Teetering Italian bank looks for investors

Italian Referendum and Political Risks in Markets

Monte dei Paschi has been looking to haul in five billion euro (£4.2 billion) from private investors to shore up its battered balance sheet and prevent a collapse which would deal a hefty blow to the European banking sector.

A key meeting of the syndicate of investment banks considering underwriting the deal is due to take place at 2pm Italian time, said one person involved.

Prime minister Matteo Renzi was scheduled to resign at 7pm on Wednesday after a bruising defeat for the Italian government in the country's referendum on constitutional reforms. And for the rest of the world's nearly equally shaky financial system.

Sources said Monday banks working on backing the planned 5 billion euro cash call had chose to wait three to four days until the political situation was clearer.

The bank now faces the prospect of a state bailout this weekend, which has disastrous implications for the rest of Italy's lenders and the wider eurozone. "We ask Italians to be on our side in this battle". And, in the way these things do, it won't be long before it spreads across Europe and on into the United Kingdom and even the US.

Hopes that the European Central Bank will deliver a fresh dose of monetary stimulus to the euro zone are also feeding investor demand for the bloc's debt, analysts said.

The situation in Italy of course is more immediate: UniCredit, the country's biggest bank, was expected to announce a €13bn capital raising next week as part of a new business plan.

To ensure its survival, the bank has launched a plan involving the spinoff of €27.6 billion ($29.4 billion) worth of nonperforming loans, combined with a capital increase of up to €5 billion.

Under EU rules, rescuing banks would mean imposing losses on their investors.

Italy's five-year debt is now trading at three-year highs.

However, the banks may not be able to raise the money through investors, leaving the government as a last resort. Italy didn't, which makes it much harder to fix them now.

Markets expect the Bank of Italy and the European Central Bank to take steps, including making state aid available for the banking sector.

Fitch - which said it had a negative outlook on the Italian banking industry for 2017 - said profitability in the sector was already frail before the referendum result that sparked political chaos and forced the resignation of the prime minister, Matteo Renzi.

Shares in Italian banks suffered sharp falls on 5 December amid speculation that the government will have to prop up Monte dei Paschi, the world's oldest surviving bank. Nationalisation of course will leave them nothing at all. Still, there is potentially volatile road ahead for EWI and stocks in the eurozone's third-largest economy. But the question is now whether political uncertainty will scare investors off.

"Italy remains an economic risk-perhaps the most significant one-for the future of the euro and Europe", Robert Kahn, an economist at Council on Foreign Relations, wrote in a report. And it's not finished yet.