Approximately 40,000 junior bondholders are about to take a huge hit as a last-gasp private rescue plan for Monte dei Paschi, the world’s oldest bank looks set to fail.


Please consider Italy to Bail Out Monte dei Paschi di Siena Bank.

Monte dei Paschi di Siena is to be rescued by the Italian state using a new €20bn bailout package, as a last-gasp private sector rescue plan for the world’s oldest bank looked set to fail, forcing losses on bondholders.

The government rescue, which had long been resisted in Rome, is designed to draw a line under the slow-burn crisis in Italian banking that has alarmed investors and become the main source of concern for European financial regulators.

The state funds to rescue the bank would come from a €20bn package approved by both houses of parliament on Wednesday that could be used to bail out several of Italy’s most fragile banks. Goldman Sachs estimates they need €38bn to be adequately capitalised

Shares in MPS were suspended on Wednesday morning after the bank, Italy’s third-largest lender by assets, warned that its liquidity levels were deteriorating rapidly. People close to the bank said small and midsized companies had been pulling deposits.

Rome and Brussels have been in talks on ways to structure the bailout of the bank in a way that compensation could be offered to an estimated 40,000 retail holders of junior debt that may suffer losses based on new EU rules.

A sale of €28bn in bad loans demanded by regulators is also in doubt and may need to be renegotiated, said two people involved.

MPS, which has already burnt through €8bn in new capital since the financial crisis, is expected to receive the state funds under a “precautionary recapitalisation” agreed with EU regulators under its new banking rules.

The Five Star Movement, the main anti-establishment opposition party led by comedian Beppe Grillo, opposed the measure, calling for a full nationalisation of struggling banks.

A backlash against a taxpayer-funded bailout of Italy’s weakest lenders has already begun. Codacons, a consumer lobby group, estimated €20bn ploughed into Italy’s failing lenders would cost each Italian family €833.

Only the Beginning

Italy approved a €20 billion bank bailout. Goldman estimates €38 billion is needed.

Given there is something on the order of €260 billion in nonperforming loans, I speculate €120 billion or more may be needed. One thing is sure: €20 billion is not nearly enough to close the gap.

Here’s the question that needs to be addressed: Realistically, what are those non-performing loans worth on the open market?

Taxpayers and junior bondholders are on the hook. This begs the question: why are not senior bondholders on the hook before taxpayers?

Regardless, this bailout/bail-in is guaranteed to help Beppe Grillo and his band of eurosceptics.

Mike “Mish” Shedlock