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Eurozone Banking Crisis Makes a Comeback. MPS to Seek Bailout

The banking crisis in the eurozone is set to make a comeback again, this time in Italy. The news doesn’t come as a surprise as the Italian banking sector has been struggling under bad debt. The situation has only worsened with investors unwilling to bailout the bank as the political uncertainty prevails.

World’s oldest bank, Monte dei Paschi di Siena to seek government bailout

After months of seeking a suitor to help the beleaguered bank, Italy’s Monte dei Paschi di Siena (MPS) was under the spotlight this week as the bank failed to find investors leading to the bank likely to seek government help. Considered to be the world’s oldest bank, the 544-year old Italian bank has caused countless sleepless nights for both the bank’s investors and politicians alike.

The bank required a capital injection of €5 billion but managed only to raise €2.5 billion. There were efforts made by J.P. Morgan to secure the €5 billion euro funding laid out by the ECB, but the efforts failed after the requirement for an anchor investor fell apart. Monte dei Paschi di Siena was pinning hopes on Qatar’s sovereign wealth fund to invest €1 billion in cash but the deal collapsed late Wednesday setting the stage for MPS to seek a bank bailout from the Italian government.

Shares in MPS have been halted several times this week as investors continued to dump the stock. It is estimated that the bank has lost over 86% this year and over 99.9% from its pre-financial crisis levels.

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Historical stock chart for Banca Monte dei paschi di Siena (BMPS)

Investors remained skeptical on investing in the failing bank led by the political uncertainty earlier in December on the Italian referendum which eventually led to the resignation of Prime Minister Matteo Renzi. The Qatar Investment Authority (QIA) had linked its participation to a ‘Yes’ vote in the Italian referendum on December 4th given the lengthy negotiations it had with the PM Renzi previously. Following the results of the referendum, QIA pulled out although the bank remained optimistic.

Earlier on Wednesday, Italian government approved a €20 billion bailout fund which will be used to guarantee liquidity to the Italian banking system and also support several of the country’s lenders that have come under pressure from high level of bad debt. However, it is unclear if the 20 billion euro will be sufficient as estimates point to a requirement of more than €52 billion to plug the bad-loan reserves. Besides MPS, other banks include UniCredit and Intesa.

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Cost of cleanup of bad loans is more than double the allocated €20 billion (Source: Bloomberg.com)

The bailout deal, if approved by the government will be the third in a decade in the bank’s history.

Making things complicated is the fact that creditors to the bank include regular people besides institutional investors who purchased MPS bonds as the equivalent to a savings account. A bail-in of the bank, where creditors of the institution will face compulsory losses before any state aid is given is also unlikely as this could potentially wipe out savings of millions of people banking with MPS. Therefore, the Italian government is more likely to chip in rather than face further voter ire in a country which is looking to turn more in support of the anti-EU parties.

EURUSD has remained largely muted to the news out of Italy as traders wind down towards the end of the year holidays as the impact is likely to be limited for the moment.