MPS in talks to issue 1 billion euros of govt-backed bonds - sources

The Monte dei Paschi bank logo is seen on the main entrance of the bank's headquarters in Siena March 12, 2012.

ROME/MILAN (Reuters) - Italy's Banca Monte dei Paschi di Siena (BMPS.MI) is in talks with the Treasury and the Bank of Italy about issuing at least 1 billion euros (806.8 million pounds) of government-backed bonds to plug a capital shortfall, two sources close to the matter said on Saturday.

If the Treasury and the Bank of Italy give the go-ahead, Italy's third biggest lender would become the country's first bank to resort to state help as the euro zone debt crisis deepens.

"There are very close contacts with the Bank of Italy and the Treasury, although there is no final go-ahead," one of the sources said.

A second source said: "They are negotiating actively, but the Bank of Italy has to give the final approval."

Monte dei Paschi has been struggling to fill a 3.3 billion euros capital deficit by end-June to meet tougher requirements set by the European Banking Authority (EBA).

The Tuscan bank, the world's oldest lender, has taken a string of measures to boost its capital but still needs to find 1.0-1.4 billion euros, according to sources close to the situation and analyst estimates.

Earlier on Saturday, the bank said it had postponed by a day to June 26 a board meeting set to approve its new business plan as it races against time to plug the capital deficit.

Citing "organisational reasons", Monte dei Paschi said in a statement the plan would now be presented to analysts on June 27. It is the second time that the board meeting and the presentation, which had initially been due for mid-June, have been postponed.

One of the sources said the delay was due to "technical and bureaucratic procedures" as it waited for the Treasury and the Bank of Italy to approve the issuing of government-backed bonds, which would have to be cleared by a government decree.

MPS already issued 1.9 billion euros of similar Treasury-backed bonds in 2009, with a coupon of 8.5 percent rising to 9 percent from July next year.

These bonds would add to Italy's already ballooning public debt of nearly 2 trillion euros, but they can be paid back early if the bank's capital base improves and the annual coupon is due only if the lender makes a profit.

One of the sources said this option would be cheaper and more realistic for MPS than issuing contingent convertible (Coco) bonds, which convert into equity if a bank hits trouble and which the bank's CEO Fabrizio Viola has said he was considering. Analysts say the so-called Coco bonds would command a double-digit interest rate, making it too expensive for MPS and wiping out the bank's profits for the foreseeable future.

"NO FLEXIBILITY"

Sources also said regulators would not give MPS more time to close its capital gap, making government-backed bonds the most obvious choice to bolster its financial strength and soothe market jitters.

"EBA has not conceded any flexibility, it wants to see firm commitments about resources by June 30," the source said.

Italian banks are not in the same situation as Spain's, whose capital hole is being filled by a euro zone bailout, thanks to a limited exposure to the real estate market and a relatively high level of household savings.

But Monte dei Paschi has been hit hard by the euro zone debt crisis because of its 25 billion euro exposure to domestic government bonds - which is proportionally higher than that of its domestic peers.

It is the only Italian bank left with a sizeable capital gap under EBA rules, on top of the 1.9 billion euros of government-backed bonds it borrowed in 2009. Any delay in fixing that weakness would further weigh on its shares, which have lost 50 percent in the past three months, analysts say.

As it seeks to raise cash quickly, Monte dei Paschi reached a deal to sell its 60 percent stake in a small unit for around 200 million euros ($251 million), two sources close to the situation said earlier on Saturday.

The sources said Cassa di Risparmio di Asti had agreed to buy Monte dei Paschi's stake in Piedmont lender Biverbanca.

The Siena-based lender has limited financial flexibility because its top shareholder, a charitable foundation with close ties to local politicians, is just emerging from months of wrestling with creditors to restructure its own debt.

The foundation has been forced to sell down its MPS stake to 36.3 percent and insists it would not fund a capital increase.

(Writing by Silvia Aloisi; Editing by Dan Lalor)