Italy approves bailout for Monte dei Paschi

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Italy’s cabinet has approved a state-bailout for the country’s third-largest bank, Monte dei Paschi di Siena.

Prime Minister Paolo Gentiloni said his government had authorised a €20bn ($21bn, £17.9bn) fund to support Italy’s embattled banking sector.

The announcement came after Monte dei Paschi had failed to raise €5bn from private investors.

The Italian bank said it would request a capital injection from the state to stay afloat.

Under new EU rules on bank bailouts, the bailout will entail a forced conversion of the bank’s junior bonds into shares.

A state bailout risks losses for thousands of ordinary retail investors. Small investors are estimated to hold some €2bn of Monte dei Paschi’s bonds.

However, the government will need to stick to new European Union rules designed to stop tax payers bearing the brunt of supporting weak banks.

The Italian parliament had already authorised the government to create a fund to prop up the bank sector.

Founded in 1472, Monte dei Paschi is said to be the oldest surviving bank in the world.

It failed an EU stress test in July due to billions of euros of risky loans on its books, made to clients who cannot afford to repay them.

The situation has worsened since then.

On Wednesday, Monte dei Paschi revealed that it could run out of funds by next April, using up nearly €11bn.

Previously it had said it had the funds to stay afloat for 11 months.

It added that by next May, it could burn through even more – €15bn in total.