After the world’s oldest bank, Monte dei Paschi di Siena, failed to secure backing from private investors, Italy’s government approved a state bailout for the bank.
In order to help the country’s embattled banking sector, with BMPS, Italy’s third largest bank, the priority, Prime Minister Paolo Gentiloni and his cabinet paved the way for a 20 billion euro ($20.8 billion) rescue fund.
Shortly after Italy’s parliament finished meeting and declared it would formally request a state bailout in an effort to stay afloat, the troubled lender issued a statement announcing the bailout package.
“This will secure the capital needs of BMPS and allow the bank to pursue its industrial plan,” Pier Carlo Padoan, Italy’s finance minister, said in a brief press conference.
“Italy’s third-largest bank will finally return with force to operate in support of the Italian economy and in a context of full tranquility for its savers and its employees,” he added.
An unsuccessful attempt to raise enough capital through private investment preceded Monte dei Paschi’s desperate need for state aid.
The bank was well short of the 5 billion euros required by Thursday afternoon even though it managed to raise 2.5 billion euros from retail and institutional investors, the bank has been saddled with non-performing loans resulting in the crisis.
After falling to its lowest share price in the previous session, BMPS’ shares were suspended from trading ahead of the European open on Friday.
A request for BMPS to have its deadline to raise sufficient funds extended to January 20 in early December was previously rejected by the European Central Bank (ECB).
Earlier this year, the ECB had given until the end of 2016 to resolve its dire situation or face being wound down to 51 European banks that went through the ECB’s stress testing and Monte dei Paschi was found to be the weakest of 51 European banks.
“Italy is really rather depressing to look at,” Paul Donovan, global chief economist at UBS Wealth Management told the media.
“(In Italy, we have) negative bank lending… In a modern capitalist society, if you don’t have normal bank lending you don’t have normal economic growth, it’s that simple,” he added.
While risking losses for thousands of ordinary retail investors, any such state bailout would enforce a conversion of the lender’s junior bonds into shares under new European Union (EU) regulations.
Prevent tax payers having to fork out the majority of the support required for an ailing bank is the aim of the EU rules.
In Italy, if all 20 billion euros be swallowed up by the fragile banking system, the debt levels are projected to climb even higher, according to a Reuters report, and that would be bad for a country whose debt levels are second only to Greece in the euro zone standing at 133 percent of gross domestic product (GDP).
(Adapted from CNBC)