EU stress tests are expected to show that one of Italy’s largest banks is in dire straits.
In anticipation, the Italian government is asking a group of pension funds to invest in a state-sponsored fund that would buy the bank’s bad loans.
Some reports suggest the pension funds could invest up to $550 million.
Monte dei Paschi (BMPS.MI), Italy’s third-biggest bank by assets, is likely to be found short of capital under an adverse scenario when EU stress tests results are announced on Friday. A deeper financial crisis at the bank could further undermine confidence in Italy’s banking sector, the euro zone’s fourth-largest.
The chairman of ADEPP, the association of sector-specific pension funds, told Reuters that the government had asked association members to invest in the state-sponsored Atlante fund, which is working with Monte dei Paschi on the sale of 10 billion euros (£8.3 billion) in bad debts after writedowns.
“The government has made a request,” Alberto Oliveti said, adding each pension fund would decide independently after a meeting of association members later on Monday.
Under the plan, Atlante would buy the bank’s loans to borrowers deemed insolvent in a complex scheme that aims to leverage fivefold the fund’s residual resources of 1.75 billion euros, sources have said.
Atlante is ready to buy the loans at a higher price than investors specialising in buying distressed assets would offer, but that would still be below the portfolio’s net book value, blowing a hole in the bank’s account and forcing it to raise capital.