MILAN • Italy's government is set to rescue Banca Monte dei Paschi di Siena after the world's oldest lender failed to raise €5 billion (S$7.5 billion) from the market, in what would be Italy's biggest bank nationalisation since the 1930s.
Italy will plough as much as €20 billion into its banks, providing both emergency liquidity guarantees and capital injections, as more lenders may seek lifelines soon.
Monte Paschi said in a statement that it will ask the government for a "precautionary" capital increase.
"Overall, it's good news. Finally, we are heading toward a solution," Mr Jacopo Ceccatelli, head of broker-dealer Marzotto SIM, said in a Bloomberg Television interview. "Italy is doing now what other countries have done many years ago to sustain their banking system."
Italy's banks are struggling under the weight of €360 billion of bad loans, a plight that has eroded profitability and undermined investor confidence. A nationalisation of Monte Paschi could be followed by rescues for lenders like Veneto Banca and Banca Popolare di Vicenza.
"We will see if other banks ask for aid," said Italian Finance Minister Pier Carlo Padoan. Banks will be able to request precautionary recapitalisations that would see some bond holders taking a hit, the Italian government said.
One of the world's oldest banks, Monte Paschi failed to raise money from private investors.
The fund-raising plan, a long shot from the start, began unravelling in earnest after voters defeated a constitutional referendum on Dec 4 and Prime Minister Matteo Renzi quit. The situation turned desperate five days later when the European Central Bank rejected Monte Paschi's plea to extend a year-end deadline for the capital raising to Jan 20.
After scouring the globe for investors willing to bet on the bank's turnaround, chief executive officer Marco Morelli could not persuade enough small bond holders to exchange their debt for stock, or pull in a so-called anchor investor.
The industry's next test will arrive in January when UniCredit, Italy's biggest bank, begins selling €13 billion in shares. The lender's non-performing loans amount to about 15 per cent of its assets.
"Paschi's failure and a state intervention will not help other Italian banks, but I don't think this will jeopardise UniCredit's capital increase," said Mr Luca Peviani of investment management firm P&G SGR. "UniCredit doesn't have anything close to Paschi's problems."