MILAN (Reuters) - UniCredit has heavily written down the value of its 700 million euro ($756 million) investment in Italy’s bank rescue fund and other investors are likely to follow suit, sources told Reuters, complicating efforts to stabilize the nation’s banking sector.

FILE PHOTO: Unicredit's bank logo is pictured on block notes and pens at the headquarters in Milan, Italy, February 9, 2016. REUTERS/Stefano Rellandini/File Photo

Italy biggest bank has cut the value of its investment in the Atlante fund by significantly more than a third on its books, according to two sources familiar with the matter.

The move is part of its plan to clean up its balance sheet before it taps the market for 13 billion euros in a share issue next week.

By writing down the stake, UniCredit is indicating that it does not believe it will make money on the investment it made into the state-managed fund created to recapitalize a number of failing Italian banks and help the industry offload bad loans.

A source at another bank estimated UniCredit’s writedown could be closer to 70 percent.

Atlante declined to comment.

Intesa Sanpaolo, which together with UniCredit is Atlante’s biggest investor, on Friday said it had written down the value of its stake in the fund by 33 percent.

A group of about half a dozen other banks that have invested in Atlante have held a series of meetings in recent days to discuss the scale of their own possible writedowns, said another source with direct knowledge of the talks. They are also likely to write down their investments by 30 percent, according to the source, who did not name the lenders.

Atlante executives have acknowledged that the value of investments has fallen but have said the fund created last April has an investment horizon of five years and aims to create value for its backers over that period.

The losses, just 10 months into a government-orchestrated campaign to shore up the industry, suggest that mending the sector has become a far more painful task than expected by many industry and government officials.

UniCredit’s move is also likely to discourage the private sector from pumping any more money into Atlante to bail out weaker banks.

That in turn could put more pressure on Rome, increasing doubts over whether 20 billion euros set aside by the government to stabilize the euro zone’s fourth-biggest banking system will be enough, say analysts. It has already earmarked about a third of that to rescue just one lender, Monte dei Paschi di Siena.

“The 20 billion euros the government has set aside is starting to look like small beer,” said Milan-based banking analyst Vincenzo Longo of brokerage IG..

The finance ministry declined to comment on the Atlante writedowns or whether the government was under more pressure as a result.

Bank of Italy Governor Ignazio Visco said on Saturday the 20 billion euros were enough to recapitalize other banks after Monte dei Paschi. Economy Minister Pier Carlo Padoan has also said the money is sufficient to address the needs of weaker lenders, adding the overall banking system is solid.

The fund writedowns are not the only new problem facing the banking sector.

UniCredit has separately sold 18 billion euros of its bad loans at an average price of just 13 cents to the euro, said the first two sources, who declined to be named because the investment writedown and loan pricing are confidential.

That price - little more than a tenth of the loans’ gross nominal value - sets a tough market precedent for other banks looking to offload their own piles of non-performing loans without incurring losses that could dangerously deplete their capital. These include banks being helped by Atlante.

Italian lenders are under pressure from the European Central Bank (ECB) to offload their soured debts, which now stand at 356 billion euros - a third of the euro zone’s total - following the financial crisis and a deep recession.

They have held on to them because they have been unwilling to sell at levels attractive to buyers, which would mean taking losses and burning through capital. On average, Italian banks still price their bad loans at just over 40 cents to the euro.

Concerns about capital needs have sent Italian banking shares down 16 percent over the past year.

MORE CASH NEEDED

Last spring, the government convinced around 70 banks and other financial institutions to put money into Atlante.

The fund was set up as a backstop to recapitalize two Veneto-based banks which were struggling to raise funds on the market, as the government feared their weakness could spread contagion to other lenders and trigger a sector-wide crisis.

But it was also meant to act as a private equity fund, holding out the promise of annual returns for its investors of 6 percent.

The fund said this week that independent auditor Deloitte had written down Atlante’s 3.5 billion euro investment in the Veneto banks by a quarter.

Atlante now owns the two Veneto banks it rescued last year, Banca Popolare di Vicenza and Veneto Banca, but the lenders need more capital, estimated by banking analysts at 3 billion euros at least.

UniCredit and Intesa Sanpaolo say they have no intention of putting more money into the fund.

Italian sovereign wealth fund Cassa Depositi e Prestiti (CDP), another major investor in Atlante with 500 million euros, does not have to disclose the value of its holding as it is not listed on the market. But it too is feeling the pinch.

“Everyone seems to think CDP has bottomless pockets. The fact they did not get involved with the rescue of Monte dei Paschi shows that is not the case,” said a source close to CDP.

The unwillingness of these players to invest further makes it more likely that the government will have to pump money into the two Veneto lenders, according to banking sources and a government official.

The finance ministry declined to comment.

UniCredit’s sale of 17.7 billion euros of bad loans for an average price of 13 cents to the euro is well below another recent deal. Atlante offered 32.5 cents to the euro for 2.2 billion euros of soured loans offloaded by three small banks rescued in 2015 in a previous government scheme.

The market value of soured debts can vary, however, depending on the quality of collateral. The sources familiar with UniCredit’s loans sale said its portfolio was diverse, with prices ranging from as little as 6 cents to more than 50 cents to the euro.