(The author is a Reuters Breakingviews columnist. The opinions expressed are his own)
By George Hay
LONDON, Nov 23 (Reuters Breakingviews) - Monte dei Paschi (BMPS.MI) is about to find out that patriotism doesn’t pay. The venerable Italian bank had hoped that the latest 1.5 billion euros of bailout cash it received from the Italian government wouldn’t end up diluting its existing shareholders too much. But Brussels is likely to nip this in the bud.
MPS needs the cash because it failed a pan-European stress test in June. The Italian government’s response was to rehash a ruse it deployed following the 2008 financial crisis to avoid taking direct equity stakes in the banks: so-called “Tremonti bonds”, named after the country’s former finance minister. These instruments, which MPS now holds for a total of 3.4 billion euros, have a stiff coupon of over 8 percent, but don’t dilute shareholders even though they do for the time being count as core Tier 1 capital.
The terms of the latest issue carried a safeguard for the taxpayer: if MPS couldn’t pay the coupon, it could be paid in shares. But they also carried a bigger get-out clause for shareholders: those shares would be issued at book value, rather than their market value. MPS currently trades at about a quarter of its book value. And its ongoing losses make a cash coupon on the bonds unlikely for at least two years. At MPS’s current share price, the get-out clause meant that the government would end up owning only about 5 percent of the bank, instead of over 15 percent if the payment was made at market price.
The EU’s competition authorities are likely to give this short shrift. Shares issued in lieu of coupons are set to be valued at current prices, according to a person familiar with the situation. The local foundations and institutions in MPS’s home town of Siena that still hold a third of its shares will face much greater dilution.
MPS has some reasons to feel bitter. The main reason it flunked the stress test was because it helped its own government by increasing its holdings of Italian government debt fivefold, to 25 billion euros, in a few years. It probably expected some financial leniency in return.
But Brussels is right not to give ground. Allowing states to rescue their lenders in such a flagrantly anti-competitive way would undermine the single market, and it would hurt the credibility of the forthcoming banking union. The burghers of Siena will have to suck it up.
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- The European Commission is likely to veto a ploy by the Italian government to avoid taking a large stake in Monte dei Paschi in return for its latest bailout, Reuters reported on Nov. 22.
- The value of new shares that Monte dei Paschi will issue to the Italian Treasury if it cannot pay interest on government loans will be close to market prices, a source close to negotiations between Italy and the European Commission told Reuters on Thursday. A previous scheme had said the value of the new shares would be based on the bank's net assets.
- Reuters: Italian Treasury set for bigger Monte Paschi stake [ID:nL5E8MMC3Q] - For previous columns by the author, Reuters customers can click on [HAY/]
(Editing by Pierre Briançon and David Evans)
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