(Adds analyst comment, more detail) MILAN, Dec 9 (Reuters) - Shares in Monte dei Paschi di Siena and other Italian banks fell on Wednesday in a sign of fading expectations that the financial sector will benefit from a wave of mergers and a government solution to its bad loan problems. Monte dei Paschi fell 1.4 percent by 1221 GMT, after an earlier 5 percent drop triggered a trading suspension. UBI , Banco Popolare and Popolare di Milano also slipped, though they recovered from earlier lows. Brokers said the Tuscan bank, which had already lost 5.6 percent on Tuesday, was bearing the brunt of a shift in sentiment towards Italian banks. This is due to lack of progress on long-awaited industry tie-ups and on a government-brokered bad bank plan to deal with soured debts. “There are a number of factors at play: the macro-economic conditions remain weak, the much-touted M&A activity is not happening, the bad bank project is stalling,” Fidentiis analyst Fabrizio Bernardi said. “If you had bought Italian banks hoping mergers would happen quickly, you sell now and look at them again next year.” A government reform of Italy’s main cooperative or “popolari” banks approved earlier this year and aimed at reducing the number of banks to make them stronger had been expected to lead to consolidation. But after months of talks among the main players, which include UBI, Banco Popolare and Popolare di Milano, no deal has materialised against a backdrop of uncertainty over bad loans and capital levels, as well as differences on governance issues. An attempt by the Italian government to set up a special vehicle to help banks get rid of bad debts after a three-year recession has also stalled, due to opposition by the European Commission. Italian banks in September had 200 billion euros ($218.8 billion) in non-performing loans, those least likely to ever be repaid, or 18 percent of total corporate loans. The lack of a quick fix for asset quality is a setback particularly for banks like Monte dei Paschi, which is on a slow recovery path after emerging as the worst performer in a European, sector-wide health check last year. It has the highest proportion of soured debts among Italian banks and has been told by the European Central Bank to find a partner, though the search has so far proved fruitless. The bank’s shares are also under pressure after investor BTG Pactual cut its stake in Monte Paschi to below 1 percent following the arrest of the Brazilian group’s former CEO and chairman Andre Esteves, according to a source close to the matter. ($1 = 0.9142 euros) (Reporting by Silvia Aloisi and Gianluca Semeraro. Editing by Jane Merriman)
Despite dragging itself out of recession last year , Italy only did so at half the pace achieved by the eurozone as a whole . Analysts say that unless Italy 's Government gets serious about tackling the bad debts that are crushing the country 's financial system , its debts will continue to underperform its peers , say analysts . Sadly , economists are only mildly optimistic on its prospects for doing this , due to the sheer lack of non - performing loans , typically defined as debts that have been delinquent for several days or more ; Italy 's bad loans have soared to over € 200bn ( $ 218bn ) , a fourfold increase since the end of 2008 , with more and more borrowers leaving behind , despite the improved economic backdrop . A need for action was highlighted yesterday when shares in Monte dei Paschi dei Siena and other Italian banks fell due to fading expectations that the banking sector will benefit from a series of mergers and the Italian Government 's solution to its bad debt issues . An attempt by the government to set up a special vehicle to help banks rid themselves of bad debts has stalled , due to European Commission opposition .