The European Central Bank’s supervisory arm has rejected a request from Rome to delay a private sector-led rescue for Monte dei Paschi di Siena, leaving Italy little option but to inject state funds and impose losses on creditors.
MPS asked the ECB for an extra five weeks to pull off a last-ditch €5bn equity injection for the lender, which emerged as the weakest in the European bank health check this summer and had already burnt through €8bn in equity in the past four years.
Bankers and politicians had wanted to avoid forcing losses on some debt holders as required under new EU rules on government bailouts of financial institutions.
But the ECB feared that if the situation at MPS were left unresolved it could lead to a systemic crisis across Italy’s banking system, according to people briefed on the deliberations.
The board of the Single Supervisory Mechanism, the ECB unit charged with banking regulation, made the decision to reject MPS’s request at a meeting on Friday, the people said.
A spokesman for the ECB declined to comment. Italy’s Treasury also declined to comment. The decision was first reported by Reuters.
Shares in MPS were suspended in afternoon trading, having fallen more than 11 per cent on the news.
Before the ECB decision, senior bankers in Italy had said the groundwork was ready for a so-called precautionary recapitalisation of Italy’s third-largest bank by assets. It would involve bondholders shouldering some of the losses so that the amount of taxpayer money needed to shore up the bank could be reduced.
MPS junior bonds collapsed in value on Friday over fears that they would be exposed to losses as part of the rescue measures. A €368m bond included in last week’s voluntary debt-for-equity swap traded as low as 18.7 cents on the euro, halving in value on the day.
The long mooted state rescue of MPS, which already has the Italian Treasury as its largest shareholder, threatens relations between Italy and European authorities.
Italy had threatened to blame the ECB for losses imposed on bondholders if Rome were forced into an urgent government bailout in the aftermath of the country’s rejection of a constitutional reform referendum, people close to the talks said this week.
Italian bankers had argued the resignation of prime minister Matteo Renzi following his decisive defeat in Sunday’s referendum made it impossible to carry out a private sector-led recapitalisation until a new government was in place.
The private sector solution for MPS, led by JPMorgan and Mediobanca, required Qatar to pump €1bn to €2bn into the Siena-based bank. But bankers said Qatar was not interested in investing until it received clarity on the formation of a new government, which may not be in place before January.
The ECB has been reluctant to offer MPS more time to solve its problems, which emerged in health checks of the eurozone’s banking system conducted in 2014 and earlier this year. MPS, the world’s oldest bank, was among the worst performers in both assessments.
Successive Italian governments of the left and right failed to tackle MPS’s problems, fearing a loss of votes since forced losses on bondholders could hit small-scale investors who purchased MPS bonds. Mr Renzi had refused a rescue deal struck with Brussels and the ECB in July, believing it would lose him crucial votes in the December referendum.
MPS has a market value of just €635m, having lost 85 per cent of its value this year.
A state-led rescue of MPS is expected to include protections for its smaller investors, say people involved in the talks.
Alberto Gallo, portfolio manager at London-based Algebris, which manages $6bn in investments, said “the endgame” for MPS was likely to be a “bail-in for institutional subordinated debt and state aid”.
“This will be a positive for Italy’s large, strong banks, which have often been used to buy or help weaker peers, a strategy used by the Bank of Italy over the past 20 years. Both MPS and other Italian banks need more consolidation,” Mr Gallo added.
The bail-in of MPS is expected to have implications for the rest of Italy’s banking sector. Shares in UniCredit, Italy’s largest bank by assets and only globally significant bank, were down nearly 6 per cent following the reports. Bankers expect that UniCredit will have to put a lower price on a €13bn equity raising it is planning for early in 2017.
Additional reporting by Thomas Hale in London