The Italian parliament approved on Wednesday a €20bn plan with the aim to bailout the country’s troubled banks.
The emergency bailout plan came after Monte dei Paschi di Siena, Italy’s third largest lender, failed to secure an anchor investor for its offer of the new shares. The bank has been trying to raise €5bn in new capital to stage its own rescue, but so far it has reportedly raised €500m.
As hopes of raising the money from private investors — via a debt-for-equity swap by the end of this month and a share placement that ends today — are fading, Italy’s government is likely to meet this week to issue an emergency decree to inject capital into Monte dei Paschi, Reuters reported.
But that could prove to be politically explosive given that investors are required to bear losses under EU bailout rules. The new rules require bond holders to take losses before taxpayer money can be injected into banks. According to Codacons, a consumer group, estimated €20bn to bail out Italy’s failing lenders would cost each Italian family €833.
Parliamentary approval for the €20bn government plan was needed to allow the state to take on new debt. Italy’s debt burden, at about 133% of annual output, is already the second highest in the euro zone after Greece.
The measure approved by parliament on Wednesday says the state can borrow money to provide “an adequate level of liquidity into the banking system” and can reinforce a lender’s capital by “underwriting new shares”.
The failure of Monte dei Paschi, the world’s oldest bank, would threaten the savings of thousands of Italians and could undermine confidence in the country’s wider banking sector, saddled with a third of the euro zone’s total bad loans.
“If the bank [Monte dei Paschi] fails, there are strong fears that its collapse could pull down much of the country’s bad debt ridden banking sector with it,” Mihir Kapadia, CEO and founder of Sun Global Investments said.
“The Italian government’s efforts cannot end with simple state support, but rather large-scale banking reforms and stringent policy measures are needed. Unless this is achieved a banking crisis looks almost inevitable. This is not just a threat to Italy, but for the larger Eurozone, the euro and the region’s political future,” Kapadia added.