Monte dei Paschi: Bail-out Or Bail-in?

In the latest episode of the slowly unfolding European banking crisis, Italy is set to bailout with public money Monte dei Paschi, the country’s third largest bank, after the latest attempt to lure private investors to save the bank has failed.

A €20 billion rescue fund is to be put together by the government, according to the Guardian, to bail out the failing bank. The bad loans within the Italian banking sector is estimated to be around €360 billion.

It is unclear what the terms would be for the nationalization of the bank or the extent of the ‘bail-in’ by the bank’s bondholders and depositors.

The ECB has a nasty diemma on its hands. Approve the bailout and the bail-in protocol it has enacted less than one year ago is effectively dead, along with its authority to implement and enforce any rule going forward. Demand a bail-in of Italian bank account holders and it will cause a nation- and possibly continent-wide bank run, not to mention the all-but-certain rise of the anti-Euro party in next year’s election.

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