Fears that the Italian government will have to prop up Monte dei Paschi di Siena (MPS) are mounting after the European Central Bank refused to give the world’s oldest bank more time to find major investors to back a €5bn (£4.2bn) cash injection.

Trading in the troubled bank’s shares was repeatedly halted on the Italian stock exchange on Friday. The MPS share price closed 10% lower as the bank’s board held a meeting that had already been scheduled before the reports that the ECB had rejected its calls for an extension to the deadline to bolster its financial position.

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The ECB refused to comment and gave no formal confirmation to MPS but its decision may have closed the door to a private sector solution, under which major investors including the sovereign wealth fund of Qatar would pump billions into the bank.

But MPS said on Friday night that its board would next meet on Sunday night and that it was pressing on with its private sector solutions

Even so there were concerns that the Italian government would still have to embark on a “precautionary recapitalisation” of the bank and potentially impose losses on retail investors who hold €2.1bn of the bank’s bonds. Under new EU rules, taxpayer money cannot be used unless bondholders take losses first. A precautionary recapitalisation takes place before a bank becomes insolvent.

ECB officials had told Reuters they hoped the refusal to extend the deadline would pave the way for similar support for other Italian banks which are struggling with €360bn of bad loans.

It appeared to leave the Italian government with little option but to embark on a “precautionary recapitalisation” of the bank and potentially impose losses on retail investors who hold €2.1bn of the bank’s bonds. Under new EU rules, taxpayer money cannot be used unless bondholders take losses first. A precautionary recapitalisation takes place before a bank becomes insolvent. The bank has capital above regulatory minimums.

ECB officials told Reuters they hoped the move would pave the way for similar support for other Italian banks, which are struggling with €360bn of bad loans.

The long-running crisis appeared to be coming to a head just days after Wednesday’s resignation of Matteo Renzi, the centre-left prime minister, prompted by his defeat in a referendum on constitutional reforms last weekend.

The fresh political uncertainty may have put off private investors who were crucial to the reform plan put in place after MPS was named the worst performer in annual stress tests on 51 major lenders across the EU.

The Italian finance ministry said it would not provide detailed comment until MPS responded to the ECB decision and it still believed such a capital increase was an “option” and was “waiting to understand whether it can work or not”.

Pier Carlo Padoan, Italy’s finance minister and a possible contender to replace Renzi, held a meeting earlier on Friday with the bank’s chief executive, Marco Morelli, and leaders of the banking consortium that have been working on the capital infusion for MPS.

News of the ECB’s decision coincided with ongoing discussions between Italy’s president, Sergio Mattarella, and political leaders over the appointment of a new prime minister who could face the decision of whether to impose losses on MPS bondholders.



With the recapitalisation deal in doubt, and a possible government rescue on the cards, the task of leading the country through a potentially contentious period may fall to Padoan, Paolo Gentiloni, the foreign minister, or even Renzi himself. New elections could be called as early as the spring.

Amid the uncertainty, the price of MPS’s bonds plunged. Tomas Kinmonth, a fixed income strategist at ABN Amro, said: “The market is trying to second guess what the plan is. If it’s private sector, the bondholders are safe”.

Some bondholders had agreed to a debt-to-equity swap, which was part of the private sector solution, and it was not clear what their status would be if the deal no longer took place.

The Eurosceptic Five Star Movement, the second most popular party in Italy, said the government needed to step into the fray. “MPS can only be saved by state aid in order to avoid bail-in rules [that hurt] small savers, as happened a year ago,” the party’s MEPs said in a statement on founder Beppe Grillo’s blog. “This is not the time to fear the European Union and a possible infraction procedure. The consequences of a disordered bail-in would be disastrous to say the least, almost apocalyptic if one considers the size of MPS.”

They added that it was time to “slam our fists at the table in Brussels ... while not giving a damn about the deficit”.

The state of the banking sector will be crucial for any recovery in the Italian economy, which has an unemployment rate of 11% and where living standards have barely grown since the country became a founder member of the single currency 15 years ago.

Analysts at Deutsche Bank said: “We believe that Italy made a major mistake in letting the banking sector slide into the current fragile condition without intervening while other euro area peers acted.”