By Valentina Za and Giuseppe Fonte
MILAN/ROME (Reuters) - Italy's Banca Carige (MI:CRGI) will raise up to 3 billion euros (2.7 billion pounds) in debt using a state guarantee after Rome approved emergency measures to shore up the ailing bank, marking a major about-face by the ruling coalition.
Italy's populist government has set up a 1.3 billion euro fund to support Carige after the European Central Bank (ECB) last week put the Genoa-based bank under temporary administration, following a failed attempt to raise capital from investors.
This represents a significant shift by the 5-Star Movement, part of the coalition government with the right-wing League, which was highly critical of past decisions to use taxpayer money to prop up banks.
Carige has emerged as Italy's latest major problem bank after the previous centre-left government rescued rival Monte dei Paschi (MI:BMPS) and bankrolled the takeover of two regional lenders by Intesa Sanpaolo (MI:ISP) in 2017.
Italian banks have been hit by a deep recession that soured nearly a fifth of all client loans.
The 5-Star and the League defended their decision as a move to shield small savers, prompting accusations of hypocrisy from the opposition.
"They only needed 10 minutes at a late-night cabinet meeting to disavow five years of lies and insults directed against us," former centre-left Prime Minister Matteo Renzi said on Twitter.
Italy's UILCA union welcomed the shift after a meeting in Genoa on Tuesday with Carige's administrators.
"An appropriate change of mind after statements such as 'We won't give a penny to banks', so that conditions are now in place to rescue the Liguria-based bank," UILCA head Massimo Masi said.
Union sources told Reuters the administrators told the meeting any job cuts would only happen after Carige clinched a merger requested by regulators, but they also noted there was no potential partner currently in sight.
The unions expressed concerns about Carige's plan to shed more problem loans after the bank said it would invite potential bidders to cut impaired debts below 10 percent of total lending, compared with 27.5 percent at the end of September.
EMERGENCY MEASURES
Carige, which has faced liquidity crises in the past, said on Tuesday it would use the state guarantee to sell bonds, but added it was unlikely to turn to the government for capital.
In a decree which came into force on Tuesday, Italy reinstated a measure adopted in the past to provide liquidity to banks and committed up to 300 million euros for a guarantee provided by the Treasury on new bonds issued by Carige in addition to funds it may borrow from the Bank of Italy.
The decree also authorised the state to buy up to 1 billion euros in Carige shares by the end of September under a "precautionary recapitalisation" scheme previously used for Monte dei Paschi, but Carige has said that applying for state aid is "a very marginal option".
European Union rules governing state aid allow for a solvent bank to receive public money to fill a hypothetical capital shortfall under a shock scenario. Carige fared poorly in ECB stress tests last year.
Weakened by decades of mismanagement and an excessive exposure to the depressed local economy, Carige has piled up more than 1.5 billion euros in losses since 2014, mostly due to bad loans.
It has since raised 2.2 billion euros in three successive cash calls, but when the bank's shares were suspended on Jan. 2, it was worth just 84 million euros.
Italian banks in November came to Carige's rescue by providing second-tier capital via a 320-million-euro hybrid bond.
But Carige's top shareholder, the Malacalza family of steel magnates, in December blocked a new share issue of up to 400 million euros that would have been guaranteed by the bond's conversion into equity.
The Malacalzas, who have already poured more than 400 million euros into Carige, have said they first want more clarity on the bank's future.
Carige can still use the bond to beef up its core capital if this fell below minimum requirements and sources have told Reuters a possible conversion, which can be requested by the bank itself or supervisory authorities, remains on the table.
In the meantime, Carige's administrators have sought a reduction in the 16 percent rate the bank pays on the bond.
A source at the banking fund that bought the bond said a meeting would take place on Wednesday to discuss Carige's proposal.