Italy's government is to seek parliamentary approval to hike national debt by up to 20 billion euros to cover any eventual operation to stabilise the banking system. As David Pollard reports, it comes as the government is widely expected to have to step in to save Monte dei Paschi di Siena, which must raise 5 billion euros in capital by the end of the year or face being wound down.
With a national debt pile at 133 per cent of GDP, the last thing Italy might want is yet more debt. But that's exactly what it might need to save its ailing banks, according to its new prime minister. (SOUNDBITE) (Italian) ITALIAN PRIME MINISTER, PAOLO GENTILONI, SAYING: "We have begun an operation that I would define as a 'saving of savings'. The cabinet meeting approved a document to go before parliament which authorizes the government to use funds." 20 billion euros is the sum in question. Sources telling Reuters that at least 15 billion of that's earmarked for Monte dei Paschi and several other smaller banks ... In a sector burdened with around 350 billion euros of non-performing loans. (SOUNDBITE) (English) INDEPENDENT MARKET ANALYST, JEREMY BATSTONE-CARR, SAYING: "Italian bank equity amounts to about 220 billion euros so there's a big gap between the two numbers and the extent of that gap indicates the extent of the Italian bank sector vulnerability, so 20 billion in that context is by no means the whole story." Paschi has given itself until Thursday to conclude a five-billion euro cash call. If its own rescue plan fails, a government bailout for Paschi may - under ECB rules - mean losses for investors. Something Gentiloni's week-old government is desperate to avoid - but amid questions over, ultimately, what it can or will do. (SOUNDBITE) (English) INDEPENDENT MARKET ANALYST, JEREMY BATSTONE-CARR, SAYING: "It's hard to see where the strong policy support is going to be for the banking sector in general and for Monte dei Paschi ... I think this is going to require many regional authorities pulling together rather than just Italy being allowed to do it by itself." And already the price is potentially high. 20 billion euros more than one percentage point of GDP - and likely to weigh on government finances next year.