The wait is almost over.
After two previous taxpayer funded bailouts, and nearly five months of foreplay since the third largest Italian bank failed the latest European stress test at the end of July, in which the Italian government in September vow that “bailout for Italian banks has been ‘absolutely’ ruled out“, a third bailout, as we previewed earlier today, is now imminent.
According to Reuters, which cites two sources, Italy is preparing to take a €2 billion controlling stake in Monte Paschi as the bank’s hopes of a private funding rescue have faded after a fruitless five month search to secure an anchor investor, following Prime Minister Matteo Renzi’s decision to quit.
The government, which is already the ailing bank’s single largest shareholder with a four percent share, is planning do a debt-for-equity swap, and buy junior bonds held by ordinary Italians to take the stake up to 40%, the sources said. The bonds would then be equitized, converting the government’s bond stake into pure equity ownership, a troubling approach as it would effectively wipe out the existing equity tranche and position the bank for a potential bankruptcy fight in court where the government faces off with the equity committee.
This transaction would make the government by far the biggest shareholder, meaning the Treasury would be able to control Italy’s third biggest bank and its shareholder meetings, or in other words, the bank would be nationalized.
The sources said a government decree authorizing the deal, which would see the state buy the subordinated bonds from retail investors and convert them into shares, could be rushed through as early as this weekend. Italy’s treasury would buy the bonds held by around 40,000 retail investors at face value, the sources said.
It is unclear how the senior bondholders, who would not be made whole would feel about a government transaction which favors the juniors (who would get par) where the bulk of the retail investors are found, would feel about such a transaction which would bring memories of the US government’s “bailout” of GM which flipped the bankruptcy process on its head by prioritizing junior pensioners over senior creditors.
That way the transaction is structure, the government would ensure retail investors do not suffer any losses in the bank’s bailout, making it politically more palatable and staving off the risk of a run on deposits that could trigger a wider banking crisis.
The bank, which needs to raise €5 billion by the end of December or risk winding down, is set to raise 1 billion euros from a bond swap with institutional investors and Rome is hoping the 2 billion euros participation from the government could help persuade private investors to fill the 2 billion euros gap. Since any new equity investors would come in as the equivalent of post-petition equity, it would mean that existing equityholders, already a token amount, would be wiped out.
“It’s a de-facto nationalization with a strong presence by the state that can attract other investors and allow the transaction to be completed,” said one of the sources, speaking on condition of anonymity.
There is another problem: in the past both Merkel and Schauble, not to mention Djisselbloem, have made it expressly clear that a bail-in mechanism should be used to preserve insolvent banks, and a state-funded and taxpayer backed bailout/nationalization is no longer permitted. Allowing Italy to proceed with this transaction would make a mockery of Europe’s entire “bail-in” protocol, not to mention the European finance ministers’ resolve and ability to implement anything, which is why the European Commission would need to assess whether the government’s intervention is taking place at market prices or if it constitutes state aid, another source said.
However, since an Italian contagion wave would inevitably slam Deutsche Bank and Germany’s various other banks, Europe will find the deal to be “whatever it needs it to be, to make it possible.
Monte dei Paschi, rated the weakest lender in European stress tests this summer, had planned to arrange a private rescue, starting with a firm commitment from one or more anchor investors and then launching a share sale this week.
There is still some hope for a private rescue without a government intervention, but that is evaporating by the hour. According to Reuters, the chances of the privately backed deal going ahead as planned were now slim. A source close to Qatar’s cash-rich sovereign wealth fund said it could inject €1.4 billion in the bank but wanted to wait to see what kind of government would succeed Renzi. Other sources were more cautious on Qatar’s willingness to back the deal.
Monte Paschi’s bank’s chief executive, Marco Morelli, held talks with European Central Bank officials in Frankfurt on Tuesday to review its options. A meeting of the bank’s board is likely to take place on Wednesday. At that point it is likely to greenlight the first major European bank bailout in a year in which the G-20 leader previously declared that the global economy is fixed and is now reflating itself back to growth.
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