Why Italy Is Still Struggling to Rescue Monte Paschi

(Bloomberg) -- Italy’s Banca Monte dei Paschi di Siena SpA is the world’s oldest bank. It’s also one of the most problematic after receiving more than 9 billion euros ($10.6 billion) in bailouts since the global financial crisis from the Italian government, which now has until the end of 2021 to exit its 64% stake. A possible sale to UniCredit SpA is raising more questions about the ballooning taxpayer cost of keeping the bank alive.

1. What’s unusual about Monte Paschi?

The lender has been considered too-big-to-fail by successive Italian governments. That’s because the economic and social costs of a liquidation are viewed as unacceptably high, with more than 4.5 million clients, 21,000 employees and 150 billion euros of total assets. The bank, which traces its roots to the 15th century, is now the country’s fourth-largest, and has grown through acquisitions that backfired. Monte Paschi ran short of capital back in 2009, at the peak of the worst financial crisis in 70 years, and ever since has been a headache for governments, regulators and investors trying to fix it. The saga has played out from the bank’s medieval headquarters in the Palazzo Salimbeni in Siena to the neo-classical finance ministry in Rome and the steel-and-glass conference rooms of the European Central Bank in Frankfurt. 

2. How did it get into trouble?

A key moment was a 2007 deal to buy Banca Antonveneta SpA for 9 billion euros in cash -- one third more than the valuation Banco Santander SA had put on it in a transaction just weeks earlier. With the financial crisis unfolding, Monte Paschi raised funds and resorted to illegal accounting to mask losses. Undermined by souring loans and investigations into derivatives deals that would later see top executives sentenced to jail, Monte Paschi repeatedly teetered near collapse, pushing the state to step in.

3. What has Italy done?

During the 2008 global financial crisis, banks in the U.S., U.K., Spain, Ireland and elsewhere were bailed out with taxpayer funds. But Italy, facing no immediate need to recapitalize its lenders, waited for an economic recovery that proved elusive. During the following years the government had to intervene several times to rescue Monte Paschi and other smaller banks, whose capital was stretched by mounting bad loans, a sovereign debt crisis and the country’s longest recession since World War II. Under Prime Minister Matteo Renzi steps were taken to modernize the industry, including measures to abolish restrictions on bank ownership and voting rights that were introduced to favor mergers.

4. What help has Monte Paschi had?

The bank received 1.9 billion euros in government aid to boost its capital in 2009, and an additional 2.2 billion euros in 2013. Even so, less than a year later Monte Paschi failed an ECB assessment, emerging with the biggest shortfall among lenders under review. Faced with a capital hole, it failed to raise fresh funds on the market and was nationalized in 2017 with a 5.4 billion-euro state bailout. In July 2021 Monte Paschi was still the worst performer in European regulators’ tests, underlining the urgency of a sale.

5. What’s the plan now?

Having agreed with the European Commission to divest its stake by the end of 2021, the government began exclusive talks to sell the bank to UniCredit. While this is Italy’s preferred option, sealing a deal has faced road-bumps, including a change in both the government and UniCredit’s management. Italy’s second-biggest lender is demanding conditions that may cost taxpayers 10 billion euros and make the government one of its shareholders. The government of Prime Minister Mario Draghi has agreed to UniCredit’s conditions, among which are the exclusion of Monte Paschi’s bad loans, but is seeking a sizable payback on the deal.

6. Why is it so sensitive?

The bank has been a political powerbase since before the Second World War, and has close links to center-left parties which have traditionally run its home region, Tuscany. Any bankruptcy would hurt the thousands of small and medium-sized companies that it finances. The Democratic Party, which governs Tuscany, is likely to oppose plans for large job cuts. Local elections in October will bring more focus on Monte Paschi. The Five Star Movement, the biggest party in Draghi’s coalition, would like to keep the bank under government control, using the lender as the core of a project to create a state bank supporting local businesses. Matteo Salvini’s populist League is questioning the timing of a deal, complicating talks over the sale.

7. Aren’t bank bailouts discouraged in Europe?

Taxpayers footed the bill when European governments were forced to bail out a large number of lenders that nearly collapsed during the 2008 crisis. Banking regulations were subsequently amended to avoid a repeat of those rescues, shifting the cost of future crises onto creditors instead. Under the new regime, banks have issued billions of euros in loss-absorbing bonds that can be “bailed in” to plug a capital hole in a failing lender and get it back up and running. In theory, state aid is only permitted in a handful of scenarios, including a so-called precautionary recapitalization -- the loophole that was used to justify Monte Paschi’s rescue by the Italian government in 2017.

8. Is this the last big bank Italy needs to worry about?

While Paschi is not the only troubled bank, it is still the most worrisome. In a fragmented industry, with more than 450 lenders, Monte Paschi looms the largest. Smaller banks, including Banca Carige SpA and Banca Popolare di Bari SCpA, are also on the state’s radar, given their precarious condition, but their size and influence are just a fraction of Monte Paschi’s.

The Reference Shelf

• Bloomberg articles on the trial of Monte Paschi officials, and the bank’s performance in ECB tests.
• A Bloomberg story on Monte Paschi derivative trades.
• Bloomberg Opinion’s Elisa Martinuzzi on state aid for Monte Paschi.
• A Bloomberg story on Monte Paschi’s acquisition of Antonveneta.

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