On Sunday night, when we commented on the results of the Italian referendum, we said that while the Italian political limbo may or may not be an issue in the near term, a bigger problem for Italy will be the fate of Monte Paschi, whose 3rd bailout was likely doomed to failure after the failed referendum, which could unleash contagion upon the Italian banking sector at a very precarious time for Italy and Europe.
Overnight, we got confirmation of that from not one but two sources, with Italian Il Sole 24 reporting that the Italian treasury is considering “precautionary” direct state intervention to rescue the bank, a plan that has already been sketched out by Rome and Brussels. The lender’s executives are meeting with European Central Bank officials today and may ask for a delay to a non-performing loan sale that’s part of the bank’s capital increase plan, the newspaper said.
In an interview with Bloomberg TV, Marcello Messori, economics professor at Luiss University said that “the probability of finding a natural market solution is very very low currently, due to the fact that instability implies that international investors have a lot of difficulties to decide in the short term for a very important recapitalization" and added that the ECB may give more time “if there is a solution on the horizon.”
There may not be a solution, as both the company's stock price, which fell for the fourth consecutive day, down 2.5% and plunging 85% YTD, and as the FT adds. According to the Nikkei's subsidiary, "bankers are running out of private-sector solutions for Monte dei Paschi di Siena and have told the Italian lender to prepare for a state bailout this weekend after prime minister Matteo Renzi was felled by a referendum defeat.
While financial markets responded relatively calmly to the referendum result, people briefed on the situation said the political upheaval made it “more difficult” to secure a €1bn investment from Qatar on which Monte dei Paschi’s €5bn capital-raising plan hinges. Senior bankers fear that a failure to shore up the bank, which was the worst loser of this summer’s European bank healthcheck, could damage already jittery investor confidence about Italy’s overall banking sector, which is hobbled by €360bn of bad loans and weak profitability.
Ironically, the bad news comes just as there was finally some good news for the bank: on Monday, bondholders agreed to convert almost a quarter of the 4.3 billion euros of debt offered subject to the swap, in line with expectations according to final results released Tuesday. The problem is that this won't be enough.
The swap was “a very good result, but is just one part of the overall bank recap: what’s crucial for the success of the deal is the commitment from anchor investors,” Fabrizio Spagna, managing director at Axia Financial Research in Padua, Italy, said by phone. “I’m skeptical that there are subjects available to subscribe the equity, and the outcome of the referendum may add pressure.”
And it is the anchor investors who have gotten cold feet. According to the FT, JPMorgan and Mediobanca, advisers to Monte dei Paschi, have been working with Pier Carlo Padoan, Italy’s finance minister, to persuade the Qatar Investment Authority to pump money into Italy’s third-largest lender. But hope is fading that they can secure a deal by this week’s deadline.
Without the cornerstone investment from Qatar, the other parts of the complex plan to fill the bank’s €5bn capital shortfall are likely to collapse.
As a result, the FT cites a senior banker who said that if the private-sector solution proved impossible, the bank and its supervisors at the European Central Bank were likely to favour a “precautionary recapitalisation” — involving an injection of state funds and the conversion of subordinated debt into equity.
Which means another taxpayer-funded bailout is imminent.
The rest of the "Plan B" alternative is largely familiar: “Whatever solution is found for Monte dei Paschi, I believe there is a significant risk of contagion to other Italian banks in particular,” said Megan Greene, chief economist at Manulife Asset Management.
To avoid the politically unpalatable option of imposing losses on the €2bn of retail bondholders in Monte dei Paschi, a plan is being drawn up to guarantee full repayment of the first €100,000 to every junior bondholder, according to senior bankers.
Senior bonds and deposits would be left unscathed. The bank is also likely to press ahead with plans to hive off €28bn in soured loans to a securitisation vehicle supported by a government guarantee.
Should the worst case scenario play out, the biggest risk is not Monte Paschi, it is what happens at other Italian banks: “If Monte dei Paschi’s plan fails, then that spells bad news for the other Italian banks that need recapitalising,” said Patrick O’Donnell investment manager at Aberdeen Asset Management. “If Italy can’t sort out its banks, then they will be in a real mess. Once again Europe finds itself in a position where politics, the ECB and the banks are dangerously entwined.”
Finally, it's not just Italian banks who are on the hook. In a letter to employees Monday, Deutsche Bank CEO warned that events in Italy are "a harbinger of renewed turbulence that could spill over from the political arena to the economy – with Europe particulary endangered." Not only Europe: Deutsche Bank too. Which is why when push comes to shove, Merkel and Schauble, who have both been vocal opponents of a state bailout will quickly close their eyes and ignore what is going on if the alternative means Italy's banking contagion jumping across the border and slamming Germany's largest bank which this summer saw its own stock price plunge to all time lows.