The defeat led to the resignation of Mr Renzi’s. 

The anti-establishment Five Star Movement, which is neck and neck in the polls with the Democratic party, has called for a full nationalisation of MPS. It had regularly attacked Mr Renzi for being too close to the banks and unwilling to flout tough EU rules on state aid.