Banking Crisis in Europe Deepens. World’s Oldest Bank in Italy in Crisis.

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Monte dei Pashi bank logo

The world’s oldest bank and Italy’s 3rd biggest bank (Monte dei Paschi di Siena) needs to tap investors for cash to pay back the EU loan of 4.1 Billion Euros it received earlier this year after the euro debt crisis. It was forced to delay a vital 3 billion euro ($4.1 Billion) share sale to raise capital until mid-May or later because of shareholder opposition. It’s main shareholder, the Monte dei Paschi foundation with close links to Siena politicians, is opposing the move.

The Bankers Move

Chairman Alessandro Profumo, a strong-willed and internationally respected banker who was formerly the chief of UniCredit, said he and CEO Fabrizio Viola will decide in January whether to step down as a result. A board meeting is scheduled for mid-January according to a bank spokesman.

Profumo and Viola have already secured a pool of banks to guarantee the cash call but only if it was carried out by the end of January.  They warn if the cash call is not done by the end of January, the financial condition could precipitate a nationalization of the bank. It faces a string of cash calls by other Italian and European lenders triggered by a sector health check at that time.

Analysts however said a delay, and the possibility of Profumo resigning, might undermine the whole rescue of the bank. “It’s important to carry out the capital increase as early as possible,” said Roberto Lottici, fund manager at Ifigest. “The risk is that the bank finds itself rushing into a cash call later at a lower price than what it could achieve now.”

The Largest Shareholders Move

The Monte dei Paschi foundation “forced a postponement until at least mid-May to win more time to sell down its 33.5 percent holding and repay its own debts.” Profumo was described by an aide as “very annoyed” with the move. Hey, no worries, former European Central Bank policymaker Lorenzo Bini Smaghi and Carlo Salvatori, chairman of the Italian unit of German insurer Allianz are among possible candidates to replace Profumo.

Siena mayor Bruno Valentini, whose city council is the top stakeholder in the Monte dei Paschi foundation, said on Friday a postponement might help keep the bank in Italian hands.

“We cannot let the third biggest bank in this country fall prey to foreign interests,” he said. “Monte dei Paschi is not just an issue in Siena, it is a big national issue.”

Antonella Mansi is a feisty 39-year-old businesswoman who was recently appointed head of the Monte dei Paschi foundation. She said her insistence on a cash call delay did not amount to a no-confidence vote in the bank’s management. Carrying out the capital increase in January would massively dilute the foundation’s holding, leaving it with virtually nothing to sell to reimburse debts of 340 million euros. “We have a precise duty to ensure (the foundation’s) survival. You can’t ask us to let it collapse,” she said.

The Battle Lines Have Been Drawn

So the battle appears to be between the politician based shareholders and the bankers. Does the foundation collapse or the bank? Something has to give here it appears.

In Siena, the bank is known as “Daddy Monte”  because it is the biggest employer. There are fears that the cash call might sever the umbilical cord between the lender and the city. The bank is already cutting 8,000 jobs and closing 550 branches.

The bank claims that the delay in the cash call will cost at least 120 million euros ($164 million at present value) in payments owed to the state on the bonds. The foundation claims it could bankrupt them.

Is Nationalization Next?

The precipitating cause is debt and a restructuring agreement with the EU Central bank in Brussels. Under the EU restructuring, if the bank cannot complete its capital increase by the end of 2014, the Treasury would convert the bonds it bought from the bank into shares, effectively nationalizing it.

So, does the baby get thrown out with the bath water? Does the bank end up in the hands of the state? Debt creates chaos eventually if not repaid. Keep in mind that Monte Paschi is not the only bank in trouble in the Euro zone. There are many others with derivative based debt. A bank failure of this size has a domino effect. If Europe goes, other financial systems will feel the effect.

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Prepare or Play?

According to the real time U.S. debt clock, the U.S. sits at $17.2 Trillion or $54,429 per citizen and $150,162 per taxpayer. We are already spending much more than we take in as a nation with a budget deficit of over $650 billion this year alone, probably more. We will not be immune from the impact. With an admitted 10.8 million and an estimated 20.3 million unemployed (when the fudged government numbers are adjusted for marginally attached and part time workers), we are not in the strongest of financial positions. I would suggest, keeping Aesop in mind, that you be the ant and not the grasshopper. Prepare just in case.

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