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The Monte Paschi announced bailout claims that retail investors will be protected from losses imposed by the bailin by compensating them for up to €100k (the financial services compensation scheme limit).

Some of the junior corporate debt is trading at 40 cents to the euro for Monte Paschi, and also below par for other banks. Does it mean that the Italian government guarantees repayment at par for corporate bonds bought by retail investors?

Since institutions will be scrambling to offload their bond portfolios, this seems like a great deal for a retail investor where one can make up to €60k for free. Seems too good to be true.

Can someone clarify some of the details behind the bailout?

Mindwin Remember Monica
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SMeznaric
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1 Answers1

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You'd be taking quite a big gamble. From the article you mentioned in comments:

A model for the compensation of retail bondholders could be what Italy did after it stepped in more than a year ago to help four small banks. Junior bondholders were automatically awarded 80 per cent of the value of their losses as long as they could prove they had low income or scant assets. Otherwise, they had to go through an arbitration process to show that they had been the victims of mis-selling — a more cumbersome path.

So if they follow the previous scheme, you would at most get 80% back - and as you'd be hard pushed to claim mis-selling if you bought right now, you'd have to be not very well-off to begin with, making this an even bigger risk.

And of course they might look at other things like how long you've owned the bond. Generally in bailouts people are quite keen to limit "moral hazard", i.e. the prospect of future bailouts encouraging people to take overly risky decisions.

Ganesh Sittampalam
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