The Italian government is close to approving its stake sale in troubled lender Banca Monte dei Paschi di Siena (BMPS), Reuters reported citing a government source.

The government is planning to cover most of the bank’s capital requirements of €1bn ($1.2bn) through the stake sale.

The Italian government bailed out BMPS by acquiring a 68% stake for €5.4bn back in 2017 when the bank was moving into bad debts following years of mismanagement.

However, at current market prices the stake is worth only €1.1bn, the report added.

According to the bailout terms agreed with the European Union competition authorities, this stake must be sold by the end of 2021.

Earlier this month, in a confidential document, the Treasury had urged Prime Minister Giuseppe Conte’s office to approve a decree detailing the privatization plans for BMPS.

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The government source said that a cabinet meeting may be held this week to discuss the plans, Reuters’ report added.

The plan, if approved, will allow the Treasury to help the troubled lender shed as much as €8.1bn in bad debts, in a scheme involving AMCO – the state-owned bad loan manager.

This deal will allow the bank to cut its bad loans – which currently represents 40% of its total lending – to below 4%.

The draft decree reads: “This clean-up is essential to give the bank the prospect of a lasting return to profitability and pave the way for the economy ministry to sell its holding.”

The European Central Bank (ECB) said will approve the clean-up if the bank replenishes its capital needs.

As a result, BMPS is planning to issue its Additional Tier 1 (AT1) bonds worth up to €750m, and also two-tier bonds worth €250m.

Italy is allowed to cover up to 70% of the bank’s capital needs, the remaining must be provided by private investors.

The Reuters report added that the bank is looking for a merger partner, which the decree cites as one of the ways for Italy to sell its stake.