By Giuseppe Fonte
ROME (Reuters) - Italy is ready to pump capital into Monte dei Paschi di Siena <BMPS.MI> if the ailing bank fails to get the 5 billion euros ($5.3 billion) it needs to remain in business from private investors, a Treasury source said on Monday.
Italy's third-biggest bank is pressing ahead with a last-ditch attempt to raise the cash on the market this year despite a government crisis triggered by Prime Minister Matteo Renzi's resignation following his defeat in a Dec. 4 constitutional referendum.
However, its chances of success are slim and the state is likely to have to step in to make up for the shortfall, bankers say.
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A failure of the world's oldest bank would threaten the savings of thousands of Italians and could have repercussions on Italy's wider banking sector, which is saddled with 360 billion euros of bad loans - a third of the euro zone's total.
"If the operation failed, the state would carry out a precautionary recapitalisation," the Treasury source said. "The bank's existence and its clients' savings will be preserved under any circumstances."
However, the source said that any injection of public money would involve the mandatory conversion of subordinated bonds into shares, including for 40,000 retail investors, in line with European rules for dealing with bank crises.
The government, well aware of the unpopularity of such a move, is looking at ways to compensate ordinary Italians who invested their savings in the bank's junior debt.
Monte dei Paschi shares closed up 3.7 percent, with traders saying the prospect that the state might act as an investor of last resort was helping the stock.
Rome is fearful of triggering a so-called precautionary recapitalisation after retail investors at four small banks had their money wiped out in a government-led rescue scheme last year, leading to protests and at least one suicide.
New Italian Prime Minister, Renzi loyalist Paolo Gentiloni, unveiled his government on Monday, keeping almost all former ministers in place in a move aimed at reassuring financial markets.
The new government may then be asked to sign off on the emergency decree needed to authorise a bailout of the bank.
Even so, Renzi said on Monday that elections should be held as quickly as possible. The opposition, anti-establishment Five-Star movement, which is ahead in opinion polls, has accused Renzi of dragging his feet on a nationalisation of Monte dei Paschi it says should have taken place months ago.
The bank had sought a three-week extension to Jan. 20 from the European Central Bank of a deadline for completing its capital raising plan, citing the political turmoil. However, this was rejected on the grounds that a delay would be of no use and it was time for Rome to step in, according to a source.
With little left to lose, the bank is pressing ahead with an eleventh-hour privately-funded scheme that includes the reopening of a voluntary debt swap offer to retail investors this week.
The initial offer, which has so far raised 1 billion euros from institutional investors, had been deemed too risky for ordinary investors.
"It seems a reckless operation," said consumer group Aduc. "How is it conceivable that in two weeks, with Christmas in the middle, 40,000 people can be called in and given all the information they need to make a considered decision?"
Another 1 billion euros should come from Qatar's sovereign wealth fund, a source close to the bank's board said on Sunday, while a consortium of banks led by JPMorgan and Mediobanca would try to sell shares for the remainder in the market, but without underwriting the issue.
The bank aims to launch the private placement and the new debt swap offer on Thursday, a source close to the matter said.
However, another source added that as of Monday evening market watchdog Consob, which needs to approve the reopening of the conversion offer to retail investors, had only received "preliminary and generic" information regarding the bank's plans and it seems unlikely that the offer could start on Thursday.
"A public intervention is becoming more and more probable as conditions worsen and time lessens," Kepler Cheuvreux said in a note. "This will be one of the new government's first priorities."
(aditional reporting by Stefano Bernabei, writing by Silvia Aloisi; Editing by David Stamp and Philippa Fletcher)