Italian Bank Rescue That Mustn’t Fail Hangs Over Como Party

(Bloomberg) -- Italy’s business elite concluded an annual summer lakeside retreat dogged by the enduring shadow cast by Europe’s unhealthiest big bank.

The need to revive Banca Monte dei Paschi di Siena SpA, the world’s oldest lender, didn’t feature on the official agenda of the Ambrosetti Forum at Lake Como this weekend, but both Prime Minister Matteo Renzi and his finance minister, Pier Carlo Padoan, were forced to confront the threat that it poses. While the meetings focused on Europe’s migrant crisis and Italy’s economic malaise, financiers in the pillared corridors of the Villa d’Este hotel spoke about little else.

“The success of Monte Paschi’s rescue plan is crucial to assess the near future of the banking system in the country as a whole,” Giovanni Bossi, chief executive officer of Italy’s financial-services firm Banca Ifis SpA said on the sidelines of the forum. “Italy cannot allow a failure of its restructuring that would heavily hurt investors’ perception of Italian banks, increasing the risk of self-fulfilling expectations.”

Monte Paschi

The institution founded in Siena in the 15th century remains in intensive care after two bailouts since 2009 and 8 billion euros ($8.9 billion) of fresh capital raised from investors in the last two years. Paschi, shown in European stress tests to be the region’s most vulnerable lender to a severe economic shock, is now the focus of a new plan to restore profitability.

At the center of that is Monte Paschi’s need for yet more cash. On July 29 -- the same day of the stress test results -- Chief Executive Officer Fabrizio Viola announced a plan to tap investors again by selling up to 5 billion euros of stock after first moving 28 billion euros of bad loans off the bank’s books for securitization and a subsequent sale. According to Corrado Passera, Italy’s former economic development minister and a former CEO of Intesa Sanpaolo SpA, the stakes couldn’t be higher.

“Monte Paschi represents the weakness of Italy’s banking system,” he said in an interview on Saturday. “If the restructuring plan doesn’t work, it risks a domino effect on the country’s banking system as a whole.”

His fellow guests agreed. For Italy, the lender is just too big too fail, according to Francesco Confuorti, CEO of Advantage Financial SA, a Milan-based investment firm.

Political Cost

“I rule out a failure because Italy cannot pay the social and political cost of such an event,” he said. “I’m sure it will act as investor of last resort if needed.”

The Paschi effort is part of Renzi’s goal to shore up the financial system, hurt by 360 billion euros in soured loans and a decade troubled by persisting economic stagnation. Unlike in Spain, where the weakest banks were bailed out in 2012, Italy’s governments didn’t force banks to confront their problems.

Turning to the European Stability Mechanism to help stabilize the country’s banking system still is an option Renzi’s government hasn’t ruled out, Italian daily La Stampa reported Monday, citing people familiar with the matter. The possibility of using the ESM, the euro area’s permanent rescue fund, was discussed by Renzi and German Chancellor Angela Merkel at recent bilateral meetings in Italy, the newspaper said.

Italy’s government denied that Monte Paschi was a matter of discussion at the summits, saying through an official that no plan B was reviewed, and it isn’t considering using the ESM.

The intervention of the ESM “may happen only after having used up the internal resources of Monte Paschi -- equity and hybrids, which is what the government may actually be willing to avoid,” Fabrizio Bernardi an analyst at Fidentiis Equities wrote in a note Monday. The ESM would imply a bail-in using subordinated bonds sold to retail, he wrote.

Since he took office in 2014, Renzi has pushed for reforms to modernize Italy and spur growth. The government also backed a fund to rescue banks and tackle troubled and defaulted loans, in addition to working behind the scenes on revamping Paschi.

“Once the plan is completed, which I’m fully confident it will be, the bank will be stronger, will have gotten rid of its non-performing loans load, will be based on a very effective business plan,” Padoan said in an interview with Bloomberg Television’s Flavia Rotondi at the Forum on Friday. “We rule out a plan B because we are very confident that plan A will work.”

Monte Paschi’s restructuring plan followed a selloff that wiped about 75 percent off its market value this year and led Italian banks to record lows in Milan. They have lost about 45 percent of their value this year, the worst performers among European lenders.

“Italy’s banking system is at a crossroads with little room for maneuver left,” says Bossi of Banca Ifis. “Monte Paschi’s rescue plan is at the center of it.”

--With assistance from John Follain Lorenzo Totaro Flavia Rotondi Chiara Vasarri Dan Liefgreen and Francesca Cinelli To contact the reporters on this story: Sonia Sirletti in Milan at ssirletti@bloomberg.net, Craig Stirling in London at cstirling1@bloomberg.net. To contact the editors responsible for this story: Simone Meier at smeier@bloomberg.net, Kevin Costelloe, Alessandra Migliaccio