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Monte dei Paschi Makes Dangerous Fuse Among Italian Banks

Dec. 18, 2016 (EIRNS)—The attempt of Italy’s oldest and fourth-largest bank to survive its bankrupting by derivatives, reaches a narrow pass this week. Monte dei Paschi di Siena (MPS) will make a last-ditch, unlikely to succeed effort to raise €5 billion in new capital from investors which have been refusing it for months. It will canvas institutional investors through Dec. 21, and small bondholders of the bank through Dec. 22, with the latter having the dire consequences of MPS bankruptcy hanging over their heads, and asked to throw good money after bad.

Should that fail, the new government of Paolo Gentiloni in Italy is reportedly prepared to attempt a rapid emergency bailout/nationalization of the bank. But this will face the opposition of German Finance Minister Wolfgang Schäuble and European Central Bank President Mario Draghi, the man responsible for the derivatives destruction of MPS in the first place (see Sunday’s briefing). They will demand a socially explosive bail-in of the bondholders be a major part of the nationalization.

Meanwhile, there are predictions of extreme danger for the other larger Italian banks in this immediate period as well. One comes from the central character portrayed in the book and film The Big Short, Michael Eisman, whose current "big short" is on big European banks in general and big Italian banks in particular. Eisman reports that a "real stress test" used among financial traders ranges the scores of all the large Italian banks from 90-140 (MPS at 140), where 100 or above indicates the bank is going to fail. And he says this rating has been deteriorating over the past five weeks as there has been a sharp global rise in interest rates ("bond bloodbath").

Deutsche Bank—ironically Eisman’s employer during the "big short"—will be hit hard by any "bail-in" of Monte dei Paschi, as it holds billions of euros of MPS’ junior bonds.

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