Valentina Za and Pamela Barbaglia by Giuseppe Fonte

MILAN (Reuters). UNICredit boss Andrea Orcel is at odds with Italy’s government over terms for a deal to purchase the bank Monte dei Paschi, sources say. The state has refused capital requirements exceeding 7 billion euros ($8billion), according to people familiar with the negotiations.

Given the many unresolved issues, negotiations are likely to be close to the wire. However, there is increasing pressure to reach a resolution.

Italy’s long-standing belief that a merger with an easier competitor is the best way to end a decade-long banking crisis has led to MPS being the embodiment of Italy’s bank woes.

UniCredit on the other side has very few choices at home to make up the difference with Intesa, the heavyweight competitor (OTC) whose market share grew by twice last year following the acquisition of UBI, the mid-sized peer.

UniCredit wants to know if it has a decision by the Oct. 27 meeting of its board. However, sources from both sides suggest that this may not be possible. There is also the possibility that three-months-old talks might end in a resounding halt.

UniCredit, in exclusive negotiations with MPS on July 29, had agreed to acquire “selected pieces” from MPS. The deal was to preserve its capital and increase earnings per share 10%.

The only global bank that is relevant to Italy said it would target only MPS branches located in the wealthier regions of northern and central Italy and will leave any risky or soured loans, as well as legal liabilities, stemming out of mismanagement.

UniCredit had completed its due diligence analysis by September, and then put things on hold until the end of this month. The Treasury was presented with specific demands, and UniCredit is currently going through them, according to two sources.

The biggest problem is that it will take the Italian tax payers four years to pay 5.4 billion euros for MPS in order to make it private again.

MPS plans to raise capital of 2.5 billion euro next year if there is no buyer. However, UniCredit thinks even a larger capital raise would only be a temporary solution. A person familiar with the matter said to Reuters.

Rome doesn’t agree with UniCredit asking for fair value adjustments after applying internal risk models and analyzing the balance sheet of MPS, according to one source. UniCredit did not respond to our request for comment.

According to the source, the Treasury has secured tax cuts worth approximately 2 billion Euros to facilitate the UniCredit MPS deal. However, the Treasury is not willing to spend more that 3.5 billion to increase MPS’ capital reserves or fund the exits of staff members.

HIGH Stakes

UniCredit must send MPS employees to early retirement to bring their efficiency level in line with the company’s. This is more than double what MPS planned to do under its draft business plan until 2025.

Neglecting to reach an agreement would result in both sides losing a lot of money.

Mario Draghi, Prime Minister of Italy faces a promise to reprivatise MPS before mid-2022. The commitment comes after the European Banking Authority (EBA) identified the lender as one of the most fragile in the euro area in its stress tests of this sector.

Orcel was the UBS investment bank chief and is currently struggling to raise UniCredit’s revenue and profit after his predecessor had focused on strengthening the capital reserve and cleaning up its balance sheet.

Although he has made it possible for potential acquisitions and mergers in order to increase growth, there are not many domestic targets. Cross-border transactions remain difficult.

According to two sources, Orcel studied Banco BPM as a potential move, a mid-tier bank.

To focus on MPS, he said that it was the best offer UniCredit has offered.

Banco BPM shares have risen 64% against 37% gains in Italy’s bank index over the same period.

Analysts say UniCredit has seen its shares rise partly due to expectations of a favorable deal with Treasury. Intesa gave Intesa 3,5 billion Euros in cash last year to encourage it to acquire for one euro the good assets from two local banks that were being liquidated.