Italy Central Bank Approves Monte Paschi Bailout Request

The Italian national flag, is seen against a giant euro banner featuring an image of a euro coin.
Jock Fistick | Bloomberg | Getty Images
The Italian national flag, is seen against a giant euro banner featuring an image of a euro coin.

Italy's central bank on Saturday gave its approval to a request by scandal hit bank Monte dei Paschi di Sienafor 3.9 billion euros ($5.3 billion) of state loans, the latest step in the battle to revive the ailing bank.

The Bank of Italy's backing was the final stage required to free up the financial help for Italy's third biggest lender, which this week revealed loss-making derivatives trades that could cost it about 720 million euros.

After a meeting that lasted most of Saturday, the central bank issued a brief statement to say its board had given "a favorable opinion" on the bailout. It gave no further details.

The scandal surrounding Italy's oldest bank has hit its share price and prompted questions about how the risky deals could have been hidden from regulators.

The issue has shot to the centre of the campaign for a Feb. 24-25 national election and politicians have blamed the Bank of Italy (BOI), led by current European Central Bank President Mario Draghi at the time of the deals, for failing to spot them.

At Saturday's meeting the BOI's four member board, chaired by Governor Ignazio Visco, had to judge whether the bank's current and future capital adequacy and stability were sufficient to receive the loans.

The Tuscan bank was forced to seek state aid last year for the second time since 2009 after becoming one of just four European lenders that failed to meet tougher capital requirements set by regulators.

Under the loan scheme the bank will issue 3.9 billion euros of bonds to the Italian Treasury, with just under half of these replacing 1.9 billion euros of existing state help.

The lender's new management, appointed last year to turn it around, said on Friday the situation was "completely under control".

The bank will pay a hefty 9 percent coupon on the bonds, which are worth more than its current market capitalisation of 3 billion euros. The coupon will increase by 0.5 percentage point every two years up to a maximum of 15 percent.

At a stormy meeting at Monte Paschi's Siena headquarters on Friday, shareholders approved two capital increases for 6.5 billion euros to be carried out if needed in the next five years, which are a condition of the state bailout.

That raises the prospect of possible nationalisation, because if the bank cannot repay the state bonds or the coupons attached to them, it will have to issue shares to the Treasury.

Prime Minister Mario Montisaid late on Friday he considered nationalisation a "remote hypothesis".

Taxpayers' Money

Monti, bidding for a second term in the election, defended his government's decision to rescue it with taxpayers' money. "It's a loan, with a high interest rate," he said.

At the World Economic Forum in Davos on Friday Visco sought to deflect accusations the BOI had not done its job properly.

"It is wrong to insinuate that there was a lack of supervision by the Bank of Italy," he said, adding the BOI would cooperate with prosecutors investigating the lender.

Draghi, also in Davos, took no questions from reporters.

Visco's task was made more difficult by a report in the Corriere della Sera daily which included excerpts of a document drafted by six BOI inspectors expressing concerns over the two main trades under scrutiny as long ago as 2010.

That document would have been sent to the BOI's head of bank supervision at the time, Anna Maria Tarantola, who has since left the bank to become president of state broadcaster RAI.

Visco sidestepped questions about whether Draghi knew about the 2008-09 derivatives trades, which involved Japanese bank Nomura and Deutsche Bank.

Internal auditors at Monte Paschi had detected anomalies at the bank's finance department responsible for derivative trades three years ago, daily Il Sole 24 Ore said on Saturday.

Monte Paschi was already under investigation over its 9-billion-euro cash acquisition of smaller lender Antonveneta from Spain's Santander in 2007.

Santander had bought Antonveneta for 6.6 billion euros in a three-way break-up bid for Dutch bank ABN AMRO, and almost immediately sold it on to Monte dei Paschi netting a hefty gain.