Monte Paschi's new capital needs could force nationalization

By Silvia Aloisi and James Mackenzie

MILAN/ROME (Reuters) - The prospect of nationalisation looms large for Italy's Monte dei Paschi di Siena now that the beleaguered lender needs to raise more than twice as much capital as originally planned to meet new European Union requirements.

Italy's third largest bank said on Monday it would approve a tougher than initially expected restructuring plan on September 24 to comply with European Union demands, confirming investor fears it is struggling to emerge from the euro zone debt crisis.

The bank's statement came after the EU told the bank over the weekend to carry out a 2.5 billion euro ($3.3 billion) capital increase if it wants EU approval of a 4.1 billion euro state bailout it received earlier this year.

The required cash call is more than twice the 1 billion euros capital increase initially planned by the bank.

The latest financial woes compound ongoing legal troubles the 540-year-old lender is facing over its expensive acquisition of rival Antonveneta in 2008 and loss-making derivative trades the Siena-based bank made in the deal's aftermath.

Though the bank is the only Italian lender among several European banks to have got state aid - its woes have become a symbol of the deeper troubles of Italy's financial sector: an economy that has not grown in more than a decade and clumsy ownership structures often more focused on politics than business.

Known as "Daddy Monte" in Siena where it is the biggest private employer, the bank is controlled by a foundation at the centre of a web of local control and political patronage.

Under the terms laid out by EU Competition Commissioner Joaquin Almunia on Saturday, if the Monte dei Paschi fails to raise enough funds, the Italian government would have to convert its loans into shares in the bank.

The possibility that Rome might take a stake in Monte dei Paschi was always on the cards under the terms of the government bailout. The rules of that aid package said that if the bank cannot pay a 9 percent annual coupon on the state loans in cash, it will have to issue shares to the treasury.

But the sheer size of the capital increase requested by Brussels - which matches Monte dei Paschi's current market capitalization - makes the prospect of the bank falling under direct state control more likely.

"There's no chance on the planet they can raise 2.5 billion euros on the market within 12 months. They're heading towards nationalisation," Giuseppe Bivona, a former Goldman Sachs and Morgan Stanley banker who has been advising consumer group Codacons in a series of lawsuits against the bank, told Reuters.

SHARES HIT

The stock, which was worth 3 euros at the time of the ill-fated Antonveneta buy and has lost 60 percent of its value since the euro zone crisis took its toll on Italian lenders two years ago, fell 2.9 percent to 0.21 euro on Monday.

While the possibility of a white knight cannot be ruled out, Monte dei Paschi's Chairman Alessandro Profumo and its CEO Fabrizio Viola - brought in last year to turn the bank around - have repeatedly said no new investors have stepped forward yet.

"It will be difficult to find someone to shell out all that money," a Milan trader said.

Monte dei Paschi's biggest shareholder is a cash-strapped foundation, a charitable entity with close ties to local politicians in Siena, home to the bank's ornate headquarters, and the surrounding Tuscany region.

The foundation has had to cut its stake in the bank to 33.5 percent to pay back big debts it had taken on to keep its grip on the lender. It is looking to further reduce its holding and has already ruled out taking part in any new cash call.

Some analysts said Monte Paschi's best option to avoid nationalisation could be a debt-to-equity swap, converting subordinated bonds it has already issued into shares. Monte dei Paschi has 5.4 billion euros of such outstanding debt, according to a financial source.

"That would be a hit for bond holders and also for shareholders, but at least it would be fairer on taxpayers and it would be in line with the new bail-in guidelines for banks," said Fabrizio Bernardi, analyst at Fidentiis.

The biggest outstanding subordinated bond - for about 2 billion euros and expiring in 2018 - was sold to retail investors to help fund the Antonveneta buy.

JOB CUTS, BRANCH CLOSURES

With investors wary about potential problems at the bank, which has announced 4,600 job cuts and closed 400 branches, it may be hard to attract private money, raising a serious problem for Prime Minister Enrico Letta.

Italy, struggling to control its 2 trillion euro public debt and looking to boost revenues through privatizations, can ill-afford to take on additional burdens as a shareholder. But it may end up with little choice.

The country has so far managed to avoid nationalizing any of its banks in the wake of the financial crisis but it has faced heavy pressure from organizations including the International Monetary Fund to strengthen its banking system.

As well as the capital hike, the Monte dei Paschi plan also includes new cost cuts and a gradual reduction in the bank's huge government bond portfolio which totaled 29 billion euros at the end of June, although the economy ministry said it would not affect its role as a market operator.

The ministry said it expected the EU approval process to be completed within two months.

($1 = 0.7600 euros)

(Additional reporting by Valentina Za, Lisa Jucca, Stephen Jewkes and Isla Binnie; editing by Philippa Fletcher)

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