Italian government has decided to bail out Monte dei Paschi di Siena, after the world's oldest bank failed to secure backing from private investors. Prime Minister Paolo Gentiloni and his cabinet paved the way for a 20 billion euro ($20.8 billion) rescue fund to help the country's embattled banking sector, with BMPS, Italy's third largest bank, the priority.
The troubled lender issued a statement saying that it would formally request a state bailout in an effort to stay afloat. "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.
Monte dei Paschi's desperate need for state aid followed an unsuccessful attempt to raise enough capital through private investment. The bank, which has been saddled with non-performing loans, raised 2.5 billion euros from retail and institutional investors, however, was well short of the 5 billion euros required.
The European Central Bank (ECB) had previously rejected a request for BMPS to have its deadline to raise sufficient funds extended to January 20 in early December. Monte dei Paschi was found to be the weakest of 51 European banks that went through the ECB's stress testing earlier in the year and was given until the end of 2016 to resolve its dire situation or face being wound down. "Italy is really rather depressing to look at," Paul Donovan, global chief economist at UBS Wealth Management said.
"(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. Under new European Union (EU) regulations, any such state bailout would enforce a conversion of the lender's junior bonds into shares while risking losses for thousands of ordinary retail investors.
