Bank of Italy approves Monte Paschi aid of $5.3 billion

ROME: The Bank of Italy approved a plan for Banca Monte dei Paschi di Siena SpA to receive 3.9 billion ($5.3 billion) in emergency loans, leaving Prime Minister Mario Monti to decide whether to push ahead with the unpopular bailout before elections next month.

The decision comes amid a political firestorm over rescuing the world's oldest bank after revelations the lender's former management hid details of structured-finance transactions from regulators that may produce hundreds of millions of euros in losses. The Bank of Italy made its announcement late yesterday, a day after Monte Paschi shareholders approved 6.5 billion in capital increases needed to secure the loans.

" The situation is under control" and the bank is prepared to take additional action if necessary, Monte Paschi Chairman Alessandro Profumo said at the January 25 shareholder meeting.

The revelations of the hidden losses came in the final weeks of the campaign before February 24 to February 25 elections and former Prime Minister Silvio Berlusconi has seized on the story to attack both Monti and front-runner, Democratic Party leader Pier Luigi Bersani. Berlusconi has tried to link funds collected from Monti's unpopular property tax to the Paschi aid, while tarring Bersani for his party's political ties to the bank.

Under the bailout plan, Monte Paschi will sell securities dubbed "Monti bonds" to the government with a 9% coupon that may rise to as much as 15%. Monte Paschi is seeking state help to bolster its balance sheet after the bank failed to meet the capital requirements set by the European Banking Authority. The bank is also selling assets and reducing risk and costs in a three-year plan to restore liquidity.

The company said on January 17 it will review its accounts after Bloomberg News reported the lender engaged in a derivative transaction with Deutsche Bank AG in 2008, dubbed "Project Santorini," that obscured losses before it sought an initial government bailout the next year. The bank said January 23 it's reviewing three money-losing structured deals, dubbed Santorini, Alexandria and Nota Italia, uncovered by newly appointed executives.

Prosecutors are investigating the actions of former management for possible criminal violation and the Bank of Italy said this month that executives withheld key aspects of the transactions from regulators.