Italy's political turmoil could not have come at a worse time for Monte dei Paschi di Siena, the big Italian bank whose overhaul seems on the verge of destruction, potentially spreading contagion throughout the fragile European banking industry.
The failure of the restructuring plan for the world's oldest bank – born in 1472 – became a distinct possibility, according to sources and several published reported, as soon as Italian prime minister Matteo Renzi announced his resignation early Monday, shortly after his resounding defeat in the referendum on constitutional change.
On Tuesday night, Reuters reported that the Italian government is preparing to inject euros 2-billion into the bank through the purchase of its subordinated, or junior bonds. The move that would make the government the bank's controlling shareholder, with a 40 per cent stake, once the bonds are converted into equity – an effective nationalization.
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Reuters said bonds held by retail investors would be bought at face value so they would not suffer losses. Those bonds trade at a substantial discount to face value.
MPS, as the bank is known, had been negotiating with Qatar's sovereign wealth fund to stump up about euros 1-billion, through a rights issue, of the euros 5-billion in new capital required to shore up the bank, which is Italy's third-largest lender. "MPS needs a cornerstone investor, but I doubt they exist anymore," said Francesco Galietti, CEO of Policy Sonar, a political risk consultancy in Rome.
Failure to find a private-sector solution could trigger a European bailout or outright nationalization, both highly costly scenarios. MPS shares lost more than 4 per cent on Monday, the day after the referendum, taking their one-year loss to 87 per cent. They rose slightly on Tuesday on the prospect of a potential bailout.
Mr. Galietti said it seems highly unlikely that the Qataris or any other big-name investor would pump capital into the bank as the Italian government launches into the political unknown.
Italian president Sergio Mattarella on Monday asked Mr. Renzi, 41, the leader of the centre-left Democratic Party, to remain in officer until Italy's 2017 budget law is passed, expected by the end of the week.
After Mr. Renzi goes, Mr. Mattarella will seek an interim prime minster as the populist, euroskeptic Five Star Movement, the opposition party that had encouraged a No vote in the referendum, lobbies for a snap election that could fulfill the party's ambition to form a government. Five Star and the Democratic Party are polling roughly equally, at 30 per cent.
Analysts and economists say the No vote and the political spasms it triggered will make it hard for any of the troubled Italian banks, including UniCredit, one of the world's biggest international banks, to raise capital. "We think a No vote makes it more difficult for Monte dei Paschi to find an anchor investor," Morgan Stanley said in a note.
The fear among bank investors and bank bosses is that MPS's recapitalization problems could damage other Italian and European banks. The Italian banks are already hobbled by weak profitability and euros 360-billion in troubled loans, equivalent to more than 20 per cent of gross domestic product, the highest level in Europe.
"The result of the constitutional referendum in Italy is a harbinger of renewed turbulence that could spill over from the political arena to the economy, with Europe particularly endangered," John Cryan, CEO of Deutsche Bank, said in a letter to employees that was widely published on Tuesday.
UniCredit alone wants to raise euros 13-billion in new equity. Its shares have lost 59 per cent in the last year, though they bounced up on Tuesday after Monday's post-referendum sell-off.
MPS, which has endured more than five centuries of on and off plague, war and regime change from its base in Tuscany, has been in trouble since the 2008 crisis year and was the standout failure in the European bank stress tests of 2014 and 2016. In the last four years, it has burned through euros 8-billion in capital.
Wall Street's JP Morgan Chase and Italy's Mediobanca, along with Italian finance minister Pier Carlo Padoan, who may become the caretaker prime minister, have been trying to convince the Qatari Investment Authority to prop up the bank's euros 5-billion recapitalization plan.
The plan included shifting some of the non-performing loans off MPS's balance sheet and the voluntary swap into equity of subordinated debt into bank equity. MPS, which is not commenting on the potential Qatari investment, said on Friday that the voluntary debt swap had raised about euros 1-billion.
If the Qataris investment falls apart, which now seems likely, a bail-in or bail-out, or a combination of the two, might be required. The former would see the remaining holders of the subordinated debt take substantial losses, or "haircut," on their holdings. The latter would see the Italian government ask the European Stability Mechanism (ESM), Europe's permanent bailout fund, for loans to recapitalize MPS and other poorly capitalized Italian banks. The ESM was used to support Spanish banks during the height of the financial crisis.
Megan Greene, Manulife's chief economist, said a bail-in "would be incredibly politically toxic for the government" because 65 per cent MPS's subordinated debt is held by retail investors. The bail-in last year of four small Italian banks triggered a political backlash and the widely reported suicide of a retail investor in Banca Etruria, a Tuscan lender.
If all options fail, Italy might be forced to nationalize MPS, Ms. Greene said. "One thing is for sure – if I were Renzi, I would be happy to be far away from government when these decisions have to be made," she said.
Eric Reguly