Using private cash to save world’s oldest bank was never the answer, analyst says

The headquarters of Monte Dei Paschi di Siena bank in Siena.
Giuseppe Cacace | AFP | Getty Images

The original plan to fix Italian banks by using private investor cash could never work, according to one analyst.

The window has officially closed for private investors to take part in any bailout of Banca Monte dei Paschi di Siena (BMPS) and after the bank admitted a lack of interest, the Italian government looks set to step in.

Eric Lonergan, Fund Manager at M&G, said Thursday that the most efficient way of fixing the problem is by using the borrowing clout of government.

"There is a very simple solution to the Italian banking problem. The Italian government can borrow at zero real, comes out and buys 50 percent of the non-performing loans and recovers the value over 20 years.

"The notion that you are selling non-performing loans to the private sector, people like me who want a 20 or 30 percent rate of return, is completely inefficient," he said.

Lonergan said the BMPS affair marked the first test of Europe's method of dealing with troubled banks and he considered the verdict "pretty damning".

Small and mid-sized firms have been pulling deposits from BMPS as investors fret over losses that could be imposed on bondholders as part of a state rescue.

CNBC has learned that the BMPS board will meet Thursday afternoon and then officially ask the Italian government for extraordinary support.

Italy's parliament is ready for the request after it approved a 20 billion euro ($20.8 billion) aid package for its troubled lenders on Wednesday.

Further, a cabinet meeting this evening in Rome is expected to agree a decree guaranteeing loans and bonds related to BMPS in a bid to diffuse the liquidity tension.

Political vacuum

Gildas Surry, Senior Analyst at Axiom Alternative Investments, said Thursday that a political vacuum in Italy was worsening the situation.

"What we have seen is probably the worst timing of all. When we don't have a clear picture of who is going to be the Italian government for the next 18 months.

"And when you look at the regulatory uncertainty, the ECB is still working out its policy on how to deal with NPL's (non-performing loans)," said Surry.

BMPS fell 20 per cent on July 5 after the European Central Bank demanded the lender cut its bad loans by 40 per cent over the next three years.

Surry said Thursday that the ECB request wanted 27 billion euros gone by the 31st of December and this was a "rush and a push" that proved too much for the Italian bank.