Monte dei Paschi faces higher capital hurdle to secure bailout Italy has bent to pressure from the European Commission and agreed tougher conditions for the bailout of Monte dei Paschi di Siena as it desperately seeks to avoid a nationalisation of its third-largest bank by assets. The EU has demanded that Monte dei Paschi increase the size of a planned €1bn capital increase and gradually wind down its €29bn Italian government bond portfolio to be allowed to take €4.1bn in bailout bonds from the state. Without the bailout, the bank would not be viable. Nonetheless, Joaquín Almunia, the European Commissioner who polices bank bailouts, failed to dispel the spectre of nationalisation hanging over the bank. He said that if the capital increase - which is now expected to be €2bn - is not successful, the Italian state will be forced to take equity in the bank, a scenario with tumultuous implications for the country's banking sector, state finances and political landscape. Monte dei Paschi, which was founded in 1472 and considers itself to be the world's oldest bank, is closely linked to Italy's centre-left political parties. Its nationalisation would threaten Italy's governing coalition led by centre-left leader Enrico Letta as well as sending shockwaves through the banking sector when the economy is showing some signs of emerging from nearly two-years of crippling recession. "If the capital increase fails, the condition will be the conversion of state aid in bank shares," Mr Almunia told reporters after a meeting with Fabrizio Saccomanni, Italy's finance minister, at a business forum run by the Ambrosetti group at the Villa D'Este in Cernobbio, northern Italy. Mr Almunia said Monte dei Paschi must complete its capital increase in the 12 months following the approval of the amended turnround programme. Italy has struggled to appease international and EU authorities about its bailout of Monte dei Paschi, which has been embroiled in a scandal that erupted 18 months ago when hidden derivatives deals to cover up losses from bad management were revealed as well as accusations of bribery and backhanders. Former top managers are under arrest and police are also investigating the suicide of the bank's longstanding director of communications. The bank's new managers narrowly avoided a bank run but the scandal has left the city of Siena, which has been its largest shareholder with a 37.5 per cent stake, nearly bankrupt as dividend payments dried up. Monte dei Paschi's core capital would be only 6.5 per cent without the aid package from the government, according to analysts" estimates. The IMF in its July statement told Italy to strengthen its banking system, push banks to provision for rising bad loans and "be prepared to take action expeditiously" if Monte dei Paschi failed to meet its targets.