MPS rushes against time to plug capital gap

Sources close to the situation have told Reuters at the weekend that the world's oldest bank is in active talks with the Treasury and the Bank of Italy for a capital fix that would make it the first Italian bank to resort to some form of state aid since the deepening of the euro zone crisis.

Citing 'organizational reasons' the bank, perceived as the weakest of all major Italian banks, has delayed to Tuesday a board meeting initially scheduled later on Monday and set to approve its new business plan under new CEO Fabrizio Viola and new Chairman Alessandro Profumo, a known turnaround banker.

Italy's third-largest bank has managed to fill two-thirds of a 3.3 billion euro gap identified by the European Banking Authority thanks to better capital management and asset sales.

MPS top management has suggested it could issue contingency capital bonds to fill the remaining capital hole. These would command double-digit interest rates in current choppy markets, while state-backed bonds similar to those allowed during the first leg of the global financial crisis under former Treasury Minister Giulio Tremonti would be cheaper.

"Issuing a fresh round of 'Tremonti bonds' seems the most reasonable option. Co-co bonds are too expensive. MPS has no other option," an Italian banker told Reuters.

MPS already issued 1.9 billion euros of similar Treasury-backed bonds in 2009, with a coupon of 8.5 percent rising to 9 percent from July next year.

These bonds would add to Italy's already ballooning public debt of nearly 2 trillion euros. But they can be paid back early if the bank's capital base improves and the annual coupon is due only if the lender makes a profit.

Italian banks are not in the same situation as Spain's, whose capital hole is being filled by a euro zone bailout, thanks to a limited exposure to the real estate market and a relatively high level of household savings.

Spanish banks may need up to 62 billion euros in extra capital of the up to 100 billion euros the EU could make available to prop them up.

Italian banks have avoided any form of direct state aid as all major banks, including top lenders UniCredit and IntesaSanpaolo , managed to boost their capital base by raising capital on the private market in the last 12 months.

But Monte dei Paschi has been hit hard by the euro zone debt crisis because of its 25 billion euro exposure to domestic government bonds - which is proportionally higher than that of its domestic peers.

Negative investor sentiment towards Italy means the value of Italian government bonds held by banks deteriorates, requiring additional capital to shore up potential losses.

Any delay in fixing that weakness would further weigh on MPS shares, which have lost 50 percent in the past three months.

Shares in MPS were up 1 percent in early trade on Monday on talks about a possible issuance of government-backed bonds, but erased earlier gains on the back a negative European banking sector. The shares had rallied nearly 10 percent on Friday, when talk of a possible fix to MPS' capital woes first emerged.

As it seeks to raise cash quickly, Monte dei Paschi reached a deal to sell its 60 percent stake in small unit Biverbanca for around 200 million euros ($251 million), two sources close to the situation said earlier on Saturday.

The Siena-based lender has limited financial flexibility because its top shareholder, a charitable foundation with close ties to local politicians, is just emerging from months of wrestling with creditors to restructure its own debt.

The foundation has been forced to sell down its MPS stake to 36.3 percent and insists it would not fund a capital increase.

($1 = 0.7977 euro)

(Writing by Lisa Jucca and Antonella Ciancio)