Italy’s Latest Rescue of Perennially Troubled Monte Dei Paschi Hits the Rocks

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.      

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  1. The Rev Kev

    As set up, this has no resolution. But I have one. First, have the government nationalize the Monte dei Paschi di Siena bank. Then sack the entire management team for screwing up a bank that has been in business for four centuries. Next, have a team of forensic accountants go through all the books – not only to get an accurate assessment of the actual position of that bank but to find out who has been conducting criminal activities so that they can spend time in Pagliarelli Prison thinking over their sins. Next, have the government guarantee all bank deposits and creditors to stabilize things. Next, write down losses and spin off everything rotten or non-profitable into a separate entity that can be slowly wound down with bits sold off for profit. Next, have the remaining Monte dei Paschi di Siena bank be capitalized through government loans (not gifts) so that it can stand on its own feet again with a new management team. Have permanently on the Board a member from the government and one from the bank’s workforce to help keep an eye on that bank. Sell that bank back into the market place, preferably to an Italian corporation, and use the money made to liquidate the loans that the government made. A lot of this was done by Sweden when they had a banking crisis about thirty years ago so is not new.

    1. Nick Corbishley Post author

      Great comment, Kev. Unfortunately your proposal is far too rational and (even more importantly) equitable to ever be considered by our current crop of senior central bankers and finance ministers. As you mention, Sweden’s experience from the early nineties offers a rare positive example of so-called “bad banking”. One of the biggest differences is that banks that failed and for whom a buyer could not be found were actually nationalised. In most other bank resolution programs since then, including the “bad bank” models employed in Spain and Italy, the banks are left in a limbo of public/private ownership. As in the case of MPS, one gets the worst of both worlds and precious little of the good. But it’s a great mechanism for further redistributing the wealth of a country from its taxpayers to the shareholders, executives and creditors of financial institutions.

    2. Colonel Smithers

      Thank you, Rev.

      Pagliarelli? No. Too soft! These mofos need hard labour. How about a prisoner swap with Putin and they enjoy the delights of mining in Siberia.

    3. jim truti

      Excellent. But that needs a quality in our ruling elite that is called “courage”.
      The predominating character of our elite nowdays is cowardice.
      You forgot the confiscation of all ill gotten gains by the bank managers, a little like Xi is doing with Evergrande’s owner, he was told apparently to pay the debts out of his own wealth, that is a good start, too bad we have to look to China to show the way.

    4. samhill

      Next, have a team of forensic accountants go through all the books

      meh, they’ll form a suicide pact, hold hands, and jump out of a window at the bank, everyone will go, “well, how’s about that!” Back to square one.

    5. Patrick Donnelly

      Just like Ireland did? The banks were grown at rates of up to 30% p.a., urged on by the senior civil servants who tended to buy up shares in those banks?

      What about checking the money laundering done through banks while they are at it?

  2. Bici Rotta

    This was the lead story on RAI TG24 yesterday, what’s the risk of international contagion from an out-and-out failure of MPS?

    1. Maxwell Johnston

      MPS is number 4 in Italy and number 49 in Europe as measured by assets (if one accepts the bank’s assets valuations as realistic), so on the surface it doesn’t look like a systemic risk. But who knows what derivatives it was dabbling in, and who the counter parties are. Maybe Super Mario knows, and maybe he’s sweating bullets. Sad to see an old horse like this go under the gun, especially after having survived centuries of unrest. And Siena itself is a lovely city. What a shame.

      1. samhill

        In the region of Tuscany, which is not insignificant on a national level, MPS might as well be JP Morgan. A complete collapse would certainly take out Tuscany, then Italy, then EU, then the world, maybe. Beats me, way beyond my pay grade but just throwing that out there.

        Lots of money small and big stashed away in Italy, it’s what allows the enormous national debt, personal debt is one of the lowest in the world, the two are intricately tied. People here think the national debt is a galactic black hole to nowhere but it’s just the other side of a galactic type O star of assets that these days of the euro and neo-liberal makeover immediately leave the country leaving the bear minimum necessary to circulate in the real economy. If it wasn’t for the risk of cascading a global default the country would probably be drained out completely to become like Lebanon. The historically brutal gentry all live abroad now, other than rent extraction have little stake and could no longer give a sh!t.

        I often wonder if the whole plan is to drive a carefully managed bankruptcy of the country to force people into desperation remortgaging or selling off the trillions in generational real estate here. I’m not talking about villas I’m talking about avg Giuseppes. I know very few Italians w/ a mortgage, most live in the same towns and same homes of their grandparents and parents and the kids and grandkids to come will do the same over and over. Many families bought second homes to set aside for the kids during the years of the Italian Miracle. A ton of families own empty inherited houses. Not having to pay rent or mortgage helps keep wages down, but Italy is less and less a productive economy. The EU/Wall St. financialized bubble crowd must have their greedy eyes on it. You can’t build a bubble collateralized by real estate if you can’t get hold of the real estate. Privatizations of social assets and a well managed national bankruptcy would free it all up.

  3. Jon Cloke

    I continue to be amazed at the repeated use of this word ‘technocrat’.

    What we’re supposed to believe is that the people who invented fraudulent and creative system-crashing finance and who brought about the 2008 collapse, like Draghi, have suddenly metamorphosed into cold, technical experts who understand global finance and can put the whole system to rights….

    Which they somehow failed to do prior to 2008

  4. Colonel Smithers

    Thank you, Nick.

    You mention Andrea Orcel. He was one of the opportunists who began that sorry train of events in 2007. Emulating “bid ‘em up” Bruce Wasserstein and playing on the egos of the leaders at RBS, Santander and Fortis for one deal, ABN AmRo, and Lloyds for another, HBOS, he was one of the architects of 2008.

    Deutsche used and abused MPS in the noughties. The Milan and London branches of the bank got MPS and its clients entangled in all sorts of complex transactions that resulted in heavy losses. Perhaps, Mutti could write a cheque on her way out and as an apology.

  5. FreeMarketApologist

    A lot of people have spent a lot of time throwing good money after bad here. The place should be liquidated and shut down. Elsewhere in the financial world, many traders would be fired for continuing to double down on bad bets. Just because it was a viable (really?) bank for 400 years doesn’t give it the automatic right to continue for another 400.

  6. Sound of the Suburbs

    Neoclassical economics is the economics of the Roaring Twenties, the Wall Street Crash and the Great Depression.
    The inherent flaws in neoclassical economics are very bad for financial stability.
    Monte dei Paschi di Siena is just yet another bank that has got into serious difficulty.

    What’s the good news?
    We can now be certain what happened in 1929.
    Bringing back neoclassical economics has allowed the same problems to be repeated again and again in different countries around the world.
    China is adding further data for examination.

    What’s wrong with neoclassical economics?
    1) It makes you think you are creating wealth with rising asset prices
    2) Bank credit flows into inflating asset prices.
    3) No one notices the private debt building up in the economy as neoclassical economics doesn’t consider debt.
    4) The banking system and the markets become closely coupled, and as soon as asset prices fall it feeds back into the banking system

    What is the fundamental flaw in the free market theory of neoclassical economics?
    The University of Chicago worked that out in the 1930s after last time.

    Banks can inflate asset prices with the money they create from bank loans.
    Henry Simons and Irving Fisher supported the Chicago Plan to take away the bankers ability to create money.
    “Simons envisioned banks that would have a choice of two types of holdings: long-term bonds and cash. Simultaneously, they would hold increased reserves, up to 100%. Simons saw this as beneficial in that its ultimate consequences would be the prevention of “bank-financed inflation of securities and real estate” through the leveraged creation of secondary forms of money.”
    Margin lending had inflated the US stock market to ridiculous levels.
    Richard Vague had noticed real estate lending balloon from 5 trillion to 10 trillion from 2001 – 2007 and went back to look at the data before 1929.
    Real estate lending was actually the biggest problem lending category leading to 1929.

    The IMF re-visited the Chicago plan after 2008.

    Existing financial assets, e.g. real estate, stocks and other financial assets, are traded and bank credit is used to fund the transfers.
    The money creation of bank credit inflates the price.
    You end up with a ponzi scheme of inflated asset prices that will collapse and feed back into the banking system.
    The money creation of unproductive bank lending makes the economy roar as you head towards a financial crisis and Great Depression.

    At the end of the 1920s, the US was a ponzi scheme of inflated asset prices.
    The use of neoclassical economics and the belief in free markets, made them think that rising asset prices represented real wealth.
    1929 – Wakey, wakey time

    Why did it cause the US financial system to collapse in 1929?
    Bankers get to create money out of nothing, through bank loans, and get to charge interest on it.
    Bankers do need to ensure that money gets paid back, and this is where they get into serious trouble.
    Banking requires prudent lending.

    If someone can’t repay a loan, they need to repossess that asset and sell it to recoup that money.
    If they use bank loans to inflate asset prices they get into a world of trouble when those asset prices collapse.
    As asset prices collapsed, the banks became insolvent as their assets didn’t cover their liabilities.
    They could no longer repossess and sell those assets to cover the outstanding loans and they do need to get the money they lend out back again to balance their books.
    The banks become insolvent and collapsed, along with the US economy.

    When banks have been lending to inflate asset prices the financial system is in a precarious state and can easily collapse.

    What was the ponzi scheme of inflated asset prices that collapsed in Japan in 1991?
    Japanese real estate.
    They avoided a Great Depression by saving the banks.
    They killed growth for the next 30 years by leaving the debt in place.

    What was the ponzi scheme of inflated asset prices that collapsed in 2008?
    “It’s nearly $14 trillion pyramid of super leveraged toxic assets was built on the back of $1.4 trillion of US sub-prime loans, and dispersed throughout the world” All the Presidents Bankers, Nomi Prins.
    We avoided a Great Depression by saving the banks.
    We left Western economies struggling by leaving the debt in place, just like Japan.
    It’s not as bad as Japan as we didn’t let asset prices crash in the West, but it is this problem has made our economies so sluggish since 2008.

    The last lamb to the slaughter, India
    They had created a ponzi scheme of inflated asset prices in real estate, but it collapsed.
    Now they need to recapitalize their banks.
    Their financial system is in a bad way, recovery isn’t going to be easy.

    Repeating the same thing over and over again during globalisation has ensured we are now certain what happened in 1929.
    Real estate is particularly dangerous as it forms such a large part of bank lending.
    Leverage it up, and add complex financial instruments, to take out the global economy (2008).

    1. Sound of the Suburbs

      Financial stability seems like an impossible dream today.

      Financial stability arrived in the Keynesian era and was locked into the regulations of the time.
      “This Time is Different” by Reinhart and Rogoff has a graph showing the same thing (Figure 13.1 – The proportion of countries with banking crises, 1900-2008).

      The neoliberals removed the regulations that created financial stability in the Keynesian era and the financial crises came back along with neoclassical economics.

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