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MPS and state aid: Hope, or a slippery slope?

Reports of a government plan to buy subordinated bonds and convert them into shares in Monte dei Paschi di Siena suggest that a state-backed rescue is now inevitable.

It’s often been said that money, like water around rocks, will always find its way around regulation. But the focus of that statement has usually been on the practices of private market participants. It’s becoming clear, less than a year after the implementation of the rule barring the use of public funds to prop up troubled banks, that the adage applies just as much to states and regulators.

Marco Morelli 160x186


Marco Morelli, CEO,
Monte dei Paschi di Siena

The Italian government is reportedly investigating a proposed purchase of subordinated bonds in Monte dei Paschi di Siena held by retail investors and converting them to shares. The scheme would reportedly take the government’s stake in MPS to 40%.

Whether or not this constitutes state aid under the Bank Recovery and Resolution Directive will be up to the European Central Bank after it examines the deal. But even in the less than 12 months that the rule has been in effect, national regulators have had to jump through hoops in several instances to save banks in order to get around at least the letter of the law.

Italy’s own scheme to put a government guarantee on the senior notes of non-performing loan-backed securitizations, if it ever happens, is wholly state aid, it’s just not called ‘state aid’. And the €2.7 billion in state funds handed to Portugal’s state-owned Caixa Geral de Depósitos raised eyebrows despite the deal including a bail-in of €960 million of its contingent convertible bonds. At the time, the Commission didn’t outline if the burden sharing aspect of the deal made it BRRD compliant, it merely highlighted that the money would be paid back with “with an appropriate remuneration”. But that isn’t a condition of BRRD. 

The situation with MPS might be different. Article 32 of BRRD allows for the temporary use of public money to address capital shortfalls resulting from stress tests, with the aim of attracting private investors. Known as a 'precautionary recapitalization', the article has not yet been used, though the ECB itself has reportedly suggested it could be used in a situation where a solvent bank’s undercapitalization is a direct result of, for example, the European Banking Authority’s stress tests, or the ECB’s asset-quality review.

MPS’s deadline for a €5 billion capital raise is a direct result of a dictate from the ECB, which imposed a target for the bank to cut net non-performing loans from €23.5 billion to €14.6 billion over two years. As part of that plan, MPS was to cut net NPLs to €21.8 billion in 2016.

Italy’s reported plan provides a much more politically palatable solution, from a domestic standpoint, than just bailing in subordinated bond holders; there was political uproar when the state did that in 2015 to retail bondholders in four Italian banks.

Outside of Italy, the proposed deal, if enacted, could prove controversial. If the ECB decides to give it the green light, it risks publicly defanging itself and angering other European governments with capital-starved banking sectors.

Full details of the state’s plan for MPS aren’t yet available, but if the ECB comes to the conclusion that the deal fits neatly into Article 32 and doesn’t constitute state aid for the purposes of BRRD, it will need to be very clear in its justification. 

The Italian government is also believed to have requested an extension from the ECB to mid-January to complete its private sector recapitalization and the treasury is reported to be preparing to apply to the ESM for a €15 billion loan to prop up the banking sector.

Euromoney has long suggested that the capital problems at Italian banks in general – and MPS in particular – cannot be fixed without state aid. That the Italian government could now be mulling such a purchase of subordinated bonds in MPS suggests that the point at which that state-aid line will be crossed is very near.

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