The European Commission and Italy have agreed on a rescue of Italian bank Monte dei Paschi di Siena, outlining a draft plan that involves significant cost cuts, some investors taking a hit and executives facing a cap on pay.
The announcement brings the long-running saga over the future of Italy’s oldest bank towards a close, with Rome signing off on an investor bail-in and the kind of deep restructuring MPS fiercely resisted for more than a year.
Margrethe Vestager, EU competition commissioner, and Pier Carlo Padoan, Italy’s finance minister, on Thursday announced they had agreed “in principle” on the steps to restructure the bank with an injection of state capital – a use of public funds for which EU approval is required.
“This solution is a positive step forward for MPS and the Italian banking sector,” said Ms Vestager. “It would allow Italy to inject capital into MPS as a precaution, in line with EU rules, whilst limiting the burden on Italian taxpayers.”
The deal exploits the potential in EU bank rescue rules for a lender to bolster its capital buffers with limited state funds if it is proven to be solvent and the burden for the rescue is shared with the private sector.
The breakthrough follows close to 18 months of discussions between Rome and Brussels over ways to bail out Italy’s weakest banks. Although the sides have resolved differences over MPS, the potential for a deal looks far less certain over Banca Popolare di Vicenza and Veneto Banca.
The two banks in the Veneto region are struggling to recover from a surge in bad loans following the European sovereign debt crisis compounded by a mis-selling scandal that has caused a flight of account holders, say people familiar with the matter.
Both have fallen below minimum capital requirements, making them ineligible for a “precautionary recapitalisation” under EU rules without a private investor first stepping in to cover the shortfall.
Italy last week said it had given both banks “all the public guarantees necessary” to shore up their liquidity. Wrangling with the EU over a rescue is being blamed by some parties in Italy for the banks’ struggles.
The worsening outlook for the banks, which Italy is trying to avoid being bailed in, has also raised questions about why the Bank of Italy and Consob, the stock market regulator, failed to bring the problems to light earlier.
The MPS deal turns on it accepting broad conditions to shrink its network, cut costs and set itself on a path to profitability. The final terms of the restructuring plan – which bankers say will involve heavy job cuts – will be settled with the European Commission in the coming weeks.
“MPS will undergo deep restructuring to ensure its viability, including by cleaning its balance sheet from non-performing loans,” Ms Vestager said.
“I hope this will enable MPS to focus on lending to the Italian businesses and support the Italian economy.”
To ensure the EU limits the cost to taxpayers, MPS is expected to confirm it has private sector buyers for a portfolio of bad loans, junior bondholders and shareholders will contribute to the rescue.
The commission said retail investors who were not “adequately informed” about the potential risks of their investment could be eligible for compensation.
“MPS will compensate retail junior bondholders who were mis-sold by converting these bonds into equity and buying those shares from the retail investors,” the commission said. “MPS will pay retail investors in more secure senior instruments.”
Other conditions imposed by the commission include a cap on senior staff pay equivalent to 10 times the average salary of an MPS employee. Although the details are unclear, this would imply the total remuneration of Marco Morelli, MPS chief executive, would fall from €1million – €2 million to less than €500,000, including any bonus. These pay curbs were a particular sticking point in the final stages of negotiations.
Copyright The Financial Times Limited 2017