MONTE dei Paschi’s desperate bid to raise £4.1billion in the private sector to save it from collapse has failed - leaving Italy’s cabinet forced to approve a state bailout.
The bank, saddled with bad loans, needed to raise £4.1billion money by the end of the month to avoid being wound down.
But after its efforts failed, the Italian bank said it would request a capital injection from the state to stay afloat.
Now Prime Minister Paolo Gentiloni said his government had authorised a £17.9billion fund to support the embattled banking sector.
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Founded in 1472, Monte dei Paschi is said to be the oldest serving bank in the world and is also the country’s third largest.
Earlier this year the European Central Bank (ECB) judged MPS to be the weakest bank in Europe with £33bn (€40bn) of bad loans on its books and it failed an EU stress test in July.
Then just a few days ago, the lender announced it only had enough cash reserves to keep it going for another four months, with just £9.27bn (€11bn) of liquidity left.
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The Tuscan lender had hoped to raise the money from private investors, via a debt-for-equity swap and a share placement.
But instead the bank has been granted a massive bailout deal to help prop up the failing sector.
Italy's parliament gave the green light on Wednesday for a £17bn plan to prop up the country's weaker banks, starting with a bailout as early as this week for the third largest, MPS.
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The cash injection is set to cause devastating losses for Italian pensioners and savers, as small investors are estimated to hold some €2billion of bonds.
It is feared the state intervention could trigger a severe backlash against the government and could be politically explosive given that investors are required to bear losses under EU bailout rules.
Italy's debt burden, at about 133 per cent of annual output, is already the second highest in the eurozone after Greece.
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The measure approved by parliament on Wednesday says the state can borrow money to provide "an adequate level of liquidity into the banking system" and can reinforce a lender's capital by "underwriting new shares".
The failure of MPS could threaten the savings of thousands of Italians and could undermine confidence in the country's wider banking sector, saddled with a third of the eurozone's total bad loans.
The bank's shares fell as much as 18 per cent on the liquidity concerns on Wednesday, but cut losses after news that parliament had approved the safety net.
