Italian troubled bank casts shadow over Draghi’s summer vacation

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SIENA (Reuters) – When Italian Prime Minister Mario Draghi returns from his brief summer break, one of the thorniest items on his to-do list will finally be to sort out the problems of the world’s oldest bank, Monte dei Paschi di Siena (MPS).

General view of a branch of Monte dei Paschi di Siena (MPS), the oldest bank in the world, which faces massive layoffs as part of a proposed company merger, in Siena, Italy, on August 11, 2021. REUTERS / Jennifer Lorenzini

The decline of the Tuscan lender has tarnished Draghi’s record since 2008, when, as head of the Bank of Italy, he approved the purchase of rival Antonveneta at an inflated price which analysts say helped its financial collapse.

Thirteen years of scandals, crisis management and state aid to keep MPS afloat have made the country’s fourth lender Rome’s No.1 banking puzzle, with a failure that risks endangering the financial stability of Italy.

The sale of the bank would complete a restructuring of the country’s banking sector which has lost € 250 billion in bad loans over the past five years, as lenders brace for another wave of bankruptcies due to the COVID crisis -19.

The government believed it had found a solution this summer by negotiating a merger with Italy’s top counterpart UniCredit, only to prevent political backlash.

Parties from all sides of Draghi’s National Unity Coalition are protesting against job losses following the planned merger with Milan-based UniCredit.

“The territorial roots of MPS, its workers and its brand must be preserved,” Antonio Misiani, economic chief of the center-left Democratic Party (PD), told Reuters as the battle lines are drawn before what promises to be complex talks.

Politics and MPS have long been linked.

Siena, like the rest of central Tuscany, is a traditional stronghold of the PD, which has often been criticized for contributing to the bank’s unrest by using it as a source of favoritism, jobs and votes.

Right-wing League leader Matteo Salvini, keen to make political capital before a crucial by-election in the city in the fall, calls the MPS a “PD disaster” and opposes the rapprochement.

He would like the State to help MPS to join forces with other medium-sized lenders to counterbalance, with a strong local presence, the “big players” UniCredit and Intesa Sanpaolo.

The PD presented no alternative to the UniCredit merger.

It’s hard to overstate the role MPS played in the history of Siena, where it was founded in 1472 to help the needy with cheap loans. He has long been the town’s largest employer and the locals who traditionally called him “Daddy Monte” watched in horror as he disappeared.

The processions of the annual medieval spectacle of Siena have always made three stops to bow to the institutions of the city: at the town hall, at the archbishopric and at the headquarters of the MPS.

“The people of Siena fell into three broad categories,” Mayor Luigi De Mossi told Reuters. “Those who worked at MPS, those who wanted to work at MPS and those who worked at MPS. “

STATE RESCUE

As Italy went through three deep recessions since 2008, the bank lost 31 billion euros ($ 36 billion) on its loan portfolio for a cumulative net loss of 21 billion euros. A state bailout in 2017 cost taxpayers € 5.4 billion.

A solution will not be cheap.

UniCredit does not want branches of MPS in poor southern Italy and has only agreed to consider purchasing “selected parts” from the smaller partner on the condition that its capital reserves are not affected and its earnings per share increases by at least 10%.

In addition, the State, which owns 64% of MPS, will retain all the legal risks associated with its mismanagement and any loans already in difficulty or that UniCredit considers likely to turn sour.

What UniCredit CEO Andrea Orcel – who as Merrill Lynch’s banker in 2007 advised MPS on the Antonveneta deal – describes as the best M&A option on the table, involves cuts to State-funded jobs that sources say could reach a third of MPS’s 21,000 employees.

Andrea Granai, head of a trade union section in Siena, says his four phones ring “from morning to night” with calls from fearful MPS workers. “The more job losses there are, the worse the consequences will be for the government and all the parties that support it,” he warned.

So how will Draghi square the circle? So far, he has tried to keep a safe distance by claiming that he is not personally following the case and by diverting questions from reporters to the Treasury.

This can be increasingly difficult as MPS issues rise to the top of its government’s agenda and make headlines across the country.

The UniCredit deal could cost Italian taxpayers more than € 5 billion in state support for layoffs, tax incentives and a commitment to strengthen the capital of the merged bank, while MPS’s future fuels the tensions within Draghi’s ruling majority.

AFFAIR ALMOST OVER?

The Italian Treasury sees a merger with a healthier counterpart as the only way to prevent the MPS from becoming a permanent drain on state finances and two people close to the negotiation said a final deal was not just a matter of technical details.

The due diligence phase officially runs until early September, but at least two or three more weeks may be needed, a third source said, with a fourth person adding that a deal is unlikely until October.

Politicians, however, demand to know from Draghi the exact price of the merger.

The fact that PD leader Enrico Letta, who does not have a seat in parliament, chose the next by-election in Siena to try to get one, raises the political stakes even more. He says he will quit his post as party leader if he loses.

The seat, which will be contested on October 3-4, was left empty when former economy minister Pier Carlo Padoan, also of the PD, was appointed president of UniCredit in April.

Salvini’s League and its right-wing ally the Brothers of Italy sense the chance to deliver a fatal blow to the left.

Their common candidate against Letta is a local wine producer, Tommaso Marzi, who owns 220 hectares of vineyards in the Sienese countryside and describes the PD leader as a foreigner only interested in the politics of national power.

In the sunny streets of Siena, semi-deserted during the August holidays, locals ignore by-elections and say all they care about is saving jobs.

“It is clear that the bank cannot stand on its own,” said the mayor of Siena. “But a solution must protect workers and suppliers. Politics took a lot of MPS and Siena, now it’s time for us to get something back.

($ 1 = 0.8527 euros)

Additional reporting by Giuseppe Fonte; Writing by Gavin Jones and Valentina Za; Editing by Elaine Hardcastle

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