By James Mackenzie
ROME (Reuters) - Italy's Banca Monte dei Paschi di Siena (MIL:BMPS) will seek 2.5 billion euros (2.1 billion pounds) in fresh capital from investors, more than double its original plan, under a new bailout to shore up the loss-making bank, the economy ministry said on Sunday.
The revised plan is the latest measure in a painful recovery process for Italy's No.3 bank. Monte Paschi is still grappling with the aftermath of a massive derivatives scandal which emerged in the wake of its expensive acquisition of rival Antonveneta in 2008.
The scale of the planned capital increase, which matches the current market capitalisation of the bank, underlines the problems still confronting Monte Paschi. The bank could fall under direct state control if it cannot raise sufficient funds from shareholders.
European Union authorities must approve 4.1 billion euros in state loans to Monte Paschi and have pressed hard for the lender to step up the size of a capital increase, previously expected to amount to 1 billion euros.
Competition Commissioner Joaquin Almunia, who met Economy Minister Fabrizio Saccomanni on the sidelines of a conference in the lakeside town of Cernobbio, said on Saturday that if the capital increase failed, the state would have to convert state aid into bank shares.
Senior executives from the bank have believed for months that they would need more cash to shore up the balance sheet, weakened during a two-year recession that has sent bad debts soaring.
Monte Paschi, the world's oldest bank, has been based in the Tuscan town of Siena since its launch in 1472, and in more recent times has been building up tight links with local politicians and businesses which could be thrown into upheaval if the bank came under state ownership.
JOB CUTS, BRANCH CLOSURES
With investors wary about potential problems at the bank, which has announced thousands of job cuts and closed hundreds of branches, it may be hard to attract private money, raising a serious problem for Prime Minister Enrico Letta.
Italy, struggling to control its 2 trillion euro public debt and looking to boost revenues through privatisations, can ill-afford to take on additional burdens as a shareholder. But it may end up with little choice.
Italy has so far managed to avoid nationalising any of its banks in the wake of the financial crisis but it has faced heavy pressure from organisations including the International Monetary Fund to strengthen its banking system.
As well as the capital hike, the plan also includes new cost cuts and a gradual reduction in the bank's huge government bond portfolio which totalled 29 billion euros at the end of June, although the ministry said it would not affect its role as a market operator.
The plan will be considered by the bank's board and approved by the government and the Bank of Italy, before being submitted to European Union authorities for clearance under state aid rules. The ministry said it expected the approvals process could be completed within two months.
The recapitalisation will aim to repay a significant portion of special bonds bought by the Italian Treasury ahead of the schedule in the current bailout plan, the ministry said.
No comment was immediately available from the bank.
(Reporting by James Mackenzie and Lisa Jucca; Editing by Patrick Graham and Ryan Woo)