The European Central Bank has rejected a request by Italy's Monte dei Paschi di Siena for more time to raise capital, a source said on Friday. As David Pollard reports, sources have also told Reuters that the country's largest lender, UniCredit, is set to announce a massive cash call, as pressure on the banking sector mounts.
Monte dei Paschi had asked the ECB for a three-week extension until January 20 to raise cash. Time to wrap up a private, 5 billion euro rescue deal. That request now, sources tell Reuters, rejected - as being of little use. Rome seen as likely to step in to avert the risk of the bank being wound down. SOUNDBITE (English) SENIOR FX STRATEGIST, RABOBANK, JANE FOLEY, SAYING: "There are of course new ECB rules in place for saving the banking sector, and there is a big risk now that private sector bond, retail bond holders would have to carry some of the cost in refinancing or saving that bank." But amid the heightened nervousness since prime minister Matteo Renzi's referendum defeat last weekend, the risk of not doing anything could be much bigger. SOUNDBITE (English) SENIOR FX STRATEGIST, RABOBANK, JANE FOLEY, SAYING: "Certainly one reason for the government or the central banks to really try and staunch these wounds is the fear of contagion. The fear of contagion not just to Italy's other banks, but potentially outside Italy's borders." The uncertainty doesn't stop there ... UniCredit - Italy's largest lender - is expected to next week announce a share sale. At a possible 13 billion euros, it would the largest such issue ever by an Italian bank. And a major test of confidence. (SOUNDBITE) (English) PANMURE GORDON, CHIEF ECONOMIST, SIMON FRENCH, SAYING: "If they are unable to raise equity then the question now falls to what degree will euro zone finance ministers tolerate a capital injection. Will they see this a systemic crisis or a potential for a systemic crisis and therefore bend the state aid rules, which they did during the financial crisis?" UniCredit's market value has gone down by more than half to 15 billion euros this year. The pressure on the sector is fast going up.