A woman strolls in front of Monte dei Paschi bank headquarters in Siena in this June 27, 2012 file photo. The Italian government looked set to take a stake in Banca Monte dei Paschi di Siena, after the world's oldest bank posted a bigger-than-expected first-half loss, making it almost inevitable that it will end 2012 in the red.

Around since 1472 … but Italy's Monte dei Paschi bank is in trouble. Photo: Reuters

WHEN it was founded in 1472, Leonardo da Vinci was 20 years old, the Wars of the Roses were raging and America had yet to be visited by Christopher Columbus.

More than five centuries on, however, historical pedigree counts for little for Monte dei Paschi di Siena, the world's oldest bank.

Having endured feuds between city states, fascism and two world wars, the venerable bank has become the latest European financial institution to be swept up in the economic crisis, announcing losses of €1.6 billion ($1.9 billion) in the first half of this year.

It is paying the price for being massively exposed to Italian government debt - once a safe option but now an enormous liability.

Founded when Siena was an independent republic, the institution - known simply as ''il Monte'' by the city's inhabitants - expanded after Italy's unification of 1861 to become the country's third-biggest bank. Its woes have had a profound effect on Siena, famed for its Renaissance palaces, gorgeous squares and rich food.

The bank has traditionally used its wealth to fund a range of social, cultural and sporting activities, from the restoration of crumbling buildings to sponsoring the city's best-known event, the Palio horse race, in which bareback jockeys hurtle around the Piazza del Campo twice every summer.

For a city of barely more than 50,000 people, the largesse was on a grand scale: about €150 million would be doled out in an average year, rising to as much as €200 million in times of plenty. In the 15 years before the economic crisis struck in 2010, the bank shelled out about €2 billion, in a system of patronage that has been compared to mediaeval city states.

The money paid for shiny new infrastructure, from roads to biotech facilities, and the fact that it has all but dried up has affected every segment of Siena society.

''The crisis is very serious for the city. Siena is a small town with a huge bank and the two have always been intertwined,'' said Giuseppe Ragusa, an economics expert from Rome's Luiss University.

Monte dei Paschi is in the unenviable position of holding about €25 billion of Italian sovereign bonds. In June, it was forced to seek a government loan of almost €2 billion to shore up its capital and pay off its debt, making it the first Italian bank to require a bailout.

''Monte dei Paschi was a lot less diversified than other Italian banks and put a lot of money into government bonds,'' Professor Ragusa said. ''Before the financial crisis, those bonds were considered a good, safe investment. But now, every time the spread between Italian and German debt rises, the value of the bonds go down. That means they have less money to lend, so their business declines. It's a vicious circle.''

The bank has been widely accused of mismanagement, notably in relation to its acquisition of another Italian bank, Banca Antonveneta, in 2007. Analysts said the €9 billion that Monte dei Paschi paid was way over the odds, putting an immense strain on its finances.

Its fall from grace comes as Italy's broader economic outlook goes from bad to worse, with the national debt spiralling to nearly €2 trillion and the country perceived as being vulnerable to contagion from neighbouring Greece.

Italians, who are already buckling under an austerity plan drawn up by Mario Monti, the technocrat Prime Minister, were hit last week by bleak statistics showing that the jobless rate among young people is close to 35 per cent and Italy's productivity is the lowest in the European Union.

In Siena, meanwhile, a new management team hopes to save Monte dei Paschi di Siena with a radical restructuring plan.

Within the next three years, 4600 staff will be axed and about 400 of its 1900 branches will be closed. The aim is to save more than €600 million and return to profitability by 2015. ''The bank has lasted for 540 years and wants to be around for another 540,'' said Alessandro Profumo, its recently elected president.

Telegraph, London