Bailout of Italy bank Monte dei Paschi could take months - report

MILAN (Reuters) - A state bailout of struggling Italian lender Monte dei Paschi di Siena could take up to three months, a newspaper said on Thursday, hours before the world's oldest lender was expected to declare its own rescue plan a failure and ask Rome for help.

Monte dei Paschi, the country's third-largest bank, has only enough funding for another four months and risks being wound down by European regulators if it cannot clear a mountain of bad loans and find 5 billion euros ($5.2 billion) in fresh capital.

Such a failure would shake the foundations of Italy's banking industry, the euro zone's fourth largest and home to a third of the bloc's bad debts. It could also lead to a sovereign credit rating downgrade and hit the euro.

Italy's new government, just 10 days' old, is poised to mount a rescue as early as Thursday or Friday, after Monte dei Paschi said it had failed to find an anchor investor for its rescue plan, confirming a Reuters story.

Italian financial newspaper Il Sole 24 Ore said the bailout plan could take two to three months, starting with a government guarantee of Monte dei Paschi's own borrowings to ensure it does not run out of cash. The bank has also been bleeding deposits heavily.

The bank, laid low by ill-judged acquisitions and a failure to deal with bad debts accumulated during the global financial crisis, said this week it could run out of liquidity in four months. Only days earlier, it had estimated 11 months.

Under the bailout plan, a guarantee would buy Prime Minister Paolo Gentiloni's government time to secure approvals from the European Central Bank (ECB) and EU authorities, Il Sole said.

Rome's plan would need to satisfy EU rules that require private investors to suffer losses before taxpayer funds can be used to save a bank, a politically explosive issue given 40,000 retail investors hold bonds in Monte dei Paschi.

The lender's own rescue plan, arranged with the help of Wall Street investment bank JPMorgan, is expected to be declared a failure on Thursday, after the offer period expires for one vital component, a roughly 3 billion euros share issue.

The offer period ends at 2 p.m. (1300 GMT) on Thursday.

The share offer and a separate debt-for-equity swap aimed to raise 5 billion euros for Monte dei Paschi. With that objective almost certain to be missed by a wide margin, the government is preparing to step in to ensure that sum is met, Il Sole said.

At least some of the bank's creditors would be forced to convert their bonds into equity in that scenario.

A state rescue of Monte dei Paschi would be part of a 20 billion euro safety net that prime minister Gentiloni plans to set up beneath the banking industry.

Other banks also need to strengthen their balance sheets, including Banca Popolare Di Vicenza, Veneto Banca and Banca Carige. Italy is also struggling to find a buyer for four small banks rescued from bankruptcy a year ago -- Banca Etruria, Banca Marche, CariFerrara and CariChieti.

($1 = 0.9570 euros)

(Reporting by Francesca Landini and Giulia Segreti; Writing by Mark Bendeich; Editing by Stephen Jewkes and Keith Weir)