ECB orders Italy’s Monte dei Paschi di Siena to cut debt

Monte dei Paschi

Shares in Italian banks have extended recent falls after Monte dei Pascha di Siena, founded in 1472 and Italy’s third-largest lender, said that the European Central Bank (ECB) has told it to draw up a plan for reducing its debt burden by October 3.

The bank has been told by the ECB in a draft letter that its gross non-performing loans need to be reduced from €46.9bn to €38.9bn by the end of 2017 and then €32.6bn by the end of 2018. The ECB also wants the bank to cut non-performing loans from €24.4bn to €18.4bn and then €14.6bn over the same period.

Monte dei Paschi’s €46.9bn of bad debt is part of a collective burden of around €360bn in impaired loans across the Italian banking sector – quadruple the level reached during the 2008 global financial crisis – and representing around one third of the eurozone’s total.

The Italian government has lobbied the European Union (EU) for permission to inject €40bn into the country’s banks to stabilise the system. However, since the ECB took over supervision of the eurozone’s largest banks in 2014 it has imposed an anti-bailout rule the that requires the stakeholders of troubled banks- shareholders, bondholders and some depositors – to step in with financial aid before the state is called upon to assist.

In the meantime, investor concerns have hit Italian bank shares this year. In April, Italy’s financial industry approved a government-backed plan to establish a rescue fund to bail out weaker banks. The government-backed but privately funded Atlante fund – around €5bn according to reports – will buy up shares and bad debt in troubled banks.

Monte dei Paschi is also scheduled to have its stress test results published at the end of this month, when bankers expect that it may be required to boost its capital – a demand that it may struggle to comply with.

Although Italy’s debt level is only exceeded in the Eurozone by that of Greece, prime minister Matteo Renzi is reportedly considering a state-backed rescue of the country’s banking sector using public funds, even if this risks contravening EU rules requiring creditors to bear most of the pain.

Officials from Atlante have met with those from state-owned Cassa Depositi e Prestiti to discuss the options for a bailout. Reports suggest that Atlante will shortly launch a non-performing loans fund with the aim of buying up Monte dei Paschi’s holdings for a price closer to book value.

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