(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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- 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
- 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
- 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)
Keywords: BREAKINGVIEWS MPS/
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