It seems what is being called a “preventitive recapitalisation” of Monte dei Paschi de Siena (MPS) is beginning to take shape. The lender has €28 billion worth (gross) of bad loans and so needs a capital hike estimated at around €5 billion. This would consist of converting some €5 billion of subordinated debt into capital, complemented with a direct injection of funds from the Italian State, which owns 4% of MPS. Atlante, a private equity fund promoted by the State, just has €4.250 billion available, so can only provide part of the solution.
The financial sector is pressurising the government to draw up a €10 billion recapitalisation programme which would not just meet the needs of MPS, but also recapitalise Banca Popolare di Vicenza and Veneto Banca. It is estimated that these banks, currently owned by Atlante, need some €3 billion between the two of them.
In principle, the Italian elections are due to take place in 2018. But Renzi’s resignation after losing the referendum is forcing the election of a new Prime Minister and the renewal of a good part of the current government. This needs to happen as soon as possible in order to approve the 2017 Budget. This government can be a provisional one until early elections in 2017, or it can be a more stable executive and complete its mandate up to the 2018 elections. As Bankinyer’s analysts say:
Taking into account that no elections can be held until Italy approves a new electoral law, and that this takes times, we think it’s increasingly likely that the new PM and government remain in power until the end of the legislature. This would allow for the recapitalisation of MPS and the two other banks to take place in a calmer manner, which would be extremely important since Atlante does not have enough funds to take the whole project on at the moment.
In this context, they also believe the most probable outcome is that the €5 billion of subordinated bonds are converted into capital for MPS, that Atlante contributes an additional around €1 billion and the Italian State extends this by the amount corresponding to its 4% stake in the bank.
In that way MPS would be recapitalised to the tune of some €6.5 billion, which is more than enough to solve the problem for now. Banca Popolare di Vicenza and Veneto Banca would remain in the hands of Atlante, which would still have €3.250 billion for their recapitalisation in the event the situation became complicated and this was inevitable.
At the same time, Unicredit, with recapitalisation needs estimated in the region of €13 billion, will continue to sell assets (Pioneer Funds, etc) to reduce this amount as far as possible. Within this framework, the PM who replaces Renzi (probably the current Finance Minister Padoan or Senate President Grasso; both with technocrat leadings) will try to see out the legislature to the end and recapitalise MPS.
This is the most urgent matter because of the risk of contagion. “For this reason, we don’t think the final outcome will be dramatic”, Bankinter concludes.