Subscribe to EIR Online


Monte dei Paschi Bank Nationalization Likely; Bondholders Will Be Burned

Dec. 22, 2016 (EIRNS)—Italian Finance Minister Carlo Padoan assured the public yesterday that the "Italian banking system is solid, even if there are some crisis situations"; but this is now not sure. The immediate "crisis situation" is the likely decision tomorrow to nationalize Monte dei Paschi di Siena (MPS) bank, the third-largest in Italy. The bank’s announcement yesterday that it had only a few months’ liquidity left, led to plunges and suspensions in trading of both its stocks and bonds; and its desperate attempt to raise €5.5 billion new capital appears almost certainly to have failed. Both MPS’ board and the Italian Cabinet had emergency meetings scheduled Thursday night on nationalization.

New elements worsen the situation today. First, the MPS bondholders are likely to be burned across the board. Those larger institutional investors who have voluntarily accepted the "swap" to raise capital, have reportedly taken a 20% haircut in the value of their bonds. Retail bondholders, who are ordinary savers, will be burned as well; i.e., the nationalization bailout will include a bail-in.

Secondly, both Bloomberg News and the Financial Times report today that two or more other banks may be nationalized right after MPS; and that the Italian government’s new €20 billion bailout fund may be increased again. Banco Popolare di Vicenza is one bank named in both reports.

Finally, some MPS bonds are now trading as low as 40 cents/dollar; if a nationalization "burns" bondholders by only 20% of their savings, the European Central Bank and/or European Commission could rule that to be a bailout, violating the EU’s bail-in rules, and demand that the bondholders’ losses be increased.

Contagion has hit other Italian bank stocks and bonds, though on a much smaller scale than MPS so far; and has hit the sovereign bonds of Spain with a sudden interest rate rise (1% on 10-year bonds).

Back to top