The colossus with the feet of clay that was Monte dei Paschi di Siena

9 March by Chiara Filoni

Photo by Paolo Perini (CC Flickr)

A little over a year after the bail-in |1| of four small banks in central Italy, the country’s banking problems are far from solved. On 23 December, Italy awoke to €20 billion in additional public debt on its balance Balance End of year statement of a company’s assets (what the company possesses) and liabilities (what it owes). In other words, the assets provide information about how the funds collected by the company have been used; and the liabilities, about the origins of those funds. sheet: a hangover from which they will not be able to recover if the authorities fail to enact binding regulations regarding banking activities.

According to Banca d’Italia, the bail-in of the four small |2| Italian banks (Banca delle Marche, Banca Popolare dell’Etruria e del Lazio, Cassa di Chieti and Cassa di Risparmio di Ferrara) begun in December 2015, ultimately cost stakeholders and bondholders €7 billion. State compensation has been provided to depositors with less than €35,000 in annual income or who had investments of less than €100,000, and who had been “encouraged” by the bank to exchange their deposits for bonds. These holders will be able to recover 80% of the value of the bonds, thus partially escaping the bail-in losses.

It has been only after this rescue (the first time that a bank’s customers are paying for a bank’s failure) that the Italian press and public opinion have discovered the urgent need to solve the problems related to the explosion of toxic loans and the dissolute management of banks, as if these two factors were new trends.

Before we dive into the “thrilling” story of Monte dei Paschi di Siena (MPS), on which much ink has been spent in recent months due to its risk of failing, the current situation of the national banking system must be considered.

Monte dei Paschi is not the only bank to worry the political and financial elites of the country, despite its strategic importance in the Italian and international banking systems.

After the 2015 bailout, two other small banks - Banca Popolare di Vicenza and Veneto Banca - were saved thanks to the intervention of a private fund with public participation (Fondo Atlante) and many others (like Carige) are still experiencing great economic difficulties, mainly because of deteriorating credit. The International Monetary Fund IMF
International Monetary Fund
Along with the World Bank, the IMF was founded on the day the Bretton Woods Agreements were signed. Its first mission was to support the new system of standard exchange rates.

When the Bretton Wood fixed rates system came to an end in 1971, the main function of the IMF became that of being both policeman and fireman for global capital: it acts as policeman when it enforces its Structural Adjustment Policies and as fireman when it steps in to help out governments in risk of defaulting on debt repayments.

As for the World Bank, a weighted voting system operates: depending on the amount paid as contribution by each member state. 85% of the votes is required to modify the IMF Charter (which means that the USA with 17,68% % of the votes has a de facto veto on any change).

The institution is dominated by five countries: the United States (16,74%), Japan (6,23%), Germany (5,81%), France (4,29%) and the UK (4,29%).
The other 183 member countries are divided into groups led by one country. The most important one (6,57% of the votes) is led by Belgium. The least important group of countries (1,55% of the votes) is led by Gabon and brings together African countries.
believes that non-performing loans (loans whose repayments have not been made 90 days after the deadline) now represent the biggest burden on the Italian banking system and amount to €360 billion |3|, or 18% of total outstanding loans.

On 6 September 2016, Banca d’Italia assessed the members of the Board of Directors and the managing director of Cassa di Risparmio di Cesena a fine of €950,000 due to a lack of “control mechanisms”, which was subsequently recapitalised by other Italian banks to the tune of €280 million.

Il Sole 24 ore, the newspaper of Confindustria (the organization representing entrepreneurs), has written of the dramatic situation faced by Italian banks (small and large) which are being called on to contribute €8.7 billion for the losses incurred by troubled banks, in accordance with the new rules imposed by the European Union. |4|

This reality demonstrates the inconsistency of statements by the Minister of the Economy, Pier Carlo Padoan, who - mistaking dreams for reality - stated a few days agoThis policy has discredited the banking system, feeding a negative perception of it. [..] Monte dei Paschi has not suffered losses to its holdings.” And even predicted that “the system is about to turn the page and it is not unlikely that series of bank consolidations, a clearing of balance Balance End of year statement of a company’s assets (what the company possesses) and liabilities (what it owes). In other words, the assets provide information about how the funds collected by the company have been used; and the liabilities, about the origins of those funds. sheets and a return to growth will begin soon”. Let’s take a closer look at this story.

The history of Monte dei Paschi di Siena’s indebtedness

Banca Monte dei Paschi di Siena is the third largest bank in Italy (based on the number of branches) and the oldest in Europe. Its story begins in 1472, however the last twenty years have been marked by a mixture of patronage, risky operations, and collusion between the spheres of politics and finance, the latter always showing great attention to their own interests and very little to those of the pubic. A story that never has the bank officials paying for their own mistakes.

In 2007, the bank completed one of its riskiest projects: the purchase of the bank Antonveneta, which was owned by the Spanish bank Santander. This was not well-advised: Monte dei Paschi bought the bank for €9 billion, or 3 times the amount of the bank’s capital. The purchase was made with derivative transactions (which would prove to be a financial failure), a capital increase of €5 billion and a loan of €1 billion euros. |5|

A year later, the financial crisis had already spread across the entirety of the European continent. The first intervention by the State, in 2009, was through Tremonti bonds (named after the then Minister of the Economy); the bonds were issued by four Italian banks and bought by the State in the amount of €4.05 billion. Monte dei Paschi issued €1.9 billion worth of these bonds.

The crisis continued and the State again had to intervene a few years later in 2012, this time through the use of Monti bonds (named after the Prime Minister at the time), and another state loan of €3.92 billion which was partially repaid in July 2014 (€3 billion) with another payment in June 2015. The €3.92 billion was the equivalent of €2 billion in new loans and €1.92 billion in converted Tremonti bonds. Interestingly, part of the interest Interest An amount paid in remuneration of an investment or received by a lender. Interest is calculated on the amount of the capital invested or borrowed, the duration of the operation and the rate that has been set. on the new loan was to be converted into shares, which meant that the government became a 4% shareholder in 2015.

From then on, the bank started to look more like a sinking ship, abandoned by those who could (by selling their stocks and bonds) while the others were left to sink.

In addition, as a counterpart to the Monti bonds, a cost-rationalization plan was approved by the bank’s executives in June 2012: over 4,600 jobs were phased out and 400 branches were closed.

Further alleged missteps by the bank were a series of loans that the bankers made to friends without due diligence: €45 billion in toxic loans including €28 billion in non-performing loans. A further example occurred in October 2014 when the Bank’s President, Giuseppe Mussari, and Director General, Antonio Vigni, were each sentenced to 3 years and 6 months in prison for “obstruction of the work of the Oversight Authority” looking into the matter of Alexandria and Santorini derivatives Derivatives A family of financial products that includes mainly options, futures, swaps and their combinations, all related to other assets (shares, bonds, raw materials and commodities, interest rates, indices, etc.) from which they are by nature inseparable—options on shares, futures contracts on an index, etc. Their value depends on and is derived from (thus the name) that of these other assets. There are derivatives involving a firm commitment (currency futures, interest-rate or exchange swaps) and derivatives involving a conditional commitment (options, warrants, etc.). , and which could have caused the bank to lose around €750 million, despite their initial AAA rating. These derivatives, which had allowed the bank to hide the losses of other risky transactions, lost their value on the stock exchange within a few years and turned out to be a time bomb for MPS.

The July 2016 stress test |6| was not reassuring (which was not surprising!). The test results showed the bank had a €2.1 billion deficiency: the worst result in Europe!
To remedy its failure, free itself of toxic securities and move forward, the bank launched a plan to increase capital through the issuance of shares and the voluntary conversion of bonds into securities: in effect, the bonds are converted into cash (thus avoiding a loss for shareholders) and then into shares (which increases the capital of the bank but does not ensure that the securities will not lose value in the future). The bank has until December 31 to complete this process and recoup €5 billion in order to have a 8% equity Equity The capital put into an enterprise by the shareholders. Not to be confused with ’hard capital’ or ’unsecured debt’. . One small problem: many of the institutional investors Institutional investors Entities which pool large sums of money and invest those sums in securities, real property and other investment assets. They are principally banks, insurance companies, pension funds and by extension all organizations that invest collectively in transferable securities. that could have contributed to the success of the operation have not accepted the deal. Why is that? The bank continues to incur losses on the stock market, due to the bad loans, which, as said above, account for 34.8% of the total assets (€136 billion), namely €45 billion. In the year 2016, the value of its shares on the stock market lost 86%. In November 2016, the Milan Stock Exchange valued its shares at €0.239. Executives have therefore implemented Plan B...

The new rescue

On 23 December 2016, Italy woke up to a new announcement: Parliament’s authorization of an injection of public funds to combat the bank’s problems. Was this a reversal (after the introduction of the new European bail-in directive) or the new European norm?

In actuality, the Italian authorities and the bank’s directors used a loophole in the new European regulation which allows for state aid in a case of a “risk of systemic crisis”, in other words, if one bank endangers the entire banking system. In any circumstance, the intervention must be “preventive”, i.e. public funds cannot be used to cover losses which have already occurred or which may crystallize in the short term and be “temporary”, giving the bank time to remedy its immediate situation.

Do these two conditions apply to Monte dei Paschi?

By a twist of fate, Monte dei Paschi is one of four Italian banks, according to the complex classification invented by the European and international regulatory bodies, considered “too big to fail” therefore the first condition applies.

However, as regards the second condition, it is clear that the first two of the government bank bailouts were not preventive recapitalizations, and probably not temporary, as the bank has not seemed to learn from its past mistakes, and will repeat its behaviour.

€20 billion in public debt as a “liquidity Liquidity The facility with which a financial instrument can be bought or sold without a significant change in price. guarantee to restore the medium- and long-term financing capacity for the entire national banking system”, is to be borrowed from the financial markets. Of this 20 billion, a good portion will be destined for the head of the class: MPS. 
The bank’s losses currently amount to €8.8 billion, and will be distributed as follows: €4.6 billion borne by the State (which will become the majority shareholder of the bank) and the rest borne by the shareholders and subordinated holders of shares and bonds, amounting to €4.2 billion.

Added to the bail-out are certain bail-in conditions: the bonds will be converted to market shares (this time not on a voluntary basis), and at lower prices when compared to their purchase value. For institutional investors, there will be no reimbursements. For the 40,000 small investors - most of whom were “bamboozled” by the bank into converting their deposits into bonds (totalling about €2.2 billion), a reimbursement (for which the percentage has yet to be decided) is foreseen, as was the case with the 4 small banks in 2015. |7| The State’s contribution will probably be much higher in the end.

The State will ultimately hold 70% of the shares of Monte de Paschi. A new “social” plan already foresees cuts to and downsizing of the industry: 600 jobs and 175 branches will disappear before April 2017, out of a total of 2,900 jobs and 500 branches.

What conclusions can be drawn from these events?

Some Belgian economists (and they are not alone), consider the current Italian banking crisis the biggest threat to the European Union of recent times. These economists are most likely concerned by the “risky Italian portfolio” held by Dexia, which as of September 30, 2016 was exposed to €27.4 billion in Italy – 16% of its total exposures.

Of course, there is cause for concern when looking at the situation of Monte dei Paschi, but not for the same reasons as those of these economists: in the Belgian case, this portfolio could mean that the guarantees Guarantees Acts that provide a creditor with security in complement to the debtor’s commitment. A distinction is made between real guarantees (lien, pledge, mortgage, prior charge) and personal guarantees (surety, aval, letter of intent, independent guarantee). made by the Belgian State to Dexia could be triggered, which would give rise to a new public bank rescue.

More generally, if the new bail-in regulation does operate as intended, in other words to make those responsible for the crisis pay, it also provides a means to protect the larger banks: “every law contains the means to circumvent it,” says an Italian proverb.

Despite, in 2015 and 2016, small Italian banks, as well as banks in Iceland and Cyprus, being allowed to fail, as they were not highly exposed abroad, this will not be allowed to happen for major systemic banks Systemic bank
Systemic banks
Certain banks are known as systemic because of their size and the danger that would be incurred for the stability of the banking system on a global scale should they fail.
such as Monte dei Paschi or Deutsche Bank, due to the risk of a snowball effect that is posed. |8|

The flip side to this is that once again the State (that is to say, the members of the public) will come to the aid of the financial sector in order to cover these losses. And in the case of Monte dei Paschi, this is will be for the third time.

Monte dei Paschi also has a high exposure through government securities (about €20 billion), which will mean further losses, and which will add €20 billion to the public debt in 2017 (the equivalent of the cost of the public intervention, and does not include interest).

Added to this are the branch closures and job losses affecting nearly 1,000 people.

We do not know the recipients of the rest of the loan but we imagine that other banks, most probably the most important, hide difficulties: we have not yet been granted this knowledge.

Similarly, we do not know the fate of Monte dei Paschi, which is now 70% nationalized: some newspapers have reported that if the bank cannot absorb these losses despite the rescue, it will most likely be sold abroad with the State divesting itself of the bank’s capital. Stay tuned.

What is certain is that an audit of the bank (and not only this bank) is urgently needed in order to finally end the socialization of losses. Additionally, a radical change to the way the world of finance operates is more than necessary, for example starting with the socialization of banks as proposed by the Belgian “Belfius est à nous” campaign: now that Monte dei Paschi is nationalized, it belongs to the Italian citizens and social movements that can propose its socialization in order to recover and manage its healthy assets for the general interest and well-being of the public.

Some data on the Italian economy in 2016

Gross Domestic Product
Gross Domestic Product is an aggregate measure of total production within a given territory equal to the sum of the gross values added. The measure is notoriously incomplete; for example it does not take into account any activity that does not enter into a commercial exchange. The GDP takes into account both the production of goods and the production of services. Economic growth is defined as the variation of the GDP from one period to another.
1.672 billion euros
Public debt 2.224 billion euros
Public debt (%) 133% of GDP
Interest on the debt (%) 100% of GDP
Expenditures for interest on the debt (%) 4.3% of GDP
Military expenditure (%) 1.9% of GDP
Health related expenditures of the State (%) 7.2% of GDP
Social services State spending (%) 21.40% of GDP
2009 bank rescue € 4.05 billion
Rescue of Monte dei Paschi in 2013 2 billion euros
December 2016 rescue 20 billion euros

Thank you to Aline Fares, Nathan Legrand and Claude Quemar for their assistance.
Translated by Mike Krolikowski


|1| The bail-in or internal bailout is the second pillar of the banking union, the new European regulations regarding the management of banking crises, which aims to end taxpayer bank bailouts by involving the bank’s creditors:

|2| The four banks together accounted for 1% of the national deposit market

|3| J. Garrido, E. Kopp, A. Weber, Cleaning-up Bank Balance Sheets: Economic, Legal, and Supervisory Measures for Italy, IMF Working Paper, July 2016, pg., available at:

|4| The rescue was made via the single resolution fund and the Interbank Fund for guardianship of deposits. For more information, see


|6| This is a simulation in which a severe economic crisis with an impact on property prices, sovereign bonds, financial markets and unemployment is hypothesized. To pass the test, the ratio between capital and the bank’s assets must be at least 5.5% after three years of economic crisis. The ECB – along with the new European regulations - is now the most important pillar of banking supervision by Eurozone members.

|7| Ibid.

|8| Before its recent and serious financial difficulties, Deutsche Bank was fined 14 billion euros (which it cannot afford) by the U.S. Department of Justice for its subprime mortgage activities. Its balance sheets account for more than half of German GDP.



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