Italians Decide Maybe They Don’t Need Banks

It's kind of cool that Italy can be a sumptuous cultural paradise and economic wasteland all at once.
Author:
Updated:
Original:
By Holapaco77 (Own work) [CC BY-SA 4.0], via Wikimedia Commons

By Holapaco77 (Own work) [CC BY-SA 4.0], via Wikimedia Commons

For a brief moment yesterday, it appeared that maybe things might be OK. A glimmer of hope broke out over the Alps. Austria—you know, the place that gave us this guy—ended the unbroken string of electoral temper-tantrums that began with Brexit and climaxed with President Trump, and awarded its presidency (for the second time) to a Green Party member born to refugees instead of the right-wing xenophobe they almost elected back in May in an election that had to be thrown out because some absentee ballot-counters got a head-start on things, and the Austrian Donald Trump’s people called “RIGGED!” (and then was further delayed because Austria ordered its new absentee ballot envelopes from the same company that provided them to George Costanza).

Unfortunately, Italy was voting at the same time on some constitutional amendments designed to make their country governable for the first time since this guy. Obviously, this happened:

Italy plunged into political and economic uncertainty early Monday as Prime Minister Matteo Renzi said he would resign after voters decisively rejected constitutional changes, a step certain to reverberate across a European Union already buffeted by anti-establishment anger….

Financial analysts have warned that instability caused by Mr. Renzi’s premature departure could result in a renewed and possibly contagious financial crisis in Italy, where banks are saddled with bad loans, and where desperately needed investors are turned off by the return of Italian instability.

Now, in fairness, it could be argued that this isn’t another Brexit or Trump, and it has been. You could (plausibly) argue that this is just Italy being Italy, and point out that, Hey! The polls were even right this time. And while the vote made Angela Merkel sad, cost Renzi his job and maybe put an end to Italy’s 700 year experiment with banking, the markets took things in admirable (and hopefully not delusional) stride.

The result from Italy did little to slow the postelection rally in U.S. banks. Shares of banks and other financial companies in the S&P 500 gained 1.1%....

The Stoxx Europe 600 rose 0.6%, despite losses in the Italian banking sector….

The mood was brighter in currency trading, with the euro last up 0.7% against the dollar at $1.0739—a marked recovery after falling to its lowest level since 2015 as the referendum results came in.

Now, about those Italian banks. And, in particular, this Italian bank….

The fate of Banca Monte dei Paschi di Siena bondholders sits on a knife edge as bankers hammer out the feasibility of a private recapitalisation for the troubled lender, after voters rejected prime minister Renzi's constitutional reforms on Sunday.

The syndicate of banks underwriting the €5bn capital raise were due to meet on Monday to discuss whether the result could knock the cash call, expected to start on December 7 or 8, off course. Under a pre-underwriting deal, the banks can drop the transaction due to adverse market conditions.

Worse, the far-bigger UniCredit plans to raise as much as €13 billion early next year….

A threat to UniCredit would be a threat to Europe’s banking system. However, there isn’t really a threat to UniCredit. The bank’s capital raising next year will probably be more expensive thanks to the political turmoil, so its existing shareholders will suffer more than they would have done, but that’s the limit of the upset—unless it looks like Five Star is coming to power soon.

Enter the European Central Bank, which has its work cut out for it keeping the world’s oldest bank (and the rest of Italy’s banking industry and economy) afloat. And people seem to think that it will, with an endless supply of quantitative easing and an assist from the European Union, whose leaders are going to take a breather before making Italy do more of the things that led to Renzi’s downfall and will almost certainly lead to his successor’s downfall, as well.

"The difference between Italy and other states such as Germany and Austria is that, until now, in Italy there has not been any significant state aid or state takeovers (of banks)," Nowotny, who heads Austria's central bank, told reporters.

"It therefore cannot be ruled out that it will be necessary for the state to take stakes (in banks) in some way," he added.

The Eurogroup said in a statement on the budgets of euro zone countries that Italy would need "significant additional measures" to rein in its budget by 0.6 percent of GDP as required under EU budget rules….

"We agreed that at this juncture it's difficult for the Italian government to commit now to take additional measures. Therefore the Eurogroup invites Italy to take necessary steps in the near future to ensure that the budget will be compliant," Dijsselbloem said.

On the bright side, maybe we won’t have to deal with Brexit after all.

Could the EU dissolve before Britain has a chance to leave?...

If the eurosceptic group continues to ride the anti-establishment wave, some believe it could win should an election be called, leaving Italy teetering on the brink of a Brexit-style shock.

Italy’s Premier, Matteo Renzi, Says He’ll Resign After Reform Is Rejected [NYT]
Austria Rejects Far-Right Presidential Candidate Norbert Hofer [NYT]
Italy’s referendum result is not another Brexit or Trump [Guardian]
Stocks Rise, Euro Recovers After Italy Referendum Result [WSJ]
Bondholders wait anxiously as BMPS fate hangs in the balance [Reuters]
No Roman Holiday for Investors in Italy [WSJ]
Italian ‘No’ Vote Poses Test for European Central Bank [WSJ]
QE infinity eyed in Europe if Renzi loses crucial Italian referendum [CNBC]
Italy might have to bail out banks, ECB’s Nowotny says [Reuters]
EU cannot ask Italy for more budget measures now: Eurogroup head [Reuters]
Italy referendum: Is the EU going to fall apart before Britain gets a chance to leave it? [Independent]

Related