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Italy readies sale of Monte dei Paschi di Siena stake -source

* Govt finalises decree to sell 68% stake in troubled lender

* Monte dei Paschi to issue 1 bln euros in capital instruments Treasury set to subscribe to up to 70% of total issuance

ROME, Aug 31 (Reuters) - Italy is close to approving plans to sell its stake in Monte dei Paschi di Siena and to cover most of the troubled Tuscan bank’s capital needs of around 1 billion euros ($1.2 billion), a government source said.

Rome spent 5.4 billion euros on a 68% stake in Monte dei Paschi in 2017 to prevent Italy’s third-largest bank from buckling under bad debts following years of mismanagement.

That stake is worth just 1.1 billion euros at current market prices and must be sold by the end of next year to meet the terms of the bailout negotiated at the time with European Union competition authorities.

Last month, the Treasury asked Prime Minister Giuseppe Conte’s office to approve as soon as possible a decree detailing privatisation plans for Monte dei Paschi, a confidential document dated Aug. 10 and seen by Reuters showed.

The government source, who spoke on condition of anonymity, said a cabinet meeting might discuss the matter as early as this week. A second source confirmed this was a possibility.

State auditors have already approved the decree, of which Reuters has seen a draft, but Conte needs to sign off on it alongside the economy and industry ministers.

The decree authorises the Treasury to help Monte dei Paschi shed 8.1 billion euros in problem debts through a complex scheme involving state-owned bad loan manager AMCO.

This clean-up “is essential to give the bank the prospect of a lasting return to profitability ... and pave the way for the economy ministry to sell its holding,” the draft decree said.

The Treasury, the bank and AMCO had started discussing the transaction at the end of 2018, it added.

With the deal, Monte dei Paschi will cut its gross problem loans, which topped 40% of total lending before the bailout, to below 4%, less than the industry average, in an effort to entice potential buyers.

Monte dei Paschi said last week the European Central Bank was set to authorise the clean-up on condition it replenished its capital buffers, which the spin-off will erode.

To do that, the bank plans to issue up to 750 million euros in so-called Additional Tier 1 bonds, costly high-risk debt which counts towards a lender’s regulatory capital, one of the sources said.

The Treasury and Monte dei Paschi both declined to comment.

The ECB also wants Monte dei Paschi to boost its second-tier capital with a 250 million euro issue, the bank has said.

Italy, which has set aside up to 1.5 billion euros to increase capital at state-controlled firms, is allowed to cover up to 70% of the bank’s overall financing needs, while private investors must provide the rest.

Based on the draft decree, Rome can sell its holding through share offerings or through “direct negotiations or a merger”. Sources have told Reuters that Monte dei Paschi is looking for a merger partner. ($1 = 0.8381 euros) (Reporting by Giuseppe Fonte; Editing by Valentina Za and Alexander Smith)

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