Italian Parliament Green Lights 20B Plan to Prop Up Banks

Italy’s parliament gave the green light on Wednesday for a 20 billion euro ($20.8 billion) plan to prop up the country’s weaker banks, starting with a bailout as early as this week for the third largest, Monte dei Paschi di Siena (BMPS.MI).

The Tuscan lender, recently judged the weakest of the European Union’s major banks, needs to erase a mountain of bad loans and raise 5 billion euros in capital by the end of this month or risk being wound down by European regulators.

But its hopes of raising the money from private investors, via a debt-for-equity swap and a share placement that ends on Thursday, are fading. A failure of Monte dei Paschi would rock Italy’s banking system, the euro zone’s fourth largest.

In the latest prospectus for the deal, the bank warned it could run out of liquidity in four months — compared to a previous 11 months estimate published as recently as Sunday.

It also said a key investor in its rescue plan, bank bailout fund Atlante, had set new conditions for its participation.

If Monte dei Paschi’s capital plan fails, Prime Minister Paolo Gentiloni’s new government is likely to meet this week to issue an emergency decree to inject capital into it.

But that could prove to be politically explosive given that investors are required to bear losses under EU bailout rules.

Parliamentary approval for the 20 billion euro government plan was needed to allow the state to take on new debt. Italy’s debt burden, at about 133 percent of annual output, is already the second highest in the euro zone after Greece.

via Reuters

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Alfonso Esparza

Alfonso Esparza

Senior Currency Analyst at Market Pulse
Alfonso Esparza specializes in macro forex strategies for North American and major currency pairs. Upon joining OANDA in 2007, Alfonso Esparza established the MarketPulseFX blog and he has since written extensively about central banks and global economic and political trends. Alfonso has also worked as a professional currency trader focused on North America and emerging markets. He has been published by The MarketWatch, Reuters, the Wall Street Journal and The Globe and Mail, and he also appears regularly as a guest commentator on networks including Bloomberg and BNN. He holds a finance degree from the Monterrey Institute of Technology and Higher Education (ITESM) and an MBA with a specialization on financial engineering and marketing from the University of Toronto.
Alfonso Esparza