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EU wary of Italy's plan to spare Monte Paschi from loan losses: sources

(The October 24 story corrects to make clear other shareholders would also be hit in paragraph 11.)

FILE PHOTO: The logo of Monte dei Paschi di Siena is seen in a bank branch entrance in Rome, Italy August 16, 2018. REUTERS/Max Rossi/File Photo

MILAN (Reuters) - Italy wants to shield Monte dei Paschi BMPS.MI from bad loan losses as it prepares the bailed-out bank for a sale, but faces resistance from European Union competition authorities, two sources close to the matter said.

Italy’s Treasury has a year-end deadline to present an outline of its strategy for getting out of the world’s oldest bank, which was at the forefront of Italy’s banking crisis until a 2017 state bailout was cleared by Brussels.

Under the terms of the bailout, Rome agreed to a tough restructuring plan for Monte dei Paschi and committed to liquidating its 68% stake in the bank by the end of 2021.

But despite disposing of around 30 billion euros in bad loans in recent years, the Tuscan bank still held 16 billion euros in soured debt at the end of June, or 16% of total loans.

This stands in the way of a merger with a rival, several sources familiar with the matter have said, and complicates the Treasury’s re-privatization efforts, with the bank’s future central to the consolidation expected to kick off next year among Italy’s second-tier lenders, which need to cut costs.

Sources have told Reuters the Treasury wants to lower the impaired debt ratio to 5% by spinning off some 10 billion euros in problem loans that would be merged with the assets of Treasury-owned bad loan manager AMCO.

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The proposal entails Monte dei Paschi transferring the loans to AMCO without changes in their accounting value under a ‘common control transaction’, given that the Treasury controls both entities, four sources familiar with the plan said.

However, two of the sources said the EU Commission’s initial reaction had not been positive, which could delay the latest clean-up to the first half of 2020.

The Commission declined to comment.


EU state aid rules require that any transaction be carried out at market values, implying Monte dei Paschi would need to write down its loans in the event of an outright sale.

The proposed scheme shields Monte dei Paschi from writedowns thanks to an accounting arrangement, often used by private companies, whereby the loss would be booked by the Treasury and other shareholders in the bank.

One of the sources said a sale would imply a 1.5 billion euro loss for Monte dei Paschi, hurting the bank’s minority shareholders but not the Treasury, which would benefit from the lower transfer price since its controls 100% of AMCO.

The Treasury fears this could expose it to possible lawsuits from Monte dei Paschi’s minority shareholders, leaving the transfer at book value as the only option, the source said.

Monte dei Paschi values debts unlikely to be repaid in full at just over half their nominal value and its worst performing loans at 38%.

That compares with an estimated average price of 27% of nominal value for soured loan transactions in Italy this year, a Banca IFIS report states.

Additional reporting by Silvia Aloisi in Milan and Francesco Guarascio in Brussels; Editing by Alexander Smith