Banca Monte dei Paschi di Siena facade
Banca Monte dei Paschi di Siena is the world's oldest bank and the center of a fraud investigation. Prosecutors say the bank tried to cover up losses from risky bets. Reuters

Banca Monte dei Paschi di Siena (BIT:BMPS), the world’s oldest surviving bank, is on the verge of collapsing after opposition from its shareholders delayed a fundraising effort to save the Italian bank, which was founded more than 500 years ago in 1472. Next step: a government takeover.

A proposal to raise capital through a 3 billion euro ($4.1 billion) stock sale beginning as early as January was voted down by the Siena-based bank’s top shareholder, at an extraordinary shareholder meeting held on Saturday. The proposed fundraising was necessary for the rescued Monte dei Paschi to repay the state's loans worth $4.1 billion to avoid a government takeover. However, the proposed stock sale has been delayed until mid-May, after investors led by the main shareholder, Fondazione Monte dei Paschi di Siena, demanded the postponement of the cash call.

"These are decisions one takes in cold blood and in the right place," Alessandro Profumo, the bank's chairman, said at the meeting according to Reuters. At a subsequent press conference, he said: "What I have on my mind is a 3 billion euro cash call because we need to pay back 4 billion euros to taxpayers. Today this is uncertain and at risk."

The clash between Fondazione, which owns about 45 percent of the bank, and Monte dei Paschi’s board could lead to the resignations of Profumo and the bank's chief executive Fabrizio Viola. Local media reports said the duo would decide on their resignation next month, when a board meeting is expected around mid-January.

The delay in the stock sale has jeopardized Profumo and Viola’s plans for an assured fundraising, as they had secured a group of bankers to guarantee the rights issue, on the condition that the stock sale would be carried out by the end of January. A delay in the plan could cause Monte dei Paschi’s cash calls to coincide with similar fundraising efforts planned by other major European banks, and could hurt Monte dei Paschi’s prospects.

The capital hike was part of a tough restructuring plan agreed with the European Commission, as a precondition for approval for a temporary government bailout. Monte dei Paschi, which is paying interest at 9 percent on the bonds that it sold to the government in exchange for state aid, will be forced to swap it for stocks if it fails to pay the returns. A delay in capital increase could lead the cash-strapped bank to default on the interest payments of about 120 million euros to the state, forcing the government to swap the bonds for stocks, effectively nationalizing it.

Italy’s economy ministry and the Bank of Italy are closely watching the developments and are hoping to find a solution, as the government’s priority is to recover taxpayers' money and avoid nationalizing the bank, ANSA news agency reported, citing a government official.

Fondazione, a charitable banking foundation, has enough stake in Italy’s third-largest bank to veto any decision, and it has sought to delay the stock sale, until it has enough time to set right its own debt amounting to about 340 million euros, Bloomberg News, reported.

The foundation had raised capital from a pool of banks by providing a 33.5 percent share in Monte dei Paschi as collateral, and according to the agreement, the lenders can take over the stock if the bank’s share price falls below an agreed threshold of about 12.8 cents a share. On Monday, the shares closed at 17 cents.

The foundation also argues that a dilution in shares could lead to the bank, the largest employer in Sienna, to fall into foreign hands, a view echoed by Siena's mayor Bruno Valentini.

"We cannot let the third biggest bank in this country fall prey to foreign interests," Valentini said, according to Reuters. "Monte dei Paschi is not just an issue in Siena, it is a big national issue."

The postponement of the capital-raising has left Monte dei Paschi to consider alternate plans including a sale, or a spinoff of its assets. Companies such as France’s BNP Paribas SA (EPA:BNP) and Credit Agricole SA had considered buying a stake in Monte dei Paschi, but the current impasse could lead to a reconsideration of such interests.

“Both points of view were understandable, but only the market’s reaction in the coming weeks will demonstrate who was right,” Nicola Trivelli, chief executive officer of Sella Gestioni Sgr, an asset management company in Milan, told Bloomberg News. “The market’s expectations were for a capital increase now as that would have secured the bank’s position. Should executives opt to leave, that would be dangerous.”