If anyone can make the Italian banking system work it is “Super Mario” Draghi. The former head of the European Central Bank has been called to form a government. If he becomes Italy’s next prime minister, sorting out struggling lender MPS will be on his agenda after the pandemic is under control. Steep full-year losses at Monte dei Paschi showed how much trouble it is in.

Italian bank shares have strengthened in line with Draghi’s political prospects. The stock of Monte dei Paschi is up by a third. The majority state-owned bank is the final obstacle to clearing up the mess left by the financial crisis at Italy’s worst-run lenders.

The departure of UniCredit chief executive Jean Pierre Mustier has increased chances of the larger bank absorbing MPS. Andrea Orcel, a former UBS investment banking boss, is expected to get the job and do a deal. It needs to be at a price fair to UniCredit minority investors. Monte dei Paschi is an unattractive asset.

The bank has already undergone some cost-cutting and decontamination. The final batch of old non-performing exposures was taken on by state-owned bad loans specialist AMCO at the end of last year. Gross NPEs fell to 4.3 per cent from 12.4 per cent in 2019.

That may be where the good news stops. Interest rate declines have been costly, triggering a 14 per cent fall in net interest income. This contributed to a decline of nearly half that in core revenues. Operating costs fell 4 per cent. They cannot be cut much further without seriously damaging the business.

Orcel will need all his charm and experience to deliver a deal that does not infuriate at least one constituency: UniCredit minorities, Italy’s warring political parties and tough new chairman Pier Carlo Padoan. The most contentious elements will be the size of the equity dowry Monte dei Paschi brings with it and the politics surrounding it. Any opportunity will pass quickly as benefits from its deferred tax assets expire at the end of this year. When Orcel starts in April, the clock will begin ticking loudly.

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