The government of Italy will likely inject close to €6.5 billion equal to $6.8 billion to rescue the third largest lender in the country Monte dei Paschi di Siena that is more than was expected initially, said sources on Tuesday.
The higher overall cost of the rescue by the state is due to the revising done by the European Central Bank of the capital shortfall of the bank to a current €8.8 million compared to an initial estimate of approximately €5 billion.
Support from the government was requested by the bank in form of state precautionary recapitalization last week after a plan to raise over €5 billion from private investors fell through.
A capital injection of €6.5 billion would give the government a 70% stake in the bank.
The remaining injection of €2.3 billion would come from converting into shares, bonds held by the bank’s institutional investors, as is required by new rules in Europe when dealing with banks in crisis.
Precautionary recapitalization is a form of state intervention with a struggling bank that remains solvent. It means just a modest bailout in investors although the government is able to buy the shares only for market terms that are endorsed by officials from EU state aid out of Brussels.
Under this plan Italy has proposed, the government is to compensate over 40,000 retail investors that hold €2 billion of the junior debt at the bank, who then convert notes they hold into bank shares.
Retail investors can swap the shares for other senior bonds, with the government buying back the shares from the lender. The plan needs the approval of the EU, which could take as many as three months.
The ECB is nearing its completion of inspecting the loan portfolio of the bank. It took a harsher stance on the bank’s capital shortfall so it would be on the safe side and help to restore confidence in the lender, said one source.
Monte dei Paschi was the weakest lender in stress tests done by European officials last summer.
It is the world’s oldest bank and will use close to a third of the billion of euros in rescue money to bolster ailing lenders.
Shares in the bank were suspended from any trading until all details of the rescue plan are released such as the prices the government it buying shares of the bank.