Italy wants to borrow up to €20 billion to support its fragile banking sector and potentially rescue Monte dei Paschi di Siena.
Monte dei Paschi di Siena, Italy’s third-largest bank, needs to raise €5 billion in fresh capital by the end of the month.
If the bank cannot arrange a private sector bailout, a state rescue may come as early as this week.
Monte dei Paschi di Siena is saddled with bad loans and is deemed to be the weakest major EU bank.
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The government will seek parliamentary approval to help to borrow the money.
PM Paolo Gentiloni, whose government has only been in office for a week, is under pressure because private investors would suffer any losses under EU bailout rules.
He described the move as a “precautionary measure”, adding: “We believe it is our duty to take this measure to protect savings. I hope all the political movements in parliament share this responsibility.”
However, Economy Minister Pier Carlo Padoan stressed the funds would be used to ensure adequate liquidity in the banking system and support other struggling banks.
Officials have also said they were examining a scheme to compensate retail investors for any losses incurred.
Paolo Gentiloni’s predecessor, Matteo Renzi, resigned after losing a referendum on constitutional reform and was regularly accused of being too close to the banks.
Paolo Gentiloni has been appointed Italy’s new prime minister after Matteo Renzi’s resignation.
Matteo Renzi resigned after losing a referendum on constitutional reform last week.
The 62-year-old former foreign minister is a loyalist from Matteo Renzi’s Democratic Party.
Correspondents say that if Gentiloni is successful in rallying support a government could be formed in days.
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In a brief acceptance speech, Paolo Gentiloni said he realized the urgency of forming the government to reassure the country.
The new prime minister said he would work within the framework of the previous administration, making it likely that he will reappoint several ministers.
Paolo Gentiloni faces a banking crisis and a rise in popular support for anti-establishment and eurosceptic parties.
Opposition parties have ruled out joining a national unity government, with the populist Five Star Movement saying it will boycott a parliamentary approval vote, due to take place on December 14, because it would have not legitimacy.
The party has called for immediate elections, currently due to be held in May 2018.
However, President Sergio Mattarella has said the current electoral rules must be revised so both houses of parliament are synchronized.
The law was changed to the so-called “Italicum” system last year to give the leading party a parliamentary majority through bonus seats in the lower Chamber of Deputies. But there has been no such change in the Senate, which is elected by proportional representation.
Senate reforms formed part of the package of reforms put to Italian voters on December 4, while the legitimacy of the system for the Chamber of Deputies is to be ruled on in January.
Matteo Renzi’s plans for constitutional reform were rejected by a margin of 59% to 41%, prompting his decision to stand down.