LONDON: Italy's government borrowing costs touched a 17-month low on Monday after its third largest bank unveiled a privately-backed rescue plan to prevent it from being wound up by regulators.
Monte dei Paschi announced the plan less than an hour before European banking regulators revealed the results of their stress tests late on Friday which predicted that the lender's capital buffers would be entirely wiped out if there was a severe economic downturn.
The solution should allow Rome to avoid having to inject public cash to recapitalise the bank, which under EU rules would entail politically unpalatable losses for Monte dei Paschi's bondholders and depositors.
But market moves were modest and partially unwound towards the end of the day as concerns persisted about another banking crisis in the bloc's third largest economy.
"There is some crumb of comfort in terms of the results and a potential plan for one particular bank but there is a broader issue at play here that needs to be addressed and will take time," Credit Agricole strategist Orlando Green said.
As expected, Monte dei Paschi fared worst in the latest EU stress tests, which also demonstrated weakness in some of Italy's other lenders and in banks in Ireland, Spain and Austria.
Italian 10-year government bond yields edged up 1 basis point to 1.18 percent, having fallen as low as 1.16 percent, their lowest since March 2015, while most euro zone equivalents were flat or a touch higher on the day. German 10-year yields, the bloc's benchmark, rose 1.5 bps to minus 0.16 percent.
Asked about Monte dei Paschi, Italian Prime Minister Matteo Renzi said the government had worked for a market solution to its problems because any state aid would have meant ordinary people would have had to pay.
But while the plan unveiled on Friday appears to have taken the onus off the government, Monte dei Paschi faces a Herculean task convincing investors to back a third recapitalisation in as many years.
The two-pronged rescue scheme hinges on Monte dei Paschi raising 5 billion euros in a cash call to be completed by the end of the year - a tall order for a lender that is worth less than 1 billion on the market and has burned through 8 billion euros from share issues since 2014.
Global investment banks have made a preliminary agreement to underwrite the rights issue by Italy's third biggest bank.
But this is subject to conditions, including that the second prong of the bank's plan is successful: the sale of 9.2 billion euros of bad loans via a mammoth securitisation, whose sheer size is unprecedented in Italy.
Monte dei Paschi shares rose on the day and at one point were up 7 percent.
However, Unicredit, another Italian lender that made a poor showing in the tests, was the worst performing stocks on the STOXX 100 index, down 9.4 percent.
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