Troubles at the oldest world lender set to persist

Tiziana Fabi | AFP | Getty Images

Italy's interim Prime Minister Paolo Gentiloni admitted Thursday that the recapitalization of the country's third largest lender would be "long and complicated" but a necessary process.

Shares of Monte dei Paschi were suspended from trading last week after the European Central Bank said that the bank needs to raise 8.8 billion euros ($9.2 billion) to improve its financial position.The bank had initially forecast a recapitalization of 5 billion euros ($5.4 billion).

The county's Economy Minister Pier Carlo Padoan argued Thursday the recapitalization should start in two to three months, but there are widespread concerns over the implications for the Italian banking system, Italy's political scene and more broadly for the euro zone.

Will the 8.8 billion euros be enough?

The ECB's calculation that Monte dei Paschi will need 3.8 billion euros more than initially forecast was due to a "rapid deterioration" in the bank's finances mainly over the last month. Italian depositors have withdrawn their money as concerns over the stability of Monte dei Paschi grew.

The ECB declined to comment on the ongoing process.

Padoan, the economy minister, said Thursday that the 8.8 billion euro recapitalization would make the oldest lender in the world "hyper-capitalized" but not "over-capitalized," Reuters reported.

However, if authorities drag out the intervention, the stability of BMPS could be further eroded. Padoan said that delisting the bank was not an option and added that trading in the company's stock should resume as quickly as possible.

The Italian government announced earlier this month that it would ready 20 billion euros to help the entire banking system in Italy, which has long been dealing with a very high level of bad loans. But at the time of the announcement, the recapitalization for BMPS was only projected at 5 billion euros.

It is unclear whether the Italian government may need to use more than 20 billion euros given the higher costs associated with Monte dei Paschi. The Italian Treasury was not able for comment at the time of writing.

Reuters reported on Tuesday, citing a Treasury source, that the amount earmarked should be enough to revamp the ailing banks.

State intervention is raising eyebrows in Germany

Some German politicians have voiced worries over Italy's public intervention to BMPS.

Given the bank's failure to raise enough money from private investors, the Italian government is preparing to step in. The cabinet approved last week a decree that allows Monte dei Paschi to receive liquidity guarantees and a capital injection.

Such intervention will be the first under new EU rules – established after the 2008 financial crisis. The Italian government needs to guarantee that BMPS' recapitalization will not be considered illegal state aid.

One possible way to guarantee compliance with EU rules is to compensate retail investors for their losses.

However, in Germany, there have been calls that the European Commission – which oversees whether the process is defying the rules - should be strict and not allow intervention from the state.

The process becomes even more sensitive at a time when both Italy and Germany head to fresh elections.

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