Breakingviews-EU drops the ball on Monte dei Paschi bailout

Fri Dec 28, 2012 7:07pm IST

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(The author is a Reuters Breakingviews columnist. The opinions expressed are his own)

By George Hay

LONDON, Dec 28 (Reuters Breakingviews) - The European Commission seems to be losing its bite. Since the 2008 financial crisis, the legislative arm of the European Union has developed a fearsome reputation for forcing bailed-out banks into savage restructurings as penance for accepting state aid. Its kid-glove treatment of Banca Monte dei Paschi (BMPS.MI), however, looks like quite a reversal.

MPS’s need for 3.9 billion euro bailout, plans for which were outlined in June, is largely self-inflicted. True, the main reason for the shortfall is spiralling yields on Italian sovereign debt, which the bank can’t control. But MPS blundered by increasing its holdings of its own government’s bonds fivefold in recent years. It also overpaid in its acquisition of Antonveneta, another Italian bank, before the crisis.

From an Italian taxpayer perspective, the rot set in with June’s decision to allow the recapitalisation to be done with hybrid debt rather than equity. Rather than take a big shareholding in MPS, the Italian state would receive bonds and an annual coupon. If the bank made no profits – which it may not this year or next – it would have to pay the coupon in shares, meaning the government would end up a shareholder anyway.

But the actual terms, unveiled on Dec. 17, are flimsier. Instead of shares, MPS can now pay the coupon by issuing yet more hybrid debt to the government. As no less an authority than the European Central Bank has pointed out, this increases the interest burden on MPS, making it harder to make the profits that would enable the bank to repay its latest bailout.

By allowing individual states to negotiate exceptions to what are generally thought to be hard and fast rules, the Commission runs the risk of diluting important principles of the single European market. On Dec. 27 MPS said that when it does finally have to pay back its latest bailout, it will have to issue cut-price shares to the government if it does not have enough cash. But the Commission’s timidity means that Italian taxpayers are getting a raw deal now.

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CONTEXT NEWS

- The European Commission on Dec. 17 temporarily approved a 3.9 billion euro recapitalisation of Banca Monte dei Paschi, to enable Italy’s third largest lender to pass a pan-European bank stress test.

- The 3.9 billion euro injection will be in the form of hybrid capital instruments rather than equity. The original intention had been for MPS to pay the coupon on this debt in the form of shares if it could not generate cash from its operations. However, the bank will now be allowed to pay the coupon by issuing further hybrid debt to the Italian state.

- Paying the coupon in hybrid debt may only be allowed once, according to a person familiar with the situation. But in an opinion also published on Dec. 17, the European Central Bank said the coupon should be paid in shares, and said paying it in debt “would add to the bank’s interest servicing burden on the NFIs in an already difficult operating environment”.

- The Commission's approval of the support measures is conditional on the presentation within six months of a restructuring plan from the date of the decision.

- Monte dei Paschi said on Dec. 27 that if it could not pay back the Italian state using cash, any future conversion of its hybrid debt into shares would be done at a 30 percent discount to the theoretical ex-rights price when, or if, new equity is issued.

- Monte dei Paschi statement: link.reuters.com/zat84t

- Commission statement: link.reuters.com/cet84t

- ECB opinion: link.reuters.com/fet84t

- Reuters: Monte Paschi sets terms of possible share issue to treasury [ID:nL5E8NR9CI] - For previous columns by the author, Reuters customers can click on [HAY/]

(Editing by Robert Cole and David Evans)

((george.hay@thomsonreuters.com))

((Reuters messaging: george.hay.thomsonreuters.com@reuters.net)) Keywords: BREAKINGVIEWS MPS/

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