Italy’s political class should be very alarmed if MPS needs state bailout

Monte dei Paschi di Siena’s attempt to float itself off the rocks with private capital appears doomed and a state-sponsored bailout looks inevitable. The Italian government on Wednesday granted itself the funds for a rescue package. The deed will probably be done by Christmas, with losses imposed on junior bondholders.

It is tempting to think this outcome was inevitable. The crisis at Italy’s third-largest lender has bubbled away for most of 2016 and the bank has a long and grim record of disappointing its backers. Over the past five years, it has raised €8bn in capital but churned out losses of €15bn.

But, turn the clock back just a few months, and there were realistic hopes that recapitalisation by the private sector would succeed. The Siena-based lender was bottom of the class in the eurozone’s regulatory stress tests in the summer but a few Greek banks have proved it is possible to find brave investors willing to take a punt on recovery.

MPS also seemed to have acquired two ingredients it had previously lacked – a credible chief executive and a serious cost-cutting plan. Marco Morelli, a former Bank of America executive, arrived in September and outlined his ambition to cut 2,500 jobs and a quarter of the branches. If recapitalisation could be achieved, said Morelli, MPS would emerge at the end of 2019 with one of the healthiest capital ratios among European banks.

And why not? Italy is not Greece. Half the country is rich. It ought to be possible for a bank founded in 1472 to shuffle off its bad loans, even at depressed prices, overcome its foolish acquisitions from the boom years and regain a profitable niche. The critical sum at stake in the recapitalisation plan – €5bn – was not off the scale and JP Morgan, the Wall Street powerhouse advising MPS, was on hand to round up a few so-called anchor investors.

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