The euro crisis upset that calculation. Across Europe, banks are confronting the same problem as seemingly safe bets that governments would repay their debts turned out to have been major gambles.
At the heart of the crisis, the tangled relationship between governments and the financial sector amplifies the financial problems on both sides. And in Siena, bountiful profits that once poured from Monte dei Paschi’s treasure-filled Gothic palazzo have dried up. Last week, the bank announced that it had lost $2 billion in the first half of 2012.
Analysts and the bank’s current management say a long-
prudent institution — based in the same building since 1472 — got caught up in the froth of the cheap-credit years before the crash and then made poor decisions about how to recover.
“It was really an orthodox and cautious bank,” said Angelo Riccaboni, rector of the University of Siena, which last year lost funding that would have come from bank profits. In Siena, he said, “people are either employees of the bank, or former employees of the bank, or would like to be employees of the bank. The city and the bank are so intertwined.”
Monte dei Paschi was lending money when Christopher Columbus was still dreaming of the shortest route from home to the shipyard, not India. But the bank’s financial situation deteriorated after it purchased a rival in 2007 in an ill-fated attempt to expand its reach across all of Italy. That decision resulted in massive debts from which the bank is still struggling to recover. The bank now appears to be the worst-off in Italy, with major capital shortfalls and a plunging share price.
The 55,000 residents of Siena are looking at the bank they call “Daddy Monte” with a newfound sense of vulnerability. This year, Sienese owners were forced to give up their majority stake in the bank, and many residents fear that the bank that has helped define the city’s identity for more than five centuries will soon slip away from them.
Profits from the bank financed the Palio, a traditional horse race in the town’s austere center square. They paid for renovations to the city’s severe Gothic buildings. They underwrote biotech programs intended to turn the Tuscan plain into a research hub. Nearly all that money — $150 million a year, on average, from 1996 to 2010 — has evaporated in the past two years.
“Nobody thought the banks would be in crisis, and then nobody thought Monte Paschi would be in crisis,” said Franco Ceccuzzi, the former mayor of Siena, who was forced to resign this year after losing support over the handling of the city’s interest in the bank’s management.