- Title: Referendum further damages Italy's banks
- Date: 28th November 2016
- Summary: LONDON, ENGLAND, UK (NOVEMBER 28, 2016) (REUTERS) (SOUNDBITE) (English) MIKE INGRAM, MARKET STRATEGIST, BGC PARTNERS, SAYING: "If the polls are to be believed and I suppose that's a big if given the run of bad polling that we have seen over the last couple of years Renzi has very little chance of actually winning this vote. Polls that I have seen put the "No" camp between 4 and 10 points ahead and that seems to be a fairly consistent message. Renzi of course has promised to go if he loses the vote and things like a technocratic government as a hold over have been mentioned. I think to a large extend it has been factored into market prices, it has certainly been factored into Italian bond spreads, for instance, against German bunds are at multi-year highs certainly since the QE programme was enacted. Having said that there is still some further downside because of course much of the Italian banking sector recapitalisation in Italy has been pushed back into the political sphere and how do they deal with that when you don't have a government."
- Embargoed: 13th December 2016 12:57
- Keywords: Italy referendum Prime Minister Matteo Renzi vote banks crisis
- Location: LONDON, ENGLAND / MILAN, ROME AND SIENA, ITALY
- City: LONDON, ENGLAND / MILAN, ROME AND SIENA, ITALY
- Country: Italy
- Reuters ID: LVA0025ACYQVH
- Aspect Ratio: 16:9
- Story Text:When a handful of European leaders met Barack Obama in Berlin this month to say their goodbyes, Italian Prime Minister Matteo Renzi informed the group that he may well lose power before the U.S. president.
While Obama leaves office on Jan. 20, Renzi has promised to resign if he does not win a Dec. 4 referendum on constitutional reform, opening the way for renewed political instability in the eurozone's third largest economy.
Opinion polls now predict Renzi's defeat, in what would be the third big anti-establishment revolt by voters this year in a major Western country, following Britain's unexpected vote to leave the European Union and the U.S. election of Donald Trump.
"If the polls are to be believed and I suppose that's a big if given the run of bad polling that we have seen over the last couple of years Renzi has very little chance of actually winning this vote. Polls that I have seen put the "No" camp between 4 and 10 points ahead and that seems to be a fairly consistent message. Renzi of course has promised to go if he loses the vote and things like a technocratic government as a hold over have been mentioned," said BGC Market commentator Mike Ingram.
Pressure is mounting on Renzi to drop his threat and instead agree to remain in power to deal with the fallout from a 'No' vote, including the risk of a fullblown banking crisis.
Having lost more than half their value over the last year, Italian banking stocks fell 3 percent to their lowest in almost two months as Italian government bonds also underperformed the wider rally in fixed income.
"The volume of questionable loans is something like 360 billion euros for the Italian banking system. And that's just those that we know about. I can't help but think that the push back we are seeing against the final settlement of Basel 3 which will happen shortly relying on banks own risk model are another way of kicking another NPL can down the road. The Italian banking system is not in good shape," said Ingram.
The Italian president could appeal to Renzi's sense of responsibility and ask him to seek a new mandate from parliament. His response might depend on the size of any defeat, with one advisor saying the 41-year-old premier could quit politics altogether if he suffers a huge snub next Sunday.
The referendum proposes constitutional reforms to strengthen the lower house of parliament and reduce the authority of the upper house Senate. Regions would lose some decision-making powers to bolster central government.
Renzi says the project is necessary to make Italy, which has had 63 governments since 1948, governable enough to enact reforms needed to revive its moribund economy. Opponents say it would reduce democratic checks and balances.
In the first week in December, Italy's third largest bank Monte dei Paschi di Siena has to launch a 5 billion euro ($5.3 billion) cash call. Investors are not expected to jump in if political instability prevails, meaning the state will almost certainly have to intervene swiftly to stave off collapse.
Although business leaders support Renzi's reforms, they have kept quiet during the referendum campaign, fearing they would prove the kiss-of-death in an era of anti-establishment angst.
But they are increasingly alarmed by the prospect of heavily indebted Italy drifting once more into political paralysis.
"The Italian banking system is not in good shape and if you look at the broader economy in Italy it has barely recovered from its lows post crisis - it's seven percent smaller than it was in 2008 so that has got to take its toll on the banking sector balance sheets, particularly in an environment where low interest rates have kept ongoing profitability very depressed indeed," added Ingram.
Opinion polls cannot be legally published in the final two weeks of campaigning, but the last 40 surveys released before the Nov. 18 cut-off showed the 'No' camp ahead by up to 11 percentage points.
A source in Renzi's Democratic Party (PD) said on Friday that private polls suggested this gap had closed to five points with a quarter of voters still undecided, meaning victory was still possible.
Initially the plan was backed by 70 percent of Italians, but when an over-confident Renzi said at the end of 2015 he would resign if defeated, opposition parties turned the referendum into a de facto ballot on his 2-1/2 years in office.
His record is mixed. Despite many reforms, Italy is set to have the third lowest growth in the 28-nation European Union in 2016 and the second lowest next year, according to EU forecasts. Unemployment is stuck above 11 percent and wages are stagnant.
A loss would provide more evidence of voter fury in Europe ahead of elections in France and Germany next year. And Renzi's exit could benefit populist ex-comedian Beppe Grillo, who wants to ditch the euro currency and whose Five Star movement won more than a quarter of the vote in Italy's last general election in 2013.
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