(Adds background, estimate of damages)
By Francesca Landini
MILAN, Nov 17 (Reuters) - A group of bondholders challenged Italy’s rescue of ailing bank Monte dei Paschi di Siena , suing the lender over the cancellation of their investments and calling for the bonds to be reinstated.
A representative of holders of the floating-rate bonds, a series maturing in 2099 and known as FRESH, said in a statement on Friday a law suit had been filed at a Luxembourg court, seeking 1 billion euros ($1.2 billion) in damages.
“While the bondholders remain open for discussions, they cannot stand by and allow for arbitrary decisions, made with no fundamental legal basis, to compromise their rights as bondholders and to undermine future confidence in the Italian and European banking sector,” the group said in a statement.
Some of the bank’s debts have been cancelled as part of a rescue that was led by the government and approved by the European Union. The bondholder group said the FRESH bonds, issued through a third party and convertible into the bank’s shares, had been cancelled as part of that rescue.
Monte dei Paschi was not immediately available for comment.
Under EU rules designed to protect taxpayers, state bailouts of banks are only allowed on the condition that investors first bear some losses, especially those who purchased shares or riskier forms of debt such as convertible or unsecured bonds.
In July, the Italian government committed 5.4 billion euros to rescue Monte dei Paschi, the world’s oldest bank and Italy’s fourth-largest lender, to prevent a wider banking crisis.
Banking analyst Vincenzo Longo, of brokerage IG, said the legal action could create some uncertainty but was unlikely to present a major obstacle to Monte dei Paschi’s recovery.
Monte dei Paschi shares fell initially but recovered to stand 4.3 percent higher in morning trade on Friday. The Italian bank sector index was down 0.75 percent.
“I don’t see it as a major concern because the bank has already passed through many difficulties,” Longo said.
The Italian banking focus has turned to Banca Carige which said on Thursday it had failed to secure underwriters for a 560-million-euro share issue, a key European Central Bank demand for the lender to safeguard its future. $1 = 0.8482 euros) (Reporting by Francesca Landini; Editing by Mark Bendeich and Adrian Croft)