Padoan Back as Finance Chief With Bank Risk Stalking Italy

(Bloomberg) -- Pier Carlo Padoan has one more chance to finish the job that’s proved beyond him so far: fixing Italy’s banks.

For almost three years as Matteo Renzi’s finance minister, Padoan struggled with the banking system’s losses under the restrictions of European Union rules and the political limitations of his government’s situation.

As he takes office for a second time under Paolo Gentiloni, Banca Monte dei Paschi di Siena SpA is running out of time to complete a crucial capital increase and the prospect of a state rescue that would likely enforce losses on thousands of retail investors is growing.

The longer Padoan, 66, takes to steer Italy’s third-biggest lender to safety, the greater the risk that its troubles could infect other banks in a system where soured loans equate to about a fifth of the country’s economic output.

“The chances that Paschi will secure its capital increase are even slimmer than before,” economist Raffaella Tenconi, founder of London-based consultancy ADA, said in a note to investors. “The murky political backdrop will probably affect other banks.”

If Padoan has to put up public money to save Monte Paschi, EU regulations may mean losses affecting as many as 80,000 people, Tenconi estimates. That’s a potentially toxic proposition for a government that is likely to be facing a general election in the next few months, she said.

The challenge isn’t just recapitalizing Monte Paschi. Other banks, including Italy’s biggest lender UniCredit SpA, are also in focus as they try to bolster their capital structure. UniCredit said Tuesday it plans to raise 13 billion euros ($13.8 billion) in a rights offer, sell off bad loans and slash costs to boost capital levels and profitability.

Gentiloni was due to speak about his government’s program in the lower house from 11 a.m. Tuesday in Rome, with a confidence vote due from 6.45 p.m., newswire Ansa said, citing lawmakers. A separate confidence vote is expected in the Senate.

Early Elections

Gentiloni was sworn in as prime minister on Monday night, replacing Democratic Party colleague Renzi who resigned last week after losing a referendum on constitutional reform. Almost 60 percent of voters rejected Renzi’s proposal to strip back the powers of the Senate on Dec. 4 as they used the ballot to vent their frustrations with their country’s economic malaise.

The former premier remains leader of the Democratic Party, the biggest group in Parliament and on Monday, he signaled he’s targeting an early election in the first part of next year as the possible moment for a comeback.

The prospect of elections in 2017, with polls showing the anti-euro Five Star party neck-and-neck with the governing Democratic Party, is a risk that investors have been tracking. But for now the banking system poses the greater concern.

“Investors are watching Italian banks first, and elections later,” said Jeroen Blokland, portfolio manager at Robeco Group in Rotterdam.

Padoan’s Challenge

Under Padoan’s watch, Italy emerged from a record-long, double-dip recession, but the recovery is failing to pick up speed and his efforts to fix the public finances are suffering. The Bank of Italy this month revised down its forecast for Italy’s economic growth by about 0.2 percentage point each year through 2018 compared with its June projection. In September the former chief economist for the Organization for Economic Cooperation and Development abandoned his aim for this year to reduce Italy’s public debt load, Europe’s second biggest.

The current political timetable is unlikely to do Padoan any favors. With the situation delicately poised, he’ll face pressure to avoid any measures that could stoke voters’ frustration with the establishment, even if those measures may be just what the banks and the country’s longer-term interests require.

“Padoan needs to show more independence in his policy on banks,” Francesco Boccia, the Democratic Party head of the budget committee in the lower house of parliament, said in a telephone interview on Monday. “Without a market solution, the new government might very soon need to set up a public fund worth as much as 20 billion euros.”

With some 360 billion euros of toxic debt in the system, other banks need to dispose of non-performing loans and UniCredit’s plans to raise capital might also be helped by the existence of a back up fund, Boccia said.

“If they were able to put some confidence back into the banking issue that would be great,” Blokland said. “The urgency is the same for Gentiloni as it was for Mr. Renzi.”

--With assistance from Ross Larsen To contact the reporters on this story: Lorenzo Totaro in Rome at ltotaro@bloomberg.net, Chiara Albanese in Rome at calbanese10@bloomberg.net, John Follain in Rome at jfollain2@bloomberg.net. To contact the editors responsible for this story: Fergal O'Brien at fobrien@bloomberg.net, Kevin Costelloe, Ben Sills