July 28, 2013 8:31 pm

Brussels gets tough on Monte dei Paschi

Brussels is demanding that Monte dei Paschi di Siena be subjected to tougher penalties before it approves the €3.9bn state bailout of Italy’s third-biggest bank by assets.

The EU’s competition enforcer told Italy that the proposed restructuring plan for the 500-year-old lender is too soft on executive pay, cost-cutting and treatment of creditors, according to private correspondence seen by the Financial Times.

Joaquín Almunia, the EU commissioner who polices bank bailouts, told Italy’s finance minister Fabrizio Saccomanni that without “urgent” changes he would launch a full-blown EU probe, a six-month process that could lead to imposed penalties or the forced repayment of the €3.9bn state loans.

In a letter dated July 16, Mr Almunia wrote that his foremost concern was with the viability of the bank, but added: “In order to allow the bank to restore its viability the existing restructuring plan needs still to be improved.”

Specific concerns listed include cost-cutting and expected profitability, the lender’s prudence in setting money aside for losses, its trading activities, exposure to sovereign risk, policies on buying back debt and excessive executive pay.

Close EU scrutiny of MPS could reignite concerns about the Italian banking system. While Rome extended billions in loans that can be converted to equity, it has doggedly avoided nationalisation of MPS since corruption scandals exploded 18 months ago about the bank’s former management.

Big hitches in securing EU approval for the state loans to MPS would put a strain on Italy’s coalition government as the leading Democratic party has close ties to the bank. The Bank of Italy, led by Mario Draghi until his move to the European Central Bank in 2011, is also facing questions over the quality of its supervision.

In his letter, Mr Almunia disputes as “considerably inflated” a previous estimate from Mr Saccomanni that 5,000 jobs would be lost if MPS were forced to comply with conditions forcing the bank to axe its proprietary trading operations and gradually write down sovereign exposure to €320m.

He also challenges Rome’s suggestion that the prospective end of the ECB’s cheap funding under its longer-term refinancing operation (LTRO) is “an additional burden” that should be factored into the tally of state aid penalties.

“This so-called commitment is a description of a factual situation and does not represent any state aid procedure-specific constraint for the bank,” Mr Almunia said. “It would be more relevant . . . that the bank clarifies and commits to the reductions which will be necessary for viability once the LTRO funding is no longer in place.”

Another point of concern is the proposed continuation of discretionary coupon payments to certain bondholders, which would normally be banned as a condition of EU approval for state support.

Mr Almunia insists outflows to hybrid and junior debt holders are “prevented to the maximum extent legally possible” and specifically mentions MPS’s outstanding upper tier 2 subordinated bonds.

One significant debt holder is the Fondazione Monte dei Paschi, a charitable foundation that controls MPS and whose net wealth has dramatically fallen since the lender hit financial trouble.

Brussels is also taking issue with proposed executive pay packages “that are well in excess of what has been accepted by the European Commission in comparable cases”. Mr Almunia says the commission typically requires total pay to be capped and mentions a benchmark of 15 times average national salary, approximately €420,000 in Italy.

Alessandro Profumo, the chairman, and Fabrizio Viola, chief executive, publicly turned down their salaries of €500,000 and €400,000 respectively when arriving at the bank. However, their full remuneration agreement is not disclosed. Senior managers are seeking incentives tied to restructuring.

The finance ministry said: “Negotiations are continuing. Almunia has not rejected the restructuring plan. There are proposals and questions but there has not been a rejection.”

The commission declined to comment.

The bailout is in the form of bank bonds bought by the government and approved by parliament in December 2012 when Mario Monti was prime minister.

Since then it has emerged that the bank’s previous management, before Mr Profumo’s appointment, was already under investigation for suspected fraud involving derivatives transactions with foreign banks and other financial crimes.

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