The Italian lender Monte dei Paschi (BMPS) is racing against time to raise 5 billion euros ($5.4 billion) by the end of the month, with analysts speculating that the issue could potentially effect the future path of politics in the country follow the resignation of Prime Minister Matteo Renzi.
BMPS failed a stress test in July and has to improve its capital position, even if that process might include public money. The main aim is to gather the 5 billion euros from private investors but with an interim government and the likelihood of new elections, many are more reluctant on putting their money into BMPS.
"The most immediate and potentially costly issue from a political standpoint (in Italy) is the recapitalization of BMPS," Fabio Fois, economist at Barclays, said in a note on Monday.
"If the private plan fails and the government decided to refer to the clause in Bank Recovery Resolution Directive (a European regulation) that permits extraordinary financial support, government's popularity could be at risk of severe deterioration," he added.
Reuters reported on Monday, citing a Treasury source, that Italian authorities will intervene with public money if necessary to ensure the continuity of the bank and to protect clients' savings. The source also said that a debt-to-equity swap was being considered.