MILAN Italy's quick formation of a new government after former Prime Minister Matteo Renzi resigned was reassuring, ratings agency DBRS told Reuters, adding a successful capital raising at Monte dei Paschi (BMPS.MI) could help financial stability.
"The durability of the government will partly depend on how successfully Monte dei Paschi is recapitalized," Fergus McCormick, chief economist and co-head of sovereign ratings at DBRS, said in an interview.
Italy's third-biggest bank has until the end of the year to raise 5 billion euros ($5.22 billion) in equity or face being wound down by the European Central Bank, potentially triggering a wider banking and political crisis in Italy.
"A drawn out recapitalization involving public funds and the forced conversion of subordinated bonds ... into shares would be very unpopular. That said, a well-delivered recapitalization could bolster financial stability," McCormick said.
He also added any further slowdown in Italy's consumption and business investment would impact nominal GDP, leading to a further increase in the debt ratio, which would be "concerning".
(Reporting by Giulio Piovaccari, writing by Agnieszka Flak, editing by Isla Binnie)