Tue Dec 20, 2016 01:54PM
Italy’s third-largest bank, Monte dei Paschi di Siena
Italy’s third-largest bank, Monte dei Paschi di Siena

Italy plans to increase sovereign debt by nearly $21 billion to support its fragile banking sector.

To this end, the government has decided to seek parliamentary approval to borrow the money.  

The process could come as early as this week with a likely bail-out of Italy’s third-largest bank, Monte dei Paschi di Siena if the bank fails to pull off its own privately funded rescue plan.

The bank needs to dispose of its bad loans and raise 5 billion euros in capital by the end of December or else face the risk of being wound down by the European Central Bank.

Back on Monday, the bank received some good news as a key investor that was reconsidering its commitment to the plan issued a statement saying that its concerns had been resolved.

Private bank rescue fund Atlante has committed to spending 1.5 billion euros to buy some of Monte dei Paschi's bad loans. This comes after the investor expressed "deep reservations" over the terms of a bridge loan that Monte dei Paschi had secured as part of the sale of bad loans.

Italian Prime Minister, Paolo Gentiloni, is under huge pressure because private investors would suffer any losses under EU bailout rules.

“We believe it is our duty to take this measure to protect savings. I hope all the political movements in parliament share this responsibility," he said.

Italy's Economy Minister, Pier Carlo Padoan, said the funds would be used to ensure adequate liquidity in the banking system.

Gentiloni took power last week when his predecessor, Matteo Renzi, resigned after losing a referendum on constitutional reform. Renzi was regularly accused of being too close to the banks.