Italy's Banca Monte dei Paschi di Siena is racing against time to win regulatory approval to sell at least 1 billion euros ($1.25 billion) of bonds to the government to plug a capital shortfall by the end of June.
Sources close to the situation told Reuters at the weekend that the world's oldest bank was in talks with the Treasury and the Bank of Italy for a capital fix that would make it the first Italian bank to resort to state aid since 2010, when the eurozone crisis deepened.
Citing "organizational reasons", the bank has delayed until Tuesday a board meeting initially scheduled for late Monday at which it is due to approve a business plan under new CEO Fabrizio Viola and new Chairman Alessandro Profumo, Italy's best known banker.
The fact that the board meeting was pushed back by a day suggests MPS hopes to get an informal nod from the Bank of Italy, which oversees Italian banks, by Tuesday afternoon.
"It would be a logical conclusion," a source close to the situation told Reuters.
On Monday, Italy's deputy economy minister, Vittorio Grilli, said he did not rule out buying bonds issued by distressed domestic banks.
"We will see," Grilli said when asked whether the Treasury could reopen the terms of a 2009-10 scheme under which it underwrote bank bonds to help troubled lenders.
The Bank of Italy, which would give formal approval to the capital-strengthening plan only after it is presented, declined to comment, as did the Treasury and MPS.
Thanks to capital management and asset sales, Italy's third-biggest bank has managed to fill about two-thirds of a 3.3 billion euro gap identified by the European Banking Authority.
MPS' CEO said last month the bank could issue contingency capital bonds to boost its capital base, but these would command double-digit interest rates in current choppy markets.
Bonds underwritten by the Treasury and similar to those allowed during the first leg of the financial crisis under former Economy 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 sold to the Treasury 1.9 billion euros of 'Tremonti bonds' in 2009, with a coupon of 8.5 percent rising to 9 percent from July next year.
Issuing more of 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 in better shape than Spain's, which are being shored up by a euro zone bailout of up to 100 billion euros, as they have limited exposure to the real estate market and retail bank deposits are relatively large.
Italian lenders have avoided any form of direct state aid as all major banks, including UniCredit and Intesa Sanpaolo, managed to boost raise capital on the private market in the last 12 months.
MPS has been hit hard by the eurozone 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 toward Italy has increased the cost of funding and sunk the value of sovereign debt held by lenders, requiring them to find additional capital.
On Monday, Italy's banking association and industry lobbies urged the European Central Bank to ensure market liquidity and resume sovereign bond purchases on the secondary market.
Any delay in filling the capital shortfall would further weigh on MPS shares, which have lost half their value in the past three months. On Monday, the stock shed 7.2 percent to 0.20 euros, in line with a weaker sector.
The shares rose as much as 10 percent on Friday when talk of a possible fix to the bank's capital problems 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 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.
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