By Valentina Za and Giuseppe Fonte
MILAN (Reuters) - Monte dei Paschi di Siena <BMPS.MI> said on Thursday its plan to raise on the market 5 billion euros ($5.2 billion) in capital by the end of the year had failed, paving the way for a state bailout of Italy's third-largest bank.
Political sources said new Prime Minister Paolo Gentiloni is ready to call a cabinet meeting within hours to approve a decree authorizing the bank's third bailout since 2009.
Parliament on Wednesday had allowed the Rome government to borrow up to an extra 20 billion euros to prop up failing banks, starting with the Tuscan lender that for years has been at the forefront of Italy's banking woes.
"The capital increase ... was not successful," the bank said after it managed to raise just 2 billion euros in capital from a debt-to-equity conversion offer. Junior bondholders who had tendered their debt in the swap will receive it back.
No fees will be paid to advisers JPMorgan <JPM.N> and Mediobanca <MDBI.MI> as well as other banks that unsuccessfully sought to place new shares in Monte dei Paschi and worked on a now collapsed bad loan sale.
A share offer that ended on Thursday met with no demand partly due to rising political risks in Italy after a Dec. 4 referendum unseated the reformist government of Prime Minister Matteo Renzi.
An Italian daily said the bailout plan could take two to three months, starting with a government guarantee of Monte dei Paschi's own borrowings to ensure it does not run out of cash.
The bank has been bleeding deposits heavily and on Wednesday it said its liquidity could run out after four months. Only days earlier it had estimated it would last for 11 months.
Its failure would shake the foundations of Italy's banking industry, the euro zone's fourth largest and home to a third of the bloc's bad debts.
But also a state bailout carries risks due to EU rules that require private investors to suffer losses before taxpayer funds can be tapped, a politically explosive issue given 40,000 retail investors hold bonds in Monte dei Paschi.
The world's oldest bank, worth just 440 million euros after losing 90 percent of its market value this year, has been laid low by ill-judged acquisitions and mismanagement. It is saddled with the largest proportion of bad debts among Italian lenders compared to its capital.
After burning through 8 billion euros of capital raised in 2014-2015 it needed more money to cover losses from a planned 27 billion euro bad loan sale demanded by the European Central Bank.
The plan engineered by JPMorgan hinged on a 1 billion euro investment by Qatar's investment authority. Confirming an earlier Reuters report, the bank said late on Wednesday it had failed to secure an anchor investor and this had discouraged other potential buyers.
For the state to step in, Monte dei Paschi needs to force at least some of its creditors to convert their bonds into equity.
Economy Minister Pier Carlo Padoan has said the impact on retail savers would be "absolutely minimized or inexistent."
Ordinary Italians have already suffered billions of euros of losses due to a string of bank crises after a harsh recession weakened the country's lenders exposing the damages wrecked by crony lending and inefficient management.
Other banks also need to strengthen their balance sheets, including Banca Popolare Di Vicenza, Veneto Banca and Banca Carige.
If the government uses all the 20 billion euros it is authorized to spend on the banking sector, it will worsen the country's already difficult debt position.
Italy's debt stands at some 133 percent of gross domestic product -- second only to Greece in the euro zone. A further 20 billion euro of debt will push the ratio above 134 percent.
($1 = 0.9544 euros)
(Writing by Mark Bendeich and Valentina Za; Editing by Keith Weir and Alexandra Hudson)