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Can the world's oldest bank survive Italy's upheaval?

Can the world's oldest bank survive Italy's upheaval?


Monte dei Paschi seeks Italian government bailout – Dec. 23, 2016

Italian banks are drowning in bad debt

The world’s oldest operating bank needs a government bailout.

Italy’s Monte dei Paschi di Siena (BMDPF) said early Friday it’s seeking “extraordinary and temporary financial support” after an effort to raise funds from private investors fell flat.

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The Italian government has been preparing for this situation by arranging a €20 billion ($20.9 billion) rescue package to prop up the country’s struggling banks.

But Monte dei Paschi didn’t specify how much money it’s asking for. It had previously tried to persuade investors to put in €5 billion ($5.2 billion), but political and economic uncertainty following the resignation of Prime Minister Matteo Renzi helped make many of them wary of signing on the dotted line.

The Italian government isn’t the only one whose finances will be affected by the bailout of the bank.

Related: Italy wants $21 billion to prop up its wobbly banks

Under new European rules, investors must take a financial hit before a government can step in with rescue money. That has raised fears that small-time, individual savers could suffer.

But at a news conference early Friday, Italian Finance Minister Pier Carlo Padoan said the bailout for Monte dei Paschi would “safeguard” the interests of mom and pop savers and shareholders.

The bank, which was founded in 1472, has roughly €28 billion ($29.3 billion) in bad debts that it has been trying to spin off into a separate entity as part of a turnaround plan.

Its share price has plunged 88% since the start of the year.

Related: India’s central bank says cash crisis is hurting the economy

Based on the European bailout rules, junior bondholders are supposed to take a financial hit.

But the Italian government said under the plan for Monte dei Paschi, bonds held largely by institutional investors will be converted at 75% of their face value into shares, while those held mainly by retail customers will be converted at their full value.

The retail investors’ shares will eventually be turned back into bonds of the same value as those they held originally, according to Padoan.

Italy’s banks have been struggling with high costs and low returns for years. Billions of euros in loans have soured due to economic stagnation. The country’s economy has barely grown for a decade.

The country’s lenders are saddled with about €360 billion ($376 billion) in non-performing loans, roughly a third of the eurozone total.

Earlier this month, Italy’s biggest bank, UniCredit, announced plans to raise €13 billion ($13.6 billion) and slash thousands of jobs to shore up its finances.

–Chris Liakos and Marta Colombo contributed to this report.

CNNMoney (London) First published December 23, 2016: 12:51 AM ET

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