Bending the rule: Monte dei Paschi

Bending the rule: Monte dei Paschi

Italy’s finance minister will meet top EU officials on Tuesday to discuss the fate of over-leveraged Monte dei Paschi –

Photo: Getty/Bloomberg

Photo: Getty/Bloomberg

Italy’s finance minister will meet top EU officials on Tuesday to discuss the fate of over-leveraged Monte dei Paschi – the world’s oldest bank. Rome wants to provide the struggling institution with a $7.1 billion bailout. But such a move could contravene EU regulations, which stipulate that ailing banks must first be helped by shareholders and creditors, not taxpayers. This is known as a bail-in.

The situation presents the EU with a dilemma. Outright opposition to Rome’s bailout plan could lead to the bank’s collapse. This in turn could devastate confidence in Italy’s financial system and lead to a recession in the Eurozone’s third-largest economy, which has been struggling with sluggish growth since 2008. The stakes for the EU couldn’t be higher: a weakened Euro and negative credit ratings could bring the debt crisis back with full force.

On the other hand, approving the state bailout too easily would set a dangerous precedent. Such a move would weaken a crucial EU regulation that aims to do away with taxpayer-financed bank rescues, which peeved many after the 2008 crisis.

Tuesday’s meeting will determine whether the Italian government has to amend its proposal. A delicate balancing act is needed from EU Competition Commissioner Margrethe Vestager.