MILAN Italian banking shares surged on Thursday following a week of plunging prices, with Rome seeking a swift solution to the sector's bad loan woes and the European Central Bank sending a soothing message to anxious investors.
The Italian banking index closed up 6.9 percent, ending a rout which had seen it lose 24 percent of its value this year.
The country's third-largest lender, Monte dei Paschi di Siena (BMPS.MI), led the recovery, jumping 43 percent.
However, that still left it down 40 percent on the month, battered by concerns over its bad loans, which total more than a fifth of all its loans -- the highest such ratio in Italy.
"Monte dei Paschi bank has been brought back to health and will be able to find needed partners in a matter of months and not years," Prime Minister Matteo Renzi said late on Thursday.
To reduce uncertainty, the Tuscan-based lender decided to bring forward the release of its 2015 results to Jan. 28, a source close to the matter said, from Feb. 5.
"The situation is much less serious than the market thinks," Renzi told reporters in Rome, adding that his economy minister was "working miracles" trying to find a solution with Brussels to Italy's bad loan problem.
Italy's banks have some 201 billion euros (155 billion pounds) in non-performing loans (NPLs) which are unlikely ever to be paid back and which are restraining the country's sluggish economic recovery by putting a brake on the release of new credits.
Rome wants to create a so-called bad bank that would effectively move the NPLs off bank balance sheets and into a separate entity, possibly underpinned by state guarantees.
However, a tightening of European Union rules on state aid at the start of the year has made it much harder to find a deal that would not impose stinging losses on bank shareholders and bond holders before taxpayer money can be used.
A senior Italian source close to negotiations being held between Rome and the European Commission said he expected an accord by next week at the latest.
The market sell-off had been partly triggered by news that the ECB had requested additional data on bad loans from six lenders, including Monte dei Paschi, sparking fears that it had specific worries about their balance sheets.
But ECB Governor Mario Draghi told a news conference in Frankfurt that the central bank, which oversees all euro zone lenders, was not about to make any "unexpected" requests for further provisions to cover the NPLs.
"The European supervisor is fully aware that to deal effectively with the NPLs, it takes years. It is not something that can be urged and resolved in a very short period of time.”
His comments helped push up an already buoyant market.
Banco Popolare BAPO.MI rose 10.3 percent, Unicredit (CRDI.MI) 7.9 percent, Ubi Banca (UBI.MI) 5.7 percent and Banca Popolare Dell'Emilia Romagna 11 percent.
"This is a relief from yesterday's carnage," one trader said. "It feels like investors want to believe we have a beginning of a solution to the NPL problem, but personally I don't think so."
Italy has been in talks with the EU for nearly a year, but a compromise has been hard to reach as the rules tightened.
Renzi said the country should have struck a deal three or four years ago when EU laws were more lenient, but promised that his government would abide by the new regulations.
He also said he hoped that the market plunge earlier in the week would encourage Italy's banks to speed up a long-delayed process of consolidation. The country has some 680 lenders, many of them small and unprofitable, and the government is pushing them to seek mergers and tie ups.
He added that the market should decide what was the best solution for troubled Monte dei Paschi. The world's oldest bank has been seeking for more than a year a merger with a stronger peer as recommended by the European Central Bank.
"Monte dei Paschi is trading at an incredible price," Renzi said. "I'd really like the solution (for the bank) to be Italian but whoever comes along will get a great bargain."
(Additional reporting by Valentina Za, Danilo Masoni and Silvia Aloisi in Milan, Paola Arosio in Rome and John O'Donnell in Frankfurt; editing by Susan Thomas)