FRANKFURT/LONDON Dec 9 The European Central
Bank hopes its decision to confront struggling Italian bank
Monte dei Paschi at last will draw a line under a multi-year
crisis that has risked tarnishing its reputation as a credible
Reuters exclusively reported on Friday that the ECB rejected
Monte dei Paschi's request for more time to complete
an ambitious, 5 billion euro ($5.3 billion) cash call -
effectively leaving it up to the Italian government to bail out
ECB officials told Reuters they hoped that a "precautionary
recapitalisation" of Monte dei Paschi by the Italian state will
pave the way for similar injections of government money into
other Italian banks plagued by bad loans totalling 360 billion
A precautionary recapitalisation is a type of state
intervention in a struggling bank that is still solvent.
It means only a modest bail-in or write down in the value of
a bank's bonds is likely, though the Italian government can buy
shares or bonds in Monte dei Paschi only on market terms
endorsed by EU state aid officials in Brussels.
"There is consensus that Monte dei Paschi needs a
precautionary recap," one of the officials said, requesting
anonymity. "Once that is done, it could serve as a template for
This scenario is subject to a number of open political
questions, such as who will be in the new Italian government
following Prime Minister Matteo Renzi's decision to resign and
how much fiscal room the European Commission is prepared to give
Rome for bank rescues.
A government-led recapitalisation will also raise questions
about whether rules introduced since the 2007-09 financial
crisis to prevent taxpayers having to fund bailouts in future
banking crises have been worth it.
Monte dei Paschi's problems date back several years but
until now the ECB, as the bank's main supervisor since November
2014, has avoided confronting matters head on.
This is despite the bank failing the EU's regular stress
test of lenders twice in a row - the latest was in July this
year - showing how Monte dei Paschi is suffering from bad loans
and too little capital.
Further delays by the ECB would start to undermine its
reputation as a banking supervisor or single supervisory
mechanism (SSM) that is meant to cut through national vested
interests in the euro zone.
"Monte dei Paschi is an existential question for the ECB, a
matter to act for its own credibility," said Karel Lannoo, chief
executive of Brussels think tank CEPS. "We are two years into
the SSM, and the Monte dei Paschi question has been known for
five to six years."
Nicolas Veron, a research fellow at economic think tank
Bruegel in Brussels and the Peterson Institute in Washington,
said the ECB has been slow to act until now because it was
building up capacity as a supervisor.
"I would have preferred them to be more forceful earlier.
They have taken a risk in terms of their reputation. This delay
has not gone unnoticed, but in fairness, it has to be asked if
they had the capacity to do things more quickly," Veron said.
Successive Italian governments failed to tackle the issue,
which became a political taboo this year when new European rules
came into force banning state bailouts unless private investors
take losses first.
The fall of Renzi this week following a resounding defeat in
a referendum on constitutional change is seen by some
commentators as bringing the country's banking crisis to a head,
thus forcing the ECB's hand.
President Sergio Mattarella began consulting political
leaders on Thursday to seek a consensus to back a government.
Without that, he will have to dissolve parliament and call early
ECB officials hope an interim government, ideally including
economy minister Pier Carlo Padoan, would take the unpopular
decision to inject capital into Monte dei Paschi, negotiating a
way to compensate savers with the European Commission.
The precautionary recapitalisation model could also be used
for other struggling lenders in Italy. This could lure private
investors back into the sector and allow the banks to sell down
their bad loans more quickly, an objective for the ECB.
Monte dei Paschi was the only Italian bank to come short
under an adverse scenario in the pan-European stress test of
large lenders this year.
($1 = 0.9460 euros)
(editing by David Stamp)