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Plunge in MPS Bank’s Bonds Threatens Depositors and other Banks

Dec. 21, 2016 (EIRNS)—Financial media today suggested strongly that the months-long attempt to recapitalize Italy’s third-largest bank, Monte dei Paschi di Siena (MPS), was failing this week, likely leading to the bank’s nationalization by the end of the week. This would mean the bailout fund of €20 billion just created by the Italian government would be used to buy up MPS’s bonds, and convert them to stock—the swap that most of the bondholders have been refusing.

When MPS announced this morning that its liquidity would only last, in its current judgment, four months rather than the eleven months it had previously claimed, the value of its bonds on the markets dropped even more sharply than its stock; some bonds reached a low of 40 cents on the dollar of face value.

Italian Finance Minister Padoan said that his ministry would try "to minimize the impact on depositors" of a nationalization, pointing to a serious problem: At what value will Mario Draghi’s European Central Bank (ECB) and the European Commission in Brussels allow Italy to buy MPS bonds, some of them at only 40 cents/dollar on the bond markets, from savers? The ECB and EC "rules" insist that those retail savers who own MPS bonds must be "bailed in" and part of their savings confiscated. This is politically and financial-system explosive, and Italy apparently wants to bail the savers out.

As to the attempt at a private "voluntary" recapitalization, the bank believes that it needs €5.5 billion in new capital—that may be an underestimation. Large institutional investors have reportedly agreed to swap €1 billion in bonds for stock; small investors, €500 million; far below the target even under the pressure of the threat to lose everything. Thus the JPMorgan Chase-led "capital rescue," according to the Financial Times report today, has failed.

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