Italy reaches EU deal on failing bank

The bank, weakened by massive amounts of debt, needs some €9 billion in fresh capital and the Italian government will contribute to the bailout with €6.6 billion of public money.

To make "precautionary recapitalisation" of the world's oldest bank possible, the bank needs to cut costs, cap the management's pay. Its junior bondholders and shareholders will also take a hit.

Under EU rules, if a bank is proven to be solvent, and the private sector shares the burden of reinforcing the lender, the bank can be given a limited amount of state funds.

Since this precautionary recapitalisation involves taxpayer money, the EU wants to make sure the bank adheres to conditions to ensure that the bank will be profitable in the long-term. "This requires the bank to undergo in-depth restructuring," the commission said in a statement.

The final terms of the restructuring deal will be negotiated over the next few weeks. Italy will also need to spell out how it wants to implement the plan.

"It [the agreement] would allow Italy to inject capital into MPS as a precaution, in line with EU rules, whilst limiting the burden on Italian taxpayers," Vestager said in a statement.

"This solution is a positive step forward for MPS and the Italian banking sector," she added.

Under the draft deal, the bank will dispose of its bad loans portfolio on market terms – reducing risks on its balance sheet.

Its senior management will be subject to a salary cap, which will equate to ten times the average pay of the bank's employees.

Compensation of the junior bondholders will be dealt with by the Italian authorities, a commission spokesman said.

The deal depends on the European Central Bank confirming that Monte dei Paschi di Siena is solvent and on Italy securing a formal confirmation from private investors, agreeing to buy the bank's non-performing loans.

The Siena bank, Italy's fourth largest, had €26 billion in defaulting debts at the end of last year, and was in talks with investors over the sale of its bad loan portfolio.

After it failed to raise €5 billion from private investors, the Italian government agreed last December to bail out the bank.

Italy’s banks are struggling under the weight of €360 billion worth of bad loans, while the eurozone's third largest economy is facing a slow economic growth and is facing elections in the autumn.