ROME (Reuters) - The CEO of Monte dei Paschi told directors on Monday the bailed-out Italian bank needs 1.5-2.0 billion euros ($1.7-$2.3 billion) in cash to avoid breaching capital requirements in the first quarter of 2021, a source with knowledge of the matter said. Italy rescued Monte dei Paschi (MPS) BMPS.MI in 2017 spending 5.4 billion euros on a 68% stake. It has earmarked another 1.5 billion euros to ease its re-privatisation, which must take place by mid-2022. The Tuscan bank’s fate took centre stage, laying bare rifts within Italy’s ruling coalition, after the conviction of three former executives forced MPS to set aside more than 400 million euros against legal claims last week, and withdraw a commitment to fund the managers’ legal costs. The provisions and a bad loan clean-up plan which requires 1.1 billion euros in equity are set to erode capital buffers MPS holds above minimum requirements, when the pandemic is stoking loan losses. MPS presents quarterly results on Thursday and the source said the board had demanded CEO Guido Bastianini discuss with the Treasury the projected capital shortfalls before facing investors. MPS declined to comment. Sources have said MPS is considering both a share issue and an Additional Tier 1 issue to fill the capital gap, but the loss-making bank can ill sustain the cost of the latter. Meanwhile, MPS is considering transferring credit risks on up to 2 billion euros of performing loans to a third party to free up capital and buy time, the source said. Italy’s Treasury, led by prominent Democratic Party (PD) member Roberto Gualtieri, is set on merging MPS with a stronger peer, a solution advocated by former MPS CEO Marco Morelli. But a majority in the co-ruling 5-Star Movement is pushing for a share issue to keep the bank under state control in the near term and to fund a stand-alone business plan that CEO Bastianini is working on, party sources have said. The government had sounded out UniCredit CRDI.MI and Banco BPM BAMI.MI as potential merger candidates for MPS, sources have said. But a person involved in the process said any deal was blocked by MPS’ pending legal disputes if the state did not provide guarantees. The Treasury denied a report in the Italian media at the weekend saying the ministry had offered to inject up to 2.5 billion euros into MPS if UniCredit CRDI.MI took it over and another 3 billion euros in deferred tax assets. UniCredit has ruled out any M&A, but sources have said it may consider MPS under the right conditions, which include a neutral impact on its balance sheet. “The deal presents more risks than opportunities for UniCredit as legal risks would increase, CET1 (capital) neutrality wouldn’t be met and even assuming significant cost synergies, the deal dilutes 2022-2023 earnings per share by around 20%,” broker Equita said.