Mario Draghi Now Has to Deal With Italy’s Monte Paschi Fiasco
(Bloomberg) -- The failure of talks between Italy’s finance ministry and UniCredit SpA over the sale of the world’s oldest bank came down to a conference call that never took place.
A self-imposed deadline to reach a deal over the sale of Banca Monte dei Paschi di Siena SpA -- founded in 1472 to help the Tuscan city-state of Siena recover from the plague -- was days away, but the two biggest hurdles still had to be cleared: specifying the assets involved and agreeing on how much money the state would pump into the troubled lender.
With the deadline fast approaching, government representatives canceled a key meeting to discuss the amount of capital that Italy was willing to provide and never rescheduled. That was the final sign for UniCredit that the treasury wasn’t going to meet its demands.
Radio silence ensued for days, before the two sides came together on Sunday to labor for hours over a two-line statement that marked the official end of negotiations, according to people familiar with the talks.
The failed deal leaves Italian taxpayers even more on the hook for another costly rescue effort and raises questions over Mario Draghi’s handling of the state’s efforts to unload Monte Paschi, which was nationalized in 2017 after previous bailouts fell short.
Rather than take an active role, Italy’s prime minister left the talks in the hands of the finance ministry even though he’s long been familiar with Monte Paschi’s woes. As governor of the Bank of Italy, he gave his blessing to the 2007 purchase of Banca Antonveneta SpA, a costly and ill-timed deal that set off the bank’s troubles.
Monte Paschi’s lingering issues serve as an unwelcome blemish for Draghi as he hosts leaders from the Group of 20 nations for a summit in Rome on Saturday and seeks to bolster the country’s recovery from the coronavirus pandemic.
Timeline of Failure
The following account is based on conversations with several people involved in the talks, who asked not to be identified because the deliberations were private. The Italian government and UniCredit declined to comment beyond public statements that have already been made.
In July, the two sides announced they started talks over Monte Paschi, opening the door to the Italian government’s favored solution for the long-troubled lender, which has burned through about 18 billion euros ($21 billion) in investor and taxpayer cash since 2008.
As talks progressed, gaps over expectations of the money needed to recapitalize the bank widened. Italy’s treasury was ready to inject 3 billion euros, while UniCredit’s due diligence showed a shortfall of about 9 billion euros.
Numbers fluctuated for months, depending on the structure of the transaction. Tension became evident on Oct. 19 when Italian officials pushed UniCredit to take on units, including leasing and factoring businesses, which were initially excluded from the deal.
Given that capital requirements were linked to the assets involved, the parties set two separate meetings on Oct. 21: one on the scope of the deal and a second on money.
With Italian and UniCredit representatives prepared to dial into a conference call to discuss capital issues, the treasury’s advisers called off the meeting on short notice, citing scheduling conflicts and asking to postpone. In the following 36 hours -- with time ticking down to UniCredit’s quarterly earnings -- no official contact took place.
UniCredit’s pessimism gradually mounted, reaching a climax on Sunday. That morning, Bloomberg reported that the talks collapsed. In the afternoon, UniCredit and Italy’s finance ministry confirmed in a tersely-worded joint statement.
Later that evening, Italian government officials conceded that the government would need to ask the European Union -- which had set an end-year deadline to sell Monte Paschi -- for more time to come up with another plan to keep the Tuscan lender in business.
Because of its 4.5 million clients, 21,000 employees and 150 billion euros in total assets, Monte Paschi has been considered too big and too politically sensitive to fail. The unresolved situation is now an issue for Draghi as the failed talks keep the company on the government’s books and all but eliminate one potential buyer.
UniCredit Chief Executive Officer Andrea Orcel has signaled that his bank will steer clear of further attempts to rescue Monte Paschi, saying that the Tuscany-based lender “will not be part of our future strategy.”
The Italian treasury is likely to move forward on its own with much of the deal offered to Orcel. The plan includes a capital injection of about 3 billion euros, the sale of bad loans, closing some branches and carrying out voluntary layoffs of some 2,000 staff.
That would still only be a temporary fix, with Italy already acknowledging that it will have to try to find another buyer eventually. Italian Finance Minister Daniele Franco said on Thursday that it would “probably be best for a medium-sized bank like Paschi to merge with other financial institutions.” But he defended the government’s tough line in the talks.
“As we showed in how we managed this negotiation, we’re not willing to sell Monte Paschi at all costs and by any means,” Franco said. “There was a gap between what they wanted and what we were willing to give in to.”
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