For a glimpse into just how insane modern finance and capital markets are, look no further than Italy's thrice insolvent (in three years) bank Monte Paschi, which after failing to finalize a private, is finalizing the terms of its nationalization with the Italian government: a rescue which will cost Italian taxpayers at least €6.6 billion, and likely more.
The bailout, however, is not the punchline. What is, is that according to Reuters, Monte dei Paschi di Siena - which has yet to be bailed out, plans to issue no less than €15 billion of debt next year "to restore liquidity and boost investor confidence."
According to daily La Repubblica, Monte dei Paschi would issue the debt in the form of bonds and commercial paper. A third of that debt would have a short-term maturity date, while the rest would mature in three years, it added. The bank could not immediately be reached for comment.
In other words, when the bank was on its own, without the explicit banking of the government, and certainly not the ECB which confirmed that Monte Paschi's deposit flight was greater than expected, no investor would touch it with a ten foot pole. However, once the bank has the full "backing" of the Italian nation, which will own at least 75% of the common equity after the bank is nationalized, there is a line of people waiting to hand over "other people's money" to the bank to generate a modest return,
Reuters confirms as much, stating that the debt sales would be supported by government guarantees which form part of a liquidity scheme for banks in need which the European Commission has agreed to extend for six months. Of course, by providin the insolvent bank this blanket guarantee, the Commission would once again be violating one of its core principles: under EU state aid rules, banks with a capital shortfall cannot benefit from general liquidity support schemes, meaning the Commission takes decisions on a case-by-case basis, as it did for Monte dei Paschi, which may be insolvent, but it is systematically important so anything goes.
Monte dei Paschi, Italy's third biggest lender and the world's oldest, had to ask Rome for help after failing to win investor backing for a share issue meant to keep it afloat. As a reminder, on Monday, the ECB revised the size of the bank's capital shortfall by 76% higher, and estimated its funding needs at 8.8 billion euros, compared with a 5 billion euro gap previously indicated by the bank. This led to a greater taxpayer contribution for the bailout, and an angry reaction from Italy's economy minister, Pier Carlo Padoan.
The Treasury may have to put up around 6.6 billion euros to salvage the lender, including 2 billion euros to compensate around 40,000 retail bond holders, the Bank of Italy said on Thursday, while the rest will come from the forced conversion of the bank's subordinated bonds into shares. Should the bank run continue or accelerate, the bank's funding needs, and thus taxpayer inflows, are only set to increase.