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Bailout looms in Monte dei Paschi's funding scramble

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Troubled Italian lender Monte dei Paschi di Siena edged closer to a state bailout on Thursday as its last-ditch plan to raise billions of euros risked falling short.

[MILAN] Troubled Italian lender Monte dei Paschi di Siena edged closer to a state bailout on Thursday as its last-ditch plan to raise billions of euros risked falling short.

BMPS, the world's oldest bank and Italy's third-biggest, launched a bid to sell fresh shares this week under plans to raise five billion euros (S$7.489 billion) in new capital.

The result of the share offer is due to be released later Thursday or early Friday but the bank acknowledged late Wednesday that it had failed to attract an anchor investor after pinning its hopes on a big Qatari takeup.

A separate debt-for-equity swap offer, which is also part of the plan to replenish its coffers, reaped just over two billion euros, the bank also said.

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The plan additionally entails selling off 27.6 billion euros in bad loans.

BMPS is at the centre of a crisis in Italy's banking sector - made up of some 700 banks - which is buckling under the weight of bad loans estimated to total 360 billion euros.

Shares in the bank have fallen over 80 per cent in the past year and it achieved the worst results in a July stress test by the European Banking Authority.

The Italian parliament approved on Wednesday a 20-billion-euro bailout package that would aim to stem the woes of the ailing banking sector.

Analysts say the "weak appetite" among private investors so far towards bolstering the bank's coffers by five billion euros raises the likelihood of a state injection.

"The low probability of achieving this amount increases (the) odds of some kind of government rescue," said Ipek Ozkardeskaya, of London Capital Group, said in a note to clients.

But the government has several options depending on how much the bank manages to pull off itself, said economist Lorenzo Codogno, of LC Macro Advisors Limited and a former senior Italian finance ministry official.

"If the shortfall is limited, the government could step in and inject probably up to another billion" without triggering a so-called bail-in, meaning shareholders must also take a writedown on some of the debt they are owed, he said.

But, he added, that: "if the whole operation fails, the government would have to intervene" with a "precautionary recapitalisation".

This means shareholders and holders of junior bonds, a risky class of debt, must contribute to saving the bank.

Just over 40,000 private individuals hold BMPS bonds.

The government is studying a scheme to compensate any losses that high-street savers would suffer.

It is keen to avoid a repetition of scenes sparked by last year's rescue of four small banks that led to heavy losses for small savers, prompting demonstrations and at least one suicide.

Finance Minister Carlo Padoan on Wednesday said that the Italian banking system "is solid, even if there are some crisis situations" and insisted that the 20 billion euros set aside was "sufficient".

Ms Ozkardeskaya, of LCG, said European banking stocks were expected to remain under pressure.

"Finding a solution to rescue Monte Paschi could trigger a short-term relief rally in the sector, yet the European banks will certainly remain on a slippery ground for a longer period of time," she added.

Shares in BMPS were up slightly in late morning trading in Milan, rising 1.7 per cent to 16.6 euros, amid hopes that the various possibilities will amount to some kind of viable solution.

Founded in Siena in 1472, BMPS has been in trouble for years. Weakened by the disastrous purchase in 2007 of the Antonveneta bank at twice the estimated value, it quickly drifted into scandal when its management team was accused of fraud and misuse of funds.

It subsequently ran up huge losses and has had to raise capital twice since 2014.

Monte dei Paschi has admitted to having only four months' worth of liquidity left.