Italy expects EU deal for Monte dei Paschi rescue

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Monte dei Paschi di Siena is close to reaching an agreement with the European Commission that will pave the way for a state bailout of Italy’s fourth biggest bank, a senior Italian treasury official said on Tuesday.

The world’s oldest bank must fill a capital shortfall of 8.8 billion euros after it emerged as the weakest lender in European stress tests last July and failed to raise cash on the market in December.

Together with two Veneto-based lenders, the Tuscan bank has been locked in talks for months with European regulators that must approve government support under tougher EU bank crisis rules that came into force last year.

Striking an accord for Monte dei Paschi “is a matter of days,” Fabrizio Pagani, told reporters on the sidelines of a conference. “After that, we will talk about the Veneto banks.”

Pagani said that a deal to sell the Tuscan lender’s impaired loans repackaged as securities — part of a drastic restructuring to unlock state aid — was also being finalised.

The Italian government is expected to pump as much as 6.6 billion euros into the bank, giving it a stake of around 70 percent in Monte dei Paschi, through a scheme that imposes some losses on the bank’s junior bond holders.

Sources have said the amount could be lower, with private investors putting in more money than initially expected.

Under EU rules, state aid cannot be used to cover predictable losses such as those stemming from writedowns on the bank’s 29.4 billion euro portfolio of defaulting debts.

A source close to the matter said Italian bank bailout fund Atlante, with one or more private equity funds, could buy the junior and mezzanine tranches of the bad loan portfolio for 1.3 billion euros, while the senior tranche would be backed by a state guarantee and sold to institutional investors.

A second source said US funds Fortress and Elliott were carrying out due diligence on the portfolio which was expected to close on June 9.

Atlante, Fortress and Elliott declined to comment.

Another sticking point in the negotiations between Monte dei Paschi and the European Commission has been how many jobs the it will have to cut.

A source told Reuters in April that Brussels had demanded more than 5,000 layoffs, while Italian media reports have put the figure at 10,000 – almost half the bank’s total workforce.