For a soldier under fire, the first rule is not to panic. Well, it also applies to an investor: the situation must be assessed coldly. But to do that you need to have the right information.
What do you have in your portfolio?
So, thinking of doing something pleasing to the readers of our blog (rightly) concerned about the evolution of the story Monte dei Paschi di Siena Bank, we report the various types of MPS shares and bonds, with the extent of the risk incurred, based on the bail-in rules - on which we refer to the specific post.
We recall that a possible bail-in envisages an intervention hierarchy, according to which those who have invested in riskier financial instruments bear any losses or conversion into shares before the others. And only after all the resources of the most risky category have been used up, can one move on to the next category. For the description and explanation of the various levels of subordination of bank bonds (a fundamental concept for understanding how much you risk with MPS) please refer to our ABCFinanza dedicated to the subject.
Therefore, first of all check in the following tables if and which MPS securities you have in your portfolio, then evaluate the risk rationally (data from Bloomberg). Keep in mind that the default probability of MPS, according to the CDS quotations (source Bloomberg), fluctuates between 8% and 9% these days.
Actions
Risk:
Whoever owns MPS shares is at the front, because it is the primary instrument for absorbing losses and recapitalizing the bank. Since the beginning of the year, the stock has lost more than 76% and, to recover this loss, it would need to register a performance of +317%.
Subordinated bonds
Risk:
It is the bank's second line of defense. Therefore, those who own subordinated bonds issued by MPS risk seeing their capital used to restore the bank (incurring losses and/or converting capital into shares) after the defense line of shares has been used.
Senior bonds
Risk:
It is the third line of defense of the bank, which eventually comes into play after the previous ones. If the bonds are secured, the investor is safe.
Is it the right time to sell?
Anyone wishing to get rid of any MPS securities in their possession should know that liquidity is scarce in these turbulent days. Therefore, assuming that it is possible to sell the bond, it is probable that the transaction will take place on very unfavorable conditions for the seller, ie with a particularly low price precisely because of the illiquidity of the bonds. It is therefore better to evaluate the situation coldly, before making hasty decisions, dictated solely by panic. Also consider the evolution of the political-institutional framework, which is crucial for understanding which direction MPS will take - just follow us to get synthetic news filtered by the "noise".
Again, at the cost of being pedantic, we would like to remind you that account holders would only be involved for the amount exceeding 100.000 euros, below which there is protection from the guarantee fund. In the event of a bail-in, therefore, the involvement of account holders over 100 thousand euros is an extreme measure and, to date, rather unlikely.
