Last night we reported that according to Reuters, with a private bailout off the table now that Italy is in political limbo, a nationalization in the form of a government debt-to-equity bailout of Monte Paschi was imminent, however there was a snag: political opposition from Brussels - which has insisted on a bail-in resolution mechanism instead of a bail out - could scuttle the transaction which is meant to make whole junior bondholders - mostly retail investors - courtesy of other taxpayers. The alternative was to request more time from the ECB, which has previously given Monte Paschi a year end deadline.
Now, according to the FT, we learn that Rome is demanding the ECB give it more time to rescue the third largest Italian bank. That was to be expected, what is surprising, however, is that as the FT adds, Italy is "preparing to blame the bank for losses imposed on bondholders if Rome is forced into an urgent state bailout", a negotiating tactic some could call blackmail.
Citing four people "close to the issue", the FT adds that the board of MPS, which has the Italian Treasury as its largest shareholder, is asking the supervisory arm of the European Central Bank to give it until mid-January to pull off a €5bn equity injection and try to avoid forcing losses on some debtholders as required under new EU bailout rules. In a letter to the ECB, MPS says political instability unleashed by the resignation of prime minister Matteo Renzi following his defeat in Sunday’s referendum has made it impossible to get the deal done until a new government is formed, these people say.
If the ECB fails to approve the extension, MPS could be heading for a recapitalisation by the Italian state in the next few days. That would be only the beginning as contagion would soon follows:
At stake is the stability of the Italian banking system and the potential wider repercussions on Europe’s financial system, which continues to struggle to recover from the eurozone debt crisis of 2010.
A "precautionary recapitalisation" would involve imposing losses on subordinated debtholders and the indemnification of retail bondholders, the people said. It would also likely be frowned upon by Merkel and Schauble. The ECB is due to review the request as early as Thursday. The ECB is understood to be unwilling to reveal its position until a letter is received. But bankers argue the supervisor is under pressure to take a tougher stance on MPS, which failed the European banks’ healthcheck in 2014 and 2016, potentially paving the way for the latest stand-off between Italy and EU authorities.
And this is where the blackmail comes in: “If they don’t give the extension, the ECB must take responsibility. They will be pushing the button,” said one person. “We are only asking for five more weeks.”
Ironically, Italy's insolence is the direct result of the ECB's own actions. As the FT notes, "Italy has been emboldened to ask for an extension for MPS — which emerged as the weakest lender under European bank stress tests in 2014 and 2016 — after investors shrugged off Mr Renzi’s defeat, reducing the sense of urgency, say senior bankers."
Of course, the only reason investors refused to sell and BTFD after the Renzi loss is because the ECB made it abundantly clear it would step in and prevent "market volatility" as was reported last week.
Italy's gambit may work: officials in Brussels have signaled they are willing to support Rome, suggesting that relatively calm markets after the vote have given Italy two months to come up with a solution for MPS with a new government in place.
Nonetheless, they say they expect the Siena-based bank will ultimately require a state “bail-in” of some debt holders.
MPS had placed its hopes on a deal with Qatar’s sovereign wealth fund, which would have involved injecting up to €2bn of equity into MPS as a way of securing influence with Mr Renzi over the purchase of more desirable assets, insiders say. The departure of Mr Renzi — who refused a deal struck with Brussels in July to recapitalise the bank and bail-in bondholders, fearing it would lose him votes at the referendum — has thrown the Qatari deal into doubt.
Meanwhile, other potential investors, such as US hedge funds, are asking for the new government — preferably led by finance minister Pier Carlo Padoan — to be in place before proceeding. They also want clarity on when national elections may take place. Potential investors would prefer a technocratic government to remain until the end of the legislature in spring 2018, said one person.
Considering today's market reaction, which has seen the S&P hit new all time highs, it is unclear what is more bullish: a failure of BMPS which would launch another wholesale rescue operation by the ECB and trillions more in liquidity, or a happy ending to the bank which - at worst - will have been bailed out three times since the financial crisis.