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A sign of the Monte dei Paschi bank is seen in Rome, Italy on Sept. 30, 2018.

Alessandro Bianchi/Reuters

Italy is close to approving plans to sell its stake in Monte dei Paschi di Siena and to cover most of the troubled Tuscan bank’s capital needs of around €1-billion ($1.9-billion), a government source said.

Rome spent €5.4-billion on a 68-per-cent stake in Monte dei Paschi in 2017 to prevent Italy’s third-largest bank from buckling under bad debts after years of mismanagement.

That stake is worth just €1.1-billion at current market prices and must be sold by the end of next year to meet the terms of the bailout negotiated at the time with European Union competition authorities.

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Last month, the Treasury asked Prime Minister Giuseppe Conte’s office to approve as soon as possible a decree detailing privatization plans for Monte dei Paschi, a confidential document dated Aug. 10 and seen by Reuters showed.

The government source, who spoke on condition of anonymity, said a cabinet meeting might discuss the matter as early as this week. A second source confirmed this was a possibility.

State auditors have already approved the decree, of which Reuters has seen a draft, but Mr. Conte needs to sign off on it alongside the economy and industry ministers.

The decree authorizes the Treasury to help Monte dei Paschi shed €8.1-billion in problem debts through a complex scheme involving state-owned bad loan manager AMCO.

This cleanup “is essential to give the bank the prospect of a lasting return to profitability … and pave the way for the economy ministry to sell its holding,” the draft decree said.

The Treasury, the bank and AMCO had started discussing the transaction at the end of 2018, it added.

With the deal, Monte dei Paschi will cut its gross problem loans, which topped 40 per cent of total lending before the bailout, to below 4 per cent, less than the industry average, in an effort to entice potential buyers.

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Monte dei Paschi said last week the European Central Bank was set to authorize the cleanup on condition it replenished its capital buffers, which the spin-off will erode.

To do that, the bank plans to issue up to €750-million in so-called Additional Tier 1 bonds, costly high-risk debt that counts toward a lender’s regulatory capital, one of the sources said.

The Treasury and Monte dei Paschi both declined to comment.

The ECB also wants Monte dei Paschi to boost its second-tier capital with a €250-million issue, the bank has said.

Italy, which has set aside up to €1.5-billion to increase capital at state-controlled firms, is allowed to cover up to 70 per cent of the bank’s overall financing needs, while private investors must provide the rest.

Based on the draft decree, Rome can sell its holding through share offerings or through “direct negotiations or a merger.” Sources have said Monte dei Paschi is looking for a merger partner.

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