A Reality Check On The Banking System: Italy's Government Nationalizes Monte Dei Paschi

| About: Banca Monte (BMDPD)

Summary

After 83 years since the last banking system nationalization, the Italian parliament approved a €20bn rescue fund for Italy’s banking sector.

Headed by prime minister, Paolo Gentiloni, the government is now expected to force private investors owning about €2.1bn of the bank’s bonds to take losses.

Clearly, the political implications of a government bailout goes beyond Italy, the eurozone’s third largest economy which is already running a 134% debt to GDP ratio.

By Edoardo Fusco Femiano, CFTe, Independent Analyst

After 83 years since the last banking system nationalization, the Italian parliament approved a €20bn rescue fund for Italy's banking sector, bailing out the world's oldest bank, Monte dei Paschi di Siena (MPS) (OTC:BMDPD), (OTCPK:BMDPY), (OTCPK:BMDSD). Late on Wednesday the bank stated that it had failed to secure an anchor investor - more precisely the Qatar sovereign wealth fund for a €1bn contribution - despite having raised almost over €2bn with a debt-for-equity swap offered to retail investors, in a total €5bn capital raise. MPS shares moved wildly in Wednesday's trading session, plunging 18% to record lows before closing 12% lower amid rumors that the fund-raising effort would fail.

With no other potential investors standing for MPS, the Italian government was expected to step in, possibly as soon as Thursday, and increase its 4% stake in the bank. Headed by prime minister, Paolo Gentiloni, the government is now expected to force private investors owning about €2.1bn of the bank's bonds to take losses. Piercarlo Padoan, the finance minister, told yesterday the Italian Parliament that the government's proposed €20bn bailout would have a minimal or non-existent impact on savers: "This measure reinforces the ability of the Italian system to grow and consolidate itself and this growth will be a further element that helps banks' balance sheets." he stated.

Clearly, the political implications of a government bailout goes beyond Italy, the eurozone's third largest economy which is already running a 134% debt to GDP ratio. The MPS test will be also a major one of the new EU rules requiring bond holders to take losses before taxpayer money can be injected into banks and it will also be used as barometer for how the government will tackle the problem inside its banking sector, laden down with €360bn of bad debts.

MPS was instructed to find more capital after it was the weakest in the latest stress test earlier this year on European banks. However, its struggle to boost its capital appeared to have an impact on its day-to-day funding and it warned its liquidity position - assets it can use immediately - was falling sharply, with a clear risk to breach regulatory minimums later next year. With reference to the bailout, it was not immediately clear how much of the €20bn approved by the Italian government would be used for MPS, just one among many banks which are in need of fresh capital injections. There are also doubts about whether the €20bn would be a large enough sum to tackle Italy's problem banks, which have accumulated bad debts after eight years of stagnation and the loss of approximately 25% of the industrial production since the financial crisis.

Renzi attempted to tackle the problem, before resigning after losing the referendum, setting up a €4.25bn backstop fund - known as Altante - which was backed by the major lenders and intended to be used to help troubled banks. Atlante has a role in the MPS situation as it was involved in taking up bad loans in a clean-up exercise.

Edoardo is an independent trader and investment advisor with more than 10 years of experience in Portfolio Management, FX and Equity Trading, Investment Research and Risk Management within primary financial institutions (Vatican Bank, Capitalia Asset Management S.g.r., SACE Spa and Citigroup CIB). Graduated in Finance at Bocconi University, he is a member of several international investment professionals associations, where he is a Lecturer of Alternative Investments, and Adjunct Professor of Derivatives Markets at Link Campus University (Rome). He has been awarded the Certified Financial Technician (CFTe) by IFTA (International Federation of Technical Analysts) and holds also the Chartered Alternative Investment Analyst (CAIA), the Certified International Investment Analyst (CIIA), and the Professional Risk Manager (NYSE:PRM) designations.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

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