New Monte Dei Paschi Information Trickles In

I had stated more information would come out about the Monte Dei Paschi bail-out solution over the next 2-3 months, but, to my surprise, information has slowly trickled out about the details of the plans for the bank. In my last article, I didn’t agree with the Italian politicians’ frustration with the ECB over its handling of the situation. As a recap, the Italian politicians were mad at the ECB for increasing the amount Monte Dei Paschi needed to stabilize the bank from 5 billion euros to 8.8 billion euros. They were also mad at the way it happened as the ECB gave an explanation with only 5 lines on Christmas day.

There wasn’t a detailed discussion about how the ECB came to its conclusion. I thought this information would come all at once when a decision was made next year, but it seems new information is trickling out daily. It’s almost as if the ECB is testing what it can get away with by floating different stories to the media outlets. I think the ECB is handling this poorly. It should be quick with its decision and firm with what it decides. The fact that the ECB gets to decide Italy’s fate is evidence of the problem with the way the system is set up. Italy should be able to decide its own fate. This isn’t to say I agree with the motivation to constantly bailout failing institutions, but it should, at least, be allowed to destroy its own future.

That being said, by buying Italian bonds, the ECB is also helping Italy. If the ECB halts its bond buying program in December, Italy will be stuck with its debt being priced at market levels. Given the debt to GDP is 133% and it will need to issue more debt to pay for the 20 billion euro bank bailout fund, this is a big problem.

Every policy decision is intermingled which is why no real change can take place. Instead most decisions kick the can down the road instead of improve the situation. The largest can kicking situation is Italy staying in the European Union itself. The difference with this decision is the biggest pain will be felt by the technocrats knowing their vision failed. Each patchwork bailout and austerity plan among the southern nations extends the life of the European Union, but doesn’t make it work for any of them.

The new details of the plan released on Friday are that Monte Dei Paschi plans to issue 15 billion euros in new debt next year to restore liquidity and boost investor confidence. Confidence is important because if depositors believe the bank is sound, they will stop taking their money out and there won’t be a run on the bank. The other pressing issue is getting the 28 billion in bad loans off the books. Monte Dei Paschi will be raising money along with Unicredit, so Italy better hope the credit conditions are optimal to absorb all this debt and equity at reasonable valuations. If hope doesn’t work, the ECB will have to work its magic to encourage private buyers.

Of course, with Monte Dei Paschi the 15 billion euros raised will not be exclusively from the private market. The debt raised will be backed by government guarantees which is evidence of how bad of shape the bank is currently in. This part of a liquidity program the European Commission decided to lengthen for another 6 months. According to Reuters, under European Union aid rules banks with capital shortfalls cannot benefit from general liquidity support schemes. It takes the banks’ issues on a case by case basis, which is why it allowed Monte Dei Paschi to participate.

Monte Dei Paschi will issue the 15-billion-euro debt in the form of bonds and commercial paper. A third of debt will have a shot term maturity date and the rest will mature in three years. The Italian treasury is expected to put up 6.6 billion euros including 2 billion euros to save the 40,000 retail debt holders who were told the bonds were secure when they were sold them. The retail bondholders should have known the risk they were taking when they bought them, but they hold political power, so they will be bailed out. That’s how politics works in Italy. Whoever has the power, gets the benefits. It’s a game of chicken. If everyone continues to ask for benefits, the system will implode from taking on too much debt, but if only one group decides to forgo its benefits and everyone else doesn’t then they will be left without them and take the brunt of the pain for the good of the whole.

Italian politicians are aware of the potential dissatisfaction they could face by not bailing out the 40,000 retail bondholders because last year there was a situation where the government helped out 4 smaller banks where there was a bail-in and retail bondholders lost money. There were 10,000 retail bondholders among these 4 banks collectively. Because of this bail-in decision there was widespread anger and protests. It would have been 4 times as bad if the Monte Dei Paschi retail bondholders weren’t helped.

As I said in the introduction, I am starting to see the side of the Italian politicians because new information is trickling in, but no firm decision has been made. This indecisiveness encourages those who were hurt by the decision to complain. If Monte Dei Paschi gets a sweetheart deal Germany will complain about the rules. It’s easy to complain because the rules appear flexible to the whims of the leaders. Neither side can complain too much because the ECB bond buying program helps lower Italy’s borrowing costs and the EU helps expand Germany’s exports.


The outlines of the plan to save Monte Dei Paschi are coming together as the bank plans to raise 15 billion euros with government help. The key to determining if that is enough money is if it inspires enough confidence among those with banking accounts to keep their deposits in the bank. Placating depositors and selling off bad loans will be the goal. If they are met, Monte Dei Paschi will be a relatively healthy bank. However, the Italian system will still be rotten to operate in and the economy will still be weak.

Spread the love

Comments are closed.