Italy bids to borrow €20 billion for ailing banks

Italy's government is to seek parliamentary approval to hike national debt by up to 20 billion euros (S$20 billion) to cover any eventual operation to stabilise the banking system.VIDEO: REUTERS

ITALY (REUTERS) - With a national debt pile at 133 per cent of GDP, the last thing Italy might want is yet more debt.

But that's exactly what it might need to save its ailing banks, according to its new prime minister.

"We have begun an operation that I would define as a 'saving of savings'. The cabinet meeting approved a document to go before parliament which authorizes the government to use funds," said Italian Prime Minister Paolo Gentiloni.

20 billion euros(S$20 billion) is the sum in question.

Sources telling Reuters that at least 15 billion of that is earmarked for Monte dei Paschi and several other smaller banks.

In a sector burdened with around 350 billion euros of non-performing loans.

Independent market analyst Jeremy Bastone-Carr said, "Italian bank equity amounts to about 220 billion euros so there's a big gap between the two numbers and the extent of that gap indicates the extent of the Italian bank sector vulnerability, so 20 billion in that context is by no means the whole story."

Paschi has given itself until Thursday to conclude a five-billion euro cash call.

If its own rescue plan fails, a government bailout for Paschi may - under ECB rules - mean losses for investors.

Something Gentiloni's week-old government is desperate to avoid - but amid questions over, ultimately, what it can or will do.

"It's hard to see where the strong policy support is going to be for the banking sector in general and for Monte dei Paschi. I think this is going to require many regional authorities pulling together rather than just Italy being allowed to do it by itself," added Mr Bastone-Carr.

And already the price is potentially high.

20 billion euros more than one percentage point of GDP and likely to weigh on government finances next year.