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Italy's government set to bail out world's oldest bank with last-ditch rescue fund

Italy's parliament has approved a 20 billion-euro ($20.8 billion) rescue fund for Monte dei Paschi di Siena after the embattled lender's last-ditch private sector rescue plan failed to secure an anchor investor.

The world's oldest bank announced late on Wednesday that it had failed to attract a major investor to commit 1 billion euros, which discouraged the wider investment community to bolster the lender. The result of which means BMPS is at the mercy of a state bailout, with any losses set to be forced onto bondholders.

A debt-for-equity swap offer had raised just over 2.4 billion euros for BMPS according to the Italian bank, however, this remains far short of its aim to gather 5 billion euros. The cash call offer for the bank ends on Thursday.

Worst timing of all

BMPS announced its 10.6 billion euro liquidity position would only last four months on Wednesday, a significant drop from 11 months it had previously forecast. Shares in the lender were suspended after falling 6.75 percent after Thursday's open though pared some of its losses to trade 0.67 percent lower by mid-morning.

Should Italy's third largest bank admit defeat with its attempted rescue plan and ask Rome for assistance, the state bailout could take up to three months, according to a report from Italian newspaper Il Sole 24 Ore.

The lender has been struggling for a long time yet its problems were exacerbated at the start of December as a consequence of political instability in the shape of Italy's referendum result.

Citizens overwhelmingly rejected a package of constitutional reforms proposed by former Prime Minister Matteo Renzi on December 4 and with unexpected changes in government, investors appear to have become increasingly reluctant to contribute to the planned recapitalization process.

Shortly after the referendum result, the European Central Bank blocked an attempt from the ailing lender to have its deadline extended in order to allow more time to find major investors and fulfill a 5 billion euro cash injection.

"Here we are looking at an acceleration of the central bank's timing, particularly the European Central Bank, who rejected the request to delay until January 20 and what we have seen is probably the worst timing of all (for BMPS)," Gildas Surry, senior analyst at Axiom Alternative Investments told CNBC on Thursday.

Little or no pain from state bailout

Italy's finance minister, Pier Carlos Padoan, attempted to reassure retail investors on Wednesday and claimed they would feel little or no pain at all from a state intervention.

One potential ramification a state rescue fund supporting BMPS had been an inadvertent boost to anti-euro sentiment among Italian voters during a politically critical time for the country. An interim team currently governs with snap elections expected to be called at some stage in 2017.

International authorities have repeatedly asked Italy's already fragile banking sector to address the large levels of non-performing loans in its banking system and there are viable concerns that a failed rescue effort could spill over and destabilize other lenders in the world's eighth largest economy.

A pedestrian pushes a baby stroller past a red Vespa scooter outside a Banca Monte Dei Paschi Di Siena SpA bank in Pescara, Italy.
Marc Hill | Bloomberg | Getty Images
A pedestrian pushes a baby stroller past a red Vespa scooter outside a Banca Monte Dei Paschi Di Siena SpA bank in Pescara, Italy.