LONDON Italian government bond yields fell on Friday as Monte dei Paschi said it would request aid from a newly approved state fund to help struggling banks, after failing to win investor backing for a desperately needed capital increase.
Ten-year yields slipped 3 basis points (bps) to 1.82 percent in thin trading as financial centres across the region prepared to close for Christmas holidays.
Another banking saga concluded with Germany's Deutsche Bank agreeing to a $7.2 billion settlement with the U.S. Department of Justice (DOJ) over toxic mortgage securities sold in the run-up to the 2008 financial crisis, nearly half of the fine initially levied in September.
Elsewhere on the continent, Credit Suisse agreed to pay $5.3 billion to the DOJ to settle similar charges, and Barclays became the latest in a long-list of other lenders under investigation to be sued.
But the central focus for financial markets was Italy where Monte dei Paschi said it would request state aid, minutes after the government authorised a 20-billion euro fund to help lenders in distress.
The private deal to try to save the world's oldest bank was hampered by political turmoil after a referendum this month led to the resignation of former Prime Minister Matteo Renzi.
With other Italian lenders looking fragile, the new administration of Paolo Gentiloni is looking to end a protracted banking crisis that has gummed up the economy.
"The situation in bond markets is reflecting the developments around Italian banks and investors are taking those well," Commerzbank strategist David Schnautz said.
The fall in Italian bond yields dragged those in neighbouring Spain lower too, with 10-year yields dropping 3 bps to 1.38 percent.
All other euro zone bond yields were about 1 bps lower on the day.
Milan's stock market rose 0.7 percent but trading in Monte dei Paschi's shares and bonds were suspended. [.EU]
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Other Italian banks that may struggle to raise capital in coming months are Banca Popolare Di Vicenza, Veneto Banca and Banca Carige. Italy is also struggling to find a buyer for four small banks rescued from bankruptcy a year ago: Banca Etruria, Banca Marche, CariFerrara and CariChieti.
Researchers at Barclays said that state intervention is unlikely to represent a systemic solution for Italy's banks, estimating that the largest six Italian lenders could need about 30 billion euros in total to clean-up their balance sheets.
And even then, Barclays said, the government may be not be able to apply the model elsewhere.
"Even assuming that 20 billion were to represent a sufficient firepower to plug the hole, we doubt the decision to deal with MPS through a public sector solution will represent a template to be enrolled across the system quickly."
(Editing by Louise Ireland)