This Bank Could Drag Down the Entire Eurozone With It Lombardi Letter 2016-12-21 09:22:16 Monte dei Paschi MPS Italian banks bailout Medici Italy’s Banca Monte dei Paschi (MPS) is on the brink of failure. The bank could drag down the entire Italian banking sector—and the euro—with it. International Markets

This Bank Could Drag Down the Entire Eurozone With It

Monte dei Paschi Bank

It Looks like Monte dei Paschi Bank Will Need Taxpayers to Bail It Out

Italy’s Banca Monte dei Paschi di Siena will be in the spotlight this week. The Italian bank is on the brink of failure. It could drag down the entire Italian banking sector in the process—and the euro with it. The first attempt to save the bank through a recapitalization failed on December 19. 

Monte dei Paschi (MPS) is the world’s oldest bank, with links to the Medici Family that once ruled Florence. It has lost some 80% of its market cap in 2016. 


Monte dei Paschi needs to increase its capital by €5.0 billion (about $5.06 billion). It needs to find this money before the end of 2016. The Italian government will be forced to act as a parachute. It seems as if, on Monday, there was insufficient private capital to guarantee the bank’s future. Failure is likely. State intervention—a bailout—remains the only solution. 

If the operation were to fail, it would open up two scenarios: an intervention of the state with a recapitalization that would result in the so-called “burden sharing,” i.e. the allocation of losses with individuals. Or it could take the “bail-in,” spreading the losses to shareholders, bondholders, and depositors.  

Monte dei Paschi will have to recognize that a market solution is no longer viable. The conversion of the bonds has failed to produce the desired result. Outside help from such entities as Qatar’s sovereign fund have not submitted any offers. Qatar was expected—or at least was hoped by MPS—to play a major role, with an investment of about $1.0 billion. 

It seems that the future of Monte dei Paschi has nationalization or massive state intervention written all over it. That should come over the next few days—if not hours. The Italian government will help the bank protect savings and financial stability.  

Indeed, if Monte dei Paschi should fail, it would drag down the rest of the Italian banks. The latter have never quite recovered from the 2008 crisis. The Italian economy has grown at a negligible pace since then, and Italian creditors are stuck with over $340.0 billion of non-performing loans.  

Germany would prefer that Italy stick with the “rule.” That is, it would prefer that the solution be market-based. However, this seems increasingly unlikely. Allowing MPS to fail would cause severe political and economic damage.

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