Yesterday, the Financial Times reported Italy demands more time from ECB to rescue Monte dei Paschi.

I was wondering how the bank or the Italian government was in a position to demand anything. It wasn’t.

Today, the ECB Squashed Italy’s Plea.

The European Central Bank has rejected a request from Rome to delay a private sector-led rescue for Monte dei Paschi di Siena, leaving Italy little option but to trigger a government bailout and impose losses on creditors.

Shares in MPS, Italy’s third-largest bank by assets, were suspended in afternoon trading and closed down more than 10 per cent in Milan trading.

Some Italian officials are fearful of a government bailout of MPS ahead of an effort by UniCredit, the country’s largest bank, to raise €13bn in capital, which is due to be announced on Tuesday.

MPS junior bonds collapsed in value on Friday over fears that they would be exposed to losses as part of the government rescue. A €241m bond included in last week’s debt-for-equity swap traded as low as 18.7 cents on the euro.

A state-led rescue of MPS is expected to include protection for its smaller investors, people involved in the talks said.

The long-mooted state rescue of MPS, which already has the Italian Treasury as its largest shareholder, could poison relations between Rome and European authorities.

MPS has a market value of just €635m, having lost 85 per cent of its value this year.

The bail-in of MPS is expected to have implications for the rest of Italy’s banking sector. Shares in UniCredit, Italy’s largest bank by assets and only globally significant bank, were down nearly 6 per cent following the reports. Bankers expect that UniCredit will have to put a lower price on a €13bn equity raising it is planning for early in 2017.

Monte Paschi’s board is investigating options including immediately triggering precautionary recapitalisation.

Individual junior bondholders may be wiped out unless they can present evidence they were duped into buying shares. Large holders of junior bonds are guaranteed to take a massive hit in a forced buy-in.

Collapse of Monte dei Paschi

mps

The bank could have raised capital at €945. Instead it raises capital at €19.50 or so, following a 97.94% loss.

Junior bondholders face 80% to 90% losses, in a forced bail-in.

Wikipedia reports Monte dei Paschi, founded in 1472, is the oldest surviving bank in the world. It is Italy’s third largest commercial and retail bank by total assets, according to research from Ricerche e Studi, using 2014 data.

Much of those alleged assets weren’t so valuable. I doubt Monte dei Paschi survives.

There is a huge political risk in play. Forced recapitalization by the ECB will play straight into Beppe Grillo’s hands.

Mike “Mish” Shedlock