Italy's government approves creation of €20 billion fund to help troubled banks

Italy's government at a cabinet meeting in the early hours of Fridayapproved the creation of a €20 billion fund to help troubled banks. Italy's banking sector is saddled with 356 billion euros of bad loans, around a third of the euro zone's total.

Monte dei Paschi di Siena the country's third-largest lender was attempting a private rescue plan in which had until December 31 to raise €5 billion in equity or face being wound down by the European Central Bank, potentially triggering a wider banking and political crisis in Italy.

The government’s decision follows just hours after the Tuscan bank declared that a last-ditch effort to raise capital from private investors had failed. The government has effectively set stage for resucue of troubled Italian lender.

European rules on bank rescues require that investors to share some burden of losses. However, under the terms attached to the Italian government’s new fund, the losses suffered by holders of Monte dei Paschi’s junior bonds appear to be fairly limited.

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