President of Germany’s Bundesbank questions wisdom behind rescuing Italy’s third-largest bank if it is in a bad financial state. A bailout of struggling Italian bank Monte dei Paschi should not be seen as a done deal, a key European Central Bank policymaker has said.
Jens Weidmann, president of Germany’s Bundesbank, said the Italian government ought to consider whether it should rescue the bank if it is in a bad financial state.
“For the measures planned by the Italian government the bank has to be financially healthy at its core,” he said in an article published German newspaper Bild.
“The money cannot be used to cover losses that are already expected. All this must be carefully examined,” added Weidmann, a member of the ECB’s governing council.
The ECB has taken a tough line with Italy’s third-largest bank, refusing to give it more time to find private investment. The Italian government approved a state bailout plan last Friday after the Siena-based bank, which can trace its roots back to 1472, failed to convince investors to fund a €5bn (£4.25bn) cash injection.
It plans to dip into a €20bn fund approved by the government earlier this month for the purpose of propping the bank up if no rescue plan could be secured elsewhere. The bailout plan was spurred by Monte dei Paschi’s poor results in ECB “stress tests”, a system set up by the European Union after the financial crisis to measure banks’ resilience to unexpected economic shocks.
Stress tests are intended to ensure that taxpayers are not asked to pick up the tab for multi-billion pound bailouts, such as those that the British government orchestrated to save Lloyds and Royal Bank of Scotland. Fears about the strength of Monte dei Paschi began to mount after it came last out of 51 European banks in the ECB’s latest round of tests in July. The bank was told to shore up its finances by the end of the year or face being wound down.