(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.
SIGN UP FOR BREAKINGVIEWS EMAIL ALERTS:
- 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
- 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
- For previous columns by the author, Reuters customers can
click on [HAY/]
(Editing by Pierre Briançon and David Evans)
Keywords: BREAKINGVIEWS MONTE/
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