FRANKFURT/BRUSSELS: Investors in Italy's Monte dei Paschi di Siena risk compulsory 'bail-in' losses, one of Europe's top regulators told Reuters, warning this could be the only choice if the bank's plans to raise fresh capital fall short.
Elke Koenig, who heads the Single Resolution Board (SRB), a bank crisis response body, made her remarks as Monte dei Paschi prepares for a multi-billion euro debt-for-equity swap and to seek fresh money from investors to mend its finances.
"They are building on a private solution," Koenig said of the attempt to raise fresh capital, describing this as "very challenging".
"If not, there are various ways and forms but normally they don't go without bail-in," she said, referring to European Union rules that impose losses on bondholders and other creditors.
Koenig, who has the authority to wind down a failing bank in the euro zone, said she stood ready to act, if needed.
"There is a resolution plan for Monte dei Paschi, as there is for every large European bank," she said. "You have to be ready for whatever comes."
Her remarks underscore the gravity of the problems facing the Italian bank, as it seeks to convince investors to back its third recapitalisation in as many years.
A failure of the world's oldest lender, Europe's weakest bank in July stress tests, could wipe out the savings of thousands of small investors, drag down other Italian banks and deal another blow to Prime Minister Matteo Renzi.
In order to avoid this, the bank's management has offered bondholders the choice of switching their debt into bank shares, a step analysts estimate could raise between 1 billion and 1.5 billion euros - filling part of a 5 billion euro capital hole. But a Dec. 4 Italian referendum on constitutional reform to make lawmaking easier has turned into a vote of confidence in Renzi's government, whose economic reforms have become unpopular.
Opinion polls are predicting defeat for Renzi, which could lead to his resignation and sap market confidence, making it hard if not impossible for Monte dei Paschi to attract investors.
The Tuscan bank announced late on Monday the terms of the voluntary debt conversion, which targets subordinated bonds held by both retail and institutional investors.
The bank continues to search for anchor investors to back a large chunk of a share issue it expects to complete immediately after the referendum. Regulators, however, have long expressed scepticism about the plan.
In a document detailing the debt swap - a key plank of its rescue plan - the bank said that if take-up was not successful, it would be unable to launch the share sale and this could trigger European bail-in rules imposing losses on bondholders.
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