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Dispute could sink Italian bank Monte Paschi's rescue plan

By Valentina Za

By Valentina Za

MILAN (Reuters) - Italian bank Monte dei Paschi di Siena <BMPS.MI> is trying to resolve differences with a key investor over its 5 billion-euro ($5.2 billion) rescue plan to allow the deal to go ahead and avoid a state bailout.

Italy's third-largest bank has until the end of December to raise capital and offload 28 billion euros in gross bad loans as requested by European Central Bank supervisors.

Monte dei Paschi has failed to find buyers for its shares so far. On Monday, it shook the market again with a warning that Italian bank industry bailout fund Atlante was rethinking its 1.5 billion euro purchase of bad loans from the lender.


Atlante had expressed "deep reservations" in a Dec. 17 letter over the terms of a bridge loan that Monte dei Paschi had secured as part of the sale of bad loans, the bank said.

Monte dei Paschi shares extended losses on the news, erasing a week's gains to close down 11 percent at 18.6 euros each.

"If issues raised by (Atlante's manager) Quaestio cannot be solved, the operation could not be concluded by Dec. 31, 2016 as requested by the European Central Bank," the bank said in a statement.

However, Carlo Messina, chief executive of Intesa Sanpaolo <ISP.MI>, one of Atlante's top contributors, said he believed the investment fund should go ahead with the deal and that it would reach a decision by Tuesday at the latest.

Italy's cabinet will meet later on Monday to discuss possibly increasing the national debt to cover the cost of saving Monte dei Paschi and other ailing banks, government sources told Reuters.

The government said in a statement that the cabinet would meet at 1830 GMT.

Italy is ready to bail out Monte dei Paschi, the world's oldest bank, to prevent it being wound down and destabilizing the euro zone's fourth-largest banking sector.

A state rescue would require many investors, including ordinary Italians, to bear losses and would risk provoking a political backlash.

The government would inject capital into Monte dei Paschi only after the forced conversion of 4.1 billion euros worth of subordinated bonds into shares, a source said on Friday. A bailout could be approved as early as Thursday.

As part of its own faltering rescue plan, Monte dei Paschi has taken out a 4.7 billion euro bridge loan with JPMorgan <JPM.N>, Mediobanca <MDBI.MI>, Credit Suisse <CSGN.S> and HSBC <HSBA.L>, said another source, familiar with the loan.

JPMorgan and Mediobanca have been working on the bank's rescue plan and have already come under fire from opposition politicians who object to them earning fees in the event of a state bailout, especially fees accruing on the bridge loan.

Monte dei Paschi needs the loan to help complete the sale of bad debts, which are to be repackaged as debt securities worth 9 billion euros. The loan is worth around half of that, but it is secured against all the securities -- which is the source of concern for Atlante, said a source familiar with the matter.

Atlante, whose shareholders include Italy's top banks and insurers as well as state-owned entities, is due to buy a 1.5 billion euro tranche of the securities. It could see its notes claimed by the four banks if the bridge loan is not repaid.

(Additional reporting by Paola Arosio and Crispian Balmer; Editing by Mark Bendeich/Keith Weir/Susan Fenton)