Reuters — Italy’s parliament gave the green light on Wednesday for a 20 billion euro plan to prop up the country’s weaker banks, starting with a bailout, as early as this week, for the third largest, Monte dei Paschi di Siena.
If Monte dei Paschi’s capital plan fails, as it is likely to do after the bank it had failed to secure enough offers for €5bn of new shares, Prime Minister Paolo Gentiloni’s new government is likely to meet this week to issue an emergency decree to inject capital into it.
But that could prove to be politically explosive given that investors are required to bear losses under EU bailout rules.
The European Commission said it had “noted” the Italian government’s motion to the Italian parliament for authorisation to change some public finances targets.
“The Commission is in close and constructive contact with the Italian government,” it added.
Parliamentary approval for the 20 billion euro government plan was needed to allow the state to take on new debt. Italy’s debt burden, at about 133 percent of annual output, is already the second highest in the euro zone after Greece.
The measure approved by parliament on Wednesday says the state can borrow money to provide “an adequate level of liquidity into the banking system” and can reinforce a lender’s capital by “underwriting new shares”.
The failure of Monte dei Paschi, the world’s oldest bank, would threaten the savings of thousands of Italians and could undermine confidence in the country’s wider banking sector, saddled with a third of the euro zone’s total bad loans.
Before the vote, Economy Minister Pier Carlo Padoan vowed to shield retail bank investors from losses. The decision will be a major test of the new EU rules requiring bond holders to take losses before taxpayer money can be injected into banks.
The bank’s shares fell as much as 18 percent on the liquidity concerns, but cut losses after news that parliament had approved the government’s 20-billion euro safety net.
