Friday 23 December 2016 2:14 pm

Monte dei Paschi bailout: Under certain conditions, Italian state aid can be signed off by EU authorities

The Italian bailout of lender Monte dei Paschi may not be in breach of EU state aid rules, officials have confirmed.

Overnight the Italian Prime Minister Paolo Gentiloni confirmed the lender – the oldest surviving bank in the world – had to go cap in hand to the government saying it needed to dip into €20bn (£17bn) of state funding.

The appeal for help followed Monte dei Paschi's failure to raise €5bn from private investors.

Is state aid allowed?

EU state aid rules dictate state aid is prohibited unless "justified by reasons of general economic development". The idea is to prevent EU companies gaining an advantage through receiving funding from the governments of member states.

But according to an European Commission spokesperson, the cash lined up by Gentiloni could be approved if certain conditions are met, including if a restructuring plan that was signed-off by EU representatives.

The spokesperson told Reuters:

A precautionary re-capitalisation solution can be put in place in full compliance with EU rules if the conditions are met, and require burden-sharing by shareholders and sub-debt investors.

Monte dei Paschi, the third largest lender in Italy, is laden with €360bn bad debt. In annual health checks by European authorities in July it languished in last place out of all the 51 EU lenders tested.

The European Central Bank gave the lender until the end of the year to bolster its balance sheet and it had hoped to flog some its non-performing debt and raise cash from private investors – through a so-called "bail-in".

But the resignation of Gentiloni's predecessor, Matteo Renzi – who has been credited with efforts to clean up problems in Italy’s banking sector – further spooked the market and it became clear the capital raise would flop.