Italy To Bail Out Old, Broke and Crooked Bank

Heard of too big to fail? How about too old, broke and crooked to fail?

Banca Monte dei Paschi di Siena SpA, a 540-year-old financial institution commonly called Europe's oldest bank, was the newest Continental house of finance to receive a government bailout, after the Italian Treasury granted the bank a €3.9 billion ($4.87 billion) credit lifeline Tuesday.

The Treasury loaned the money to Monte dei Paschi even though it is seen as basically insolvent by the markets -- the nominal amount of the rescue package exceeds the market capitalization of the bank -- and even though the institution's chairman, Alessandro Profumo, is under criminal indictment, accused of helping devise a tax evasion scheme when he was CEO of rival bank UniCredit.

The state aid was seen as necessary, the government said, because the bank could not find private sources of funding given currently highly volatile market conditions. The institution needs at least €3.27 billion to meet European Union rules on minimum capital levels.

The government support is certainly not the largest seen so far in four years of global financial crises. But it is among the most generous, as it only requires the bank to pay the 8.5 percent interest rate on the loan if the bank reports a profit, and, additionally, has a clause that allows Monte dei Paschi to convert the loan into equity -- essentially stiffing the Italian government -- should the bank continue to struggle.

The current loan, in a way, constitutes a doubling down by the Italian government, as a €1.9 billion bailout provided to Monte dei Paschi in 2009 gets rolled into the new loan.

Italy's financial system is under an immense amount of stress at the moment, with some market-watchers predicting it will follow the trail blazed by the Irish, Greek, Portuguese, Cypriot and Spanish banks and require a systemic bailout.

A lot of the current concern is based on the fact the balance sheets of the banche are bloated with Italian national debt, meaning any kind of government default would obliterate Italian financiers. Ironically, by adding billions of euro more to the national government's liabilities, the rescue of Monte dei Paschi makes such an outcome all the more likely.

Profumo, the bank chairman, explained that dynamic in a weekend television interview earlier this month, saying Monte dei Paschi holds lots of Italian sovereign bonds that some think they will not be repaid, but if they'll be repaid, then banks are solid.

The bailout could not come at a worse time for Italian leaders. The country last said it expects GDP to contract by 1.5 percent this year. Horrendous retail sales data out Tuesday also indicates the country's recession might cut even deeper than that.

And even as it provides pay only if you're profitable loans to Monte dei Paschi, the Italian government is paying through the nose for borrowing from private investors. Tuesday, the yield on 2-year obligations exceeded 4.9 percent for the first time this year.

Shares of Banca Monte dei Paschi SpA collapsed Tuesday, declining 5.47 percent to trade at 19.07 euro-cents on the Milan Stock Exchange, as wider market indices were down 1.11 percent Tuesday. The bank's valuation has dropped by 96 percent since the global financial crisis started.