Published: Thu, June 01, 2017
Worldwide | By Gretchen Simon

European Union agrees initial deal with Italy on Monte dei Paschi recapitalisation

European Union agrees initial deal with Italy on Monte dei Paschi recapitalisation

The European Commission and Italy agreed on a bailout for embattled bank Monte dei Paschi that would pave the way for the injection of billions of euros. Italy will be using a particular type of European bailout, known as precautionary recapitalization, created to shield taxpayers from the cost of bank failures in the case of solvent banks that aren't at risk of posting big future losses.

The final terms of the restructuring deal will be negotiated over the next few weeks.

The deal concludes months of talks between the European Commission and the Italian government on a rescue and restructuring package for troubled lender Monte dei Paschi (MPS).

Rome was wary of imposing the cost on small investors such as pensioners that spent all their savings in MDP's bonds, as they thought they were putting their money in a savings account.

Since this precautionary recapitalisation involves taxpayer money, the European Union wants to make sure the bank adheres to conditions to ensure that the bank will be profitable in the long-term.

The Commission said it had agreed in principle on a restructuring plan for the bank so that it can be bailed out by the state under new European rules for dealing with bank crises. But the figures included in the plan remained confidential. Its junior bondholders and shareholders will also take a hit.

On top of that, the Italian authorities will have to confirm the selling of a pool of non-performing loans at market terms to private investors.

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He pointed out that the country's troubled banks have 20 billion euros in net bad loans.

Its senior management will be subject to a salary cap, which will equate to ten times the average pay of the bank's employees.

However, the agreement is still dependent on the confirmation by the European Central Bank (ECB) as the supervisory authority of all banks at the Eurosystem.

"This solution is a positive step forward for MPS and the Italian banking sector".

Under EU rules, if a bank is proven to be solvent, and the private sector shares the burden of reinforcing the lender, the bank can be given a limited amount of state funds.

But Italy's problems with its financial systems and its high level of "bad loans" are far from over.

Meanwhile, two other Italian struggling lenders-Banca Popolare di Vicenza SpA and Veneto Banca SpA-have asked to tap public money to stay afloat. "I hope this will enable MPS to focus on lending to the Italian businesses and support the Italian economy", added the Commissioner for Competition.

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