Italy’s problem bank casts shadow over Draghi’s summer break

When Italian Prime Minister Mario Draghi returns from his brief summer break one of the thorniest items on his to do list will be finally fixing the woes of the world’s oldest bank, Monte dei Paschi di Siena. The Tuscan lender’s decline has tarnished Draghi’s record ever since 2008 when, as Bank of Italy chief, he approved its purchase of rival Antonveneta at an inflated price that analysts say contributed to its financial meltdown.

Thirteen years of scandals, crisis management and state help to keep MPS afloat have turned the country’s fourth largest lender into Rome’s No.1 banking headache, with failure seen risking Italy’s financial stability. Selling the bank would complete a restructuring of the country’s banking industry which has shed 250 billion euros in impaired loans over the past five years. This is as lenders brace for a new wave of bankruptcies due to the COVID. Parties of all stripes in Draghi’s national unity coalition are protesting over job losses as a result of the proposed tie-up with Milan-based UniCredit.

Antonio Misiani, economics chief of the centre-left Democratic Party said that the MPS’ territorial roots, its workers and its brand must be safeguarded. This is because, battle lines are drawn ahead of what are set to be complex talks. Politics and MPS have long been intertwined. Siena, like the rest of the central region of Tuscany, is a traditional bastion of the PD, which has often been criticized for contributing to the bank ‘s troubles by using it as a source of patronage, jobs and votes.  Processions in Siena’s annual medieval pageant have always made three stops to bow before the city institutions, at the city hall, at the archbishopric and at the MPS headquarters. Mayor Luigi De Mossi told that the people of Siena fell into three big categories. Those who worked at MPS, those who wanted to work at MPS and those who used to work at MPS.

UniCredit doesn’t want MPS’ branches in Italy’s poor south. It has only agreed to consider buying selected parts of the smaller partner on condition its capital buffers are unaffected and its earnings per share rise by at least 10%. Moreover, the state, which owns 64% of MPS, will keep all legal risks stemming from its mismanagement and any loans already in trouble or which UniCredit deems likely to turn sour. That may be increasingly difficult as MPS’ problems rise to the top of his government’s agenda and the front pages of the country’s newspapers. The UniCredit deal could cost Italian taxpayers more than 5 billion euros in state support for layoffs, tax incentives and a commitment to reinforce the merged bank ‘s capital, while MPS’ future is fueling tensions in Draghi’s ruling majority.

Politicians, however, are demanding to know from Draghi the precise price tag of the merger. Raising the political stakes even higher is the fact the PD’s leader, Enrico Letta, who has no seat in parliament, has chosen the upcoming by-election in Siena to try to get one. Salvini’s League and its rightist ally Brothers of Italy sense the chance of delivering a fatal blow to the left. In Siena’s sun-baked streets, semi-deserted during the August holidays, locals shrug off the by-election and say all they care about is saving jobs.