Even former ECB Chairman Mario Draghi, now in his new role as Italy’s prime minister, can’t convince other Italian banks to take on the world’s oldest lender.
After a brief honeymoon period, things are getting messy in Draghi’s Italy, as I reported last week. Almost 4 million workers — many of them in strategic sectors — have been suspended from their jobs for not taking the Covid-19 vaccine. According to The Guardian, the introduction of the “no jab, no job” rule triggered an instant increase in the number of bookings for first doses, but that number has already begun to tail off. In other words, not everyone is caving in to the government’s demands.
Things are even messier this week as tensions have returned to the boil in the financial sector. Sunday saw the collapse of months-long negotiations over the sale of Monte dei Paschi di Siena (MPS), the world’s oldest still-standing (più o meno) lender, to Unicredit, Italy’s one and only globally systemically important bank (G-SIB).
“Despite the effort from both sides, UniCredit and the Ministry of Economy and Finance (MEF) announce that the negotiations pertaining to the potential acquisition of a defined perimeter of Banca Monte dei Paschi di Siena will no longer continue,” UniCredit and the Treasury said in a joint statement.
Given that Unicredit was the only domestic bank big enough to absorb MPS and apparently crazy enough to actually want to — at least until this Sunday — the breakdown in talks is a big blow to Italy’s technocratic government. In August, Draghi’s Economy Minister Daniele Franco said that a deal was as good as guaranteed. Now he has some serious explaining to do. The Draghi government has until December 31 to offload its 64% stake in the bank under conditions set by the European conditions. Barring a last-minute yuletide miracle, that is not going to happen and Draghi will have to ask for an extension.
Negotiations were always going to be fraught, given the parlous state of MPS’ finances (more on that later) and Unicredit’s much stronger negotiating position. But so much is at stake that both sides seemed to be making every effort to sew up a deal.
In December 2020, the government approved tax incentives for bank mergers which would entail a €2.3 billion benefit for an MPS buyer. To facilitate negotiations, Pier Carlo Padoan, Italy’s Minister of Finance and Economy at the time of MPS’ 2017 bailout, appointed Chairman of Unicredit. When Unicredit’s then-CEO Jean Paul Mustier refused to give his blessing to the merger, he was shown the door. His replacement was Andrea Orcel, a high-profile deal maker who, as luck would have it, had advised MPS on its disastrous 2007 merger with Antonveneta, which was one of the prime causes of MPS’ downfall.
Then, in February this year, Italian president Sergio Mattarella handpicked Mario Draghi to lead a technocratic “government of experts.” One of Draghi’s top briefs was to complete the government’s sale of MPS. But it seems that even he can’t make that happen.
Negotiations apparently hit the rocks after UniCredit refused to accept anything less than €8.5 billion in public funds for taking MPS off the government’s hands, according to the Corriere della Sera newspaper. Unicredit was also not willing to take on any of MPS’ impaired loans or sacrifice any of its own capital in the tie-up. It also wanted complete protection from legal liability in any present or future lawsuits against MPS. In short, it wanted all gain, no pain.
For its part, the ministry was reportedly unwilling to spend more than €5 billion. And that included fees covering impaired loans and the forced redundancy of around 7,000 MPS employees. The deal also faced stiff opposition from local Democratic Party politicians and unions.
“The fate of MPS does not seem to be very different from that of (national airline) Alitalia,” which was finally put out of its misery earlier this month, said the newspaper Stampa. “No one other than the state seems willing to take on its inefficiencies.”
But there’s an important difference between the two. Unlike MPS, Alitalia is not a bank whose disorderly collapse has the potential to unleash all sorts of financial shock waves, not only across Italy but Europe as a whole. Winding up MPS will be a lot more complex and dangerous than winding up Alitalia. The bank is still significantly under-capitalized despite having received myriad capital injections, from both investors and the government. Here’s a quick rundown of all the money it has burnt through over the past 13 years (courtesy of Reuters):
- In January 2008, MPS announces a €5 billion rights issue, comprising: a €1 billion convertible financial instrument called “Fresh 2008”, which it’s safe to say did not remain fresh for long; €2 billion euros in subordinated, hybrid capital bonds; and a €1.95 billion bridge loan to fund the Antonveneta deal. In that deal, signed in November 2007, MPS bought the Italian regional lender Antonveneta from Santander for a whopping €9 billion in cash, just months after the Spanish bank had paid €6.6 billion for the same lender and months before the beginning of the global financial crisis.
- In March 2009, MPS sells €1.9 billion in “special” bonds to Italy’s Treasury to buttress its finances. It wasn’t enough.
- In July 2011 MPS raises €2.15 billion euros in a rights issue ahead of European stress test results. Still not enough.
- Two months later, the Bank of Italy extends €6 billion euros in emergency liquidity to MPS through repo deals as the euro zone sovereign debt crisis escalates.
- In June 2012, MPS asks Italy’s Treasury to underwrite up to another €2 billion euros in more “special” bonds.
- In October 2012, shareholders approve a €1 billion euro share issue aimed at new investors.
- In June 2014, MPS raises €5 billion euros in a sharply discounted rights issue and repays the state €3.1 billion.
- In November 2014, MPS announces plans to raise up to €2.5 billion euros more, after stress tests results.
- In June 2015, MPS raises €3 billion euros in another cash call having upped the size of its rights issue after a 5.3 billion euro net loss for 2014 on record bad loan writedowns.
- In July 2016, MPS announces a new €5 billion rights issue and plans to offload €28 billion euros in bad loans. Still not enough.
- In July 2017, the ECB declares MPS solvent, which allows the EU Commission to clear the way for Italy’s government to bail out the lender. In return for €5.4 billion of public funds the government takes a 68% stake in the bank. Private investors — mainly other Italian banks — chip in a further €2.8 billion euros. Still not enough.
- In August 2020, Italy sets aside a further €1.5 billion to tide MPS over as it works to meet a re-privatisation deadline.
That deadline is almost certainly not going to be met. Even if it is extended to mid-2022, it still probably won’t be met. In the meantime, MPS’s finances continue to deteriorate.
By the end of 2020, annual losses at the Tuscan bank had soared by more than 60% to €1.7 billion. The government will now need to request permission from Brussels to inject as much as €4 billion more of public funds into a bank that has barely turned a profit in the past decade. Its books are still crammed full with toxic assets at varying stages of decomposition. It also faces an estimated €10 billion in legal claims. In the ECB’s latest stress tests, in July, MPS was one of only four banks out of 50 whose leverage ratio fell below the regulatory minimum of 3% and the only one to have its capital wiped out.
Finding a buyer for a lender in such fragile financial health is going to be a tall order, especially now that the only likely domestic candidate has withdrawn from contention. Of the few international banks that already have operations of any scale in Italy — BNP Paribas, Deutsche Bank and Credit Agricole — none appears to have shown any interest. The only foreign entity that has is U.S. private equity fund Apollo Global Management Inc but that was back in February and it doesn’t appear to have led anywhere.
An alternative, mentioned months ago by Italian newspaper La Repubblica, would involve the creation of a smaller, leaner MPS focused exclusively on the regions of Tuscany and Umbria where it would have 20% market share. Its NPLs would be taken on by the state-owned asset management units Amco and Fintecna. The plan would have the added advantage of avoiding drastic cuts to personnel “while the rest of the branches in the Center and South would be sold to the best buyer”.
But that will take time. Draghi will have to kick the can even further down the road, which he is more than capable of. The ECB and European Commission will almost certainly grant him more time. But money is arguably an even more important issue than time. Yet more public funds will have to be poured into the bottomless holes on MPS’ balance sheets, at a time that Italy’s public debt is already a whopping 155% of GDP. Junior bondholders may also end up sharing some of the pain. They are already enduring a fresh bout of volatility, reports Bloomberg, as some bonds yesterday plumbed lows not seen since March last year. And there is still no fix in sight.