* Monte Paschi board to approve new plan on Sept. 24
* Bank needs to win EU green light for state bailout
* Failure of big capital increase could force
By Silvia Aloisi and Stefano Bernabei
MILAN/ROME, Sept 20 Italy's scandal-hit Monte
dei Paschi di Siena will next week unveil a drastic
turnaround plan for the bank to meet European Union demands and
try to lure investors in a make-or-break attempt to avoid
Italy's third biggest lender was brought close to financial
collapse by the euro zone debt crisis and is engulfed in a
judicial probe over its costly purchase of a rival in 2007 and
loss-making derivative trades it made in the deal's aftermath.
The bank, which took 4.1 billion euros ($5.5 billion) in
state loans in February, has been told to beef up an already
tough restructuring plan if it wants to win the European Union's
approval for the bailout.
Brussels has also demanded that the Tuscan lender carries
out a 2.5 billion euros capital increase in 2014. That is more
than double the 1 billion euro originally planned by the bank
and roughly equal to Monte dei Paschi's current market
capitalisation, making it a very challenging goal.
"At the moment there seems to be little interest in Monte
dei Paschi among investors, either from a strategic or financial
view point," Societe Generale analyst Carlo Tommaselli said in a
report this week. "The execution risk ... is high."
EU Competition Commissioner Joaquin Almunia has said that if
the bank, the world's oldest still in business, cannot raise the
funds in the market, the government would have to convert its
loans into shares in the bank, thus taking it over.
The possibility that the Italian treasury could take a stake
in the bank was already contemplated under the terms of the
government's bailout scheme. This states that if Monte dei
Paschi cannot pay its annual nine percent coupon on the state
loans, it will issue shares to the treasury.
The sheer size of the capital increase demanded by the EU,
the third cash call for the bank since 2008 excluding the
bailout, makes the prospect of Monte dei Paschi falling under
direct government control a lot more likely.
Monte dei Paschi has lost nearly 8 billion euros in the past
two years, and most analysts do not expect it to post a profit
Without the bailout, its core Tier 1 ratio - a measure of a
bank's financial strength - would fall to just 6.5 percent, well
below a minimum of nine percent required by the European Banking
Authority, analysts estimate.
The new restructuring plan is expected to include more cost
cuts on top of the 4,600 jobs and 400 branches the bank is
already shedding in a restructuring drive started by CEO
Fabrizio Viola and Chairman Alessandro Profumo - brought in last
year to turn its fortunes around.
The plan, to be approved on Tuesday, will also feature a
gradual reduction in the bank's 29-billion euro Italian
government bond portfolio, of which just under 30 percent
expires by 2015, sources close to the matter told Reuters.
The bank is the only Italian lender among several European
banks to have received state aid, but its woes have become a
symbol of the deeper troubles of Italy's financial sector: an
economy that has barely grown in more than a decade and opaque
ownership structures often more focused on politics than
Known as "Daddy Monte" in Siena where it is the biggest
private employer, the bank is controlled by a foundation at the
centre of a web of local control and political patronage.
The foundation has had to cut its stake in Monte dei Paschi
to 33.5 percent from 49 percent in the past 18 months to pay
back creditors after running up big debts to keep a grip on the
Two days after Monte dei Paschi approves its plan, three of
the bank's former top managers will stand trial in Siena on
charges they hid from regulators the true nature of a 2009
derivative trade with Japanese bank Nomura, which
prosecutors allege was made to conceal losses.