This past month, the world’s oldest bank, Monte dei Paschi, struggled then failed to raise €5 billion capital. That failure triggered a €20 billion recapitalization effort by the Italian government.

Already we learn Monte dei Paschi Shortfall Hits €8.8 Billion.


The European Central Bank has said that Monte dei Paschi di Siena’s capital shortfall has risen to €8.8bn from €5bn, significantly increasing the price tag of the rescue of Italy’s third-largest lender by the government.

In a statement released late on Monday, MPS also revealed that the ECB had warned that the bank’s liquidity had suffered a “rapid deterioration” over the past month, as it tried in vain to muster enough cash from private investors to avoid a state bailout.

On Monday, the ECB sent a letter to the Italian finance ministry to inform it that MPS’s capital shortfall was now €8.8bn, compared to the €5bn it was estimated to need in the aftermath of July’s Europe-wide banking stress tests.

The worsening capital and liquidity position at MPS marks a new twist in a long-running saga surrounding the fate of world’s oldest bank, which has arguably emerged as the weakest link in the Italian and European banking system.

Rome will not have to cover the entire capital shortfall, since more than €2bn of the funds are expected to come from a haircut to institutional holders of junior debt in MPS under new EU rules on “burden sharing” in bank bailouts.

But the higher price tag for MPS will potentially give it less leeway to cover possible rescues of other smaller regional Italian banks which have been suffering from similar problems, even though Italian officials have insisted that there is ample room in the €20bn already approved.

Only the Beginning

On December 21 I wrote Bail-In Coming for 40,000 Junior Bondholders of Monte dei Paschi: Expect More Bank Bail-Ins

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.

Pretending Continues

It’s ridiculous to pretend €20 billion can cover hundreds of billions of euros of nonperforming loans.

Italy could not even get through the month of December without shortfalls becoming greater than expected.

Mike “Mish” Shedlock