Italy to bail out Monte dei Paschi in Xmas cheer for savers

Milan (AFP) - Italy on Friday approved a state-funded rescue of the world's oldest bank, Monte dei Paschi di Siena (BMPS), in a bid to shore up the country's beleaguered financial system.

The rescue plan comes as a relief for investors in Italy's third largest bank but is also fraught with political and economic complications for a centre-left government preparing for an election in the next 15 months.

A cabinet meeting that concluded in the early hours issued a green light for the cash-strapped state to come to the rescue of stricken BMPS.

It will do so by dipping into a debt-financed 20-billion-euro ($21-billion) war chest that was approved by parliament this week, adding to Italy's already massive debt burden and to borrowing costs which have ticked higher as a result of the current crisis.

Around a quarter of the rescue fund is going to be required immediately to inject cash into Tuscan lender BMPS, which confirmed Thursday that it had failed to raise the capital it needed from private investors.

Prime Minister Paolo Gentiloni said the rescue plan would guarantee the savings of some 40,000 small investors -- most of them elderly -- who would otherwise have spent Christmas fretting over investments that are widely seen as having been mis-sold in the first place.

Finance Minister Pier Carlo Padoan told a late night press conference that the deal would get the bank off its sickbed, enable it to resume lending to businesses and ensure "full tranquility for its savers and its employees".

Whether markets regard BMPS as on the road to recovery will not be clear for some time, with the resumption of trading in its shares after the Christmas break set to provide the first test.

But Friday's overall mood on the Milan stock exchange was upbeat, with the main index rising by nearly one percent.

- 'Something of a relief' -

The news that it will receive state aid comes as "something of a relief, even if it does involve taxpayer funds and represents a big deja vu, having already been rescued in recent years", said Mike van Dulken, of Accendo Markets.

Key question marks remain, he added.

"Now it's a question of what price institutional bondholders have to pay and what sort of compensation retail investors will be offered to ensure the bailout follows new EU rules preventing the bill for state aid being unfairly pinned on taxpayers and that the deal is more politically palatable," he said.

EU regulators said Friday they are keeping a close eye on the planned rescue to make sure it follows the bloc's rules, but also seemed to sound a conciliatory note.

There are "number of solutions" to fix the bank, they said, that remain "in full compliance with the EU rules addressing liquidity and capital shortages".

The EU is unlikely to make things difficult, analysts concluded.

"The bailout will go ahead since it should meet the EU regulations - or at least gives the impression of meeting them," said Jasper Lawler, senior market analyst at the London Capital Group.

BMPS has lost 80 percent of its market value this year as customers have abandoned the bank in droves. Trading in its stock, bonds and related products were all suspended on Thursday.

The bank launched a bid to sell fresh shares this week under plans to raise five billion euros to shore up its capital base.

But it acknowledged late Wednesday that it had failed to attract a cornerstone investor -- a key sign of market confidence -- after pinning its hopes on a big Qatari take-up.

"State intervention was not the preferred option for the bank but it will allow us to move on with the elimination of doubtful loans," said BMPS chairman Marco Morelli in a letter to staff.

Founded in 1472, BMPS is at the centre of a broader banking crisis in Italy with the country's 700 banks burdened by a total of 360 billion euros in non-performing loans.

Economists say the high level of bad loans reflects the problems many Italian companies have faced since the country adopted the euro at its launch 16 years ago.

The economy has barely grown since then.