Italy Sets Up Fund to Help Troubled Banks
Move to create €20 billion fund comes shortly after Monte dei Paschi says it failed to raise capital
Italy’s government has set up a backstop fund to shore up troubled banks, setting the stage for the rescue of troubled Italian lender Banca Monte dei Paschi di Siena SpA.
At a cabinet meeting in the early hours of Friday, the government of Prime Minister Paolo Gentiloni approved the creation of a €20 billion ($20.9 billion) fund to help troubled banks. Shortly afterward, Monte dei Paschi said it will apply to tap this fund for fresh equity to shore up its balance sheet .
The government’s decision comes just hours after the Tuscan bank declared that a last-ditch effort to raise capital from private investors has failed. The bank, Italy’s No. 3 lender, attempted to raise €5 billion to stay afloat and avert a government bailout.
The government said that if a bank taps the newly created fund, its outstanding junior bonds will be forcibly converted into shares. European rules on bank rescues require that investors suffer at least some losses.
However, under the terms attached to the Italian government’s new fund, the losses suffered by holders of Monte dei Paschi’s junior bonds appear to be fairly limited.
The government said that for the Tuscan bank, some junior bonds held mainly by institutional investors will take a 25% haircut on their face value when converted into shares when the bank taps the fund.
In the case of those held by retail investors, however, their bond holdings will also be forcibly converted into shares, but at their full value. MPS will swap the shares obtained by retail investors from the forced conversion of their junior bonds with senior bonds and then the government will buy those shares from the bank.
A Treasury official said the government believes the mechanism to rescue Monte dei Paschi—which other troubled banks can also tap—abides by European rules, even though the government hasn’t received a specific green light by the European Commission.