(Bloomberg) -- Talks between Italy and the European Commission to recapitalize Banca Monte dei Paschi di Siena SpA and other banks are stuck on whether creditors should face losses if taxpayer funds are used, according to people familiar with the discussions.
The plan favored by Italy is for a precautionary recapitalization under the European Union's bank resolution rules, which allow governments to fund lenders when capital gaps emerge in stress tests, said the people, who could not be named because the talks are private.
Italy is arguing that under this scenario, there should be zero or very little cost to bondholders because the rules don't force burden sharing when losses are hypothetical, said one person. Italy and the Commission are still distant from reaching an agreement because their interpretation of the rules differ, the people said. If adopted, the plan could also be used as a benchmark for other lenders, the people said.
With about 360 billion euros ($389 billion) in soured loans saddling Italian banks, the government has been sounding out regulators on ways to shore up lenders bruised by a renewed selloff after the British vote to leave the European Union. Lorenzo Bini Smaghi, the former member of the ECB's executive board who now chairs Societe Generale SA, said Wednesday that Italy's banking crisis could spread to the rest of Europe, and rules limiting state aid to lenders should be reconsidered to prevent greater upheaval.
A spokesman for the Treasury declined to comment, while officials for the Commission did not immediately respond to requests for comment.
Under the plan Italian banks would sell shares or convertible bonds, securities that the state would agree to buy if they were left unsold, acting as a backstop, the people said.
Italy aims at a recapitalization of as much as 5 billion euros for Paschi to cover losses from a request by the European Central Bank to cut 10 billion euros in net bad loans over three years and strengthen the bank's finances, one person said.
The plan would ideally kick in as soon as possible, one person said, adding that an accord is unlikely before July 29, when results of EU stress tests are published.
“The coming days will let European authorities reflect attentively on the credit situation on our continent,” Prime Minister Matteo Renzi told reporters in Rome on Wednesday.
To contact the reporters on this story: John Follain in Rome at jfollain2@bloomberg.net, Sonia Sirletti in Milan at ssirletti@bloomberg.net. To contact the editors responsible for this story: Alan Crawford at acrawford6@bloomberg.net, Dan Liefgreen at dliefgreen@bloomberg.net, Elisa Martinuzzi, David Scheer
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