Italian banks slump as Renzi loses referendum vote. What next?
Stefano Rellandini/FilesSELECT/Reuters
Main page Finance, European Union
Hot topic
Dec. 6, 2016

Banking sector is in turmoil on the news of the Prime Minister Matteo Renzi's resignation after Italian voters replied with a "No" to the proposed constitutional changes at Sunday's referendum.

Italy has declined changes to the constitution that the country's Prime Minister Renzi put forth on the December 4 referendum. Renzi's suggestion was to significantly reform Italy's "ineffective" governmental structure by reducing the power of the upper house Senate and cutting the number of its members from 315 to 100. By achieving that, passing new laws would only require an approval of the lower house of parliament instead of a bilateral agreement of both houses that is required now, says BBC. The suggested changes were part of Renzi's effort to make it easier to pass laws in the country and push Italy forward after long years of economic stagnation. On top of that, analysts estimated that this would cut political costs by €500 million per year.

Renzi made the referendum into a personal vote of confidence, claiming that he would resign from his position in case voters voted against the proposed constitutional change. And, based on the vote counts from yesterday, an overwhelming 59.1% of Italians voted "No" on Sunday's referendum in disapproval of Renzi's proposal and support of the current status quo. As he promised, Renzi submitted his resignation to the Italian President Sergio Mattarella yesterday, what means that Italy is about to stay without fixed government the next months.

During his emotional midnight speech on Sunday, Renzi said that he takes "full responsibility for the defeat" and "we leave with no regrets", as reported by the Wall Street Journal.

"This is an occasion to really change Italy. Most of the people voting No are the ones wanting to keep the the current government out. They don’t care if it takes ages to approve a legislation, they just want Renzi out. But this is ridiculous, in a country where for 70 years we had 63 governments, and where at the G7 we always have to send a different prime minister," said one of the voters living in the U.K. interviewed by the Guardian.

Many said that the results of the referendum indirectly show the Italian society's support for right-wing and populist parties, including those promoting leaving the EU. These groups claimed that by voting "Yes", voters support Italy's traditional elites and promoted the referendum as a way to punish those in power, even in the absence of any kind of alternative, said the Fortune.

The WSJ experts say that the referendum results will only bring more uncertainty to the country's economy and government, especially with Renzi's resignation. Europe's fourth-biggest economy has been struggling with finding ways to foster growth and support problematic sectors for years but with an empty Prime Minister seat and, possibly, new parliamentary elections coming ahead the "No" vote only added more problems to Italy's table.

Here, the Financial Times editor Lionel Barber says that the nation's vote against the changes is just a form of an open protest against any type of government.

Banks' worst nightmare

As CNN Money puts it, with more bank branches than pizzerias in the country, Italian banks are weighed down by high costs and low returns and the controversial referendum only added more uncertainty to the sector. On top of that, Italian banks have accumulated over $380 billion of bad loans over the years of recession and the analysts say that many of the lenders desperately needed change to stay alive.

"If there is no solution, say, by Christmas, financial markets will start getting nervous again. If Italy does not get a new government soon, financial stability risk would increase and would collapse the time needed for the healing of the banking sector. The ECB may provide temporary relief if needed, but it would only be temporary," Lorenzo Codogno, a former General Director of the Italian Treasury, told the Guardian.

Bloomberg agrees that the difficult political situation in Italy, aggravated by Renzi's resignation, threatens to affect the banks' plans to reduce the burden of non-performing loans. Shortly after Renzi had confirmed his statement to resign as a Prime Minister following the vote, shares of most Italian banks sharply slumped. Banca Popolare di Milano (MI: PMII) lost 8% yesterday whereas Banco Popolare Societa Cooperativa (MI: BAPO) dropped 7%. Monte dei Paschi di Siena (MI: BMPS), the oldest and one of the most troubled Italian banks, lost 4% on fears that its rescue plan might be cancelled.

Monte dei Paschi was one of the banks participating in the "stress test" that analyzes how big financials would behave in the situation of a sharp economic slowdown. And, among 51 major European banks, Monte dei Paschi demonstrated the worst performance, what served as a big alarm sign for the EU government. That is why, a few months ago, the European Banking Authority confirmed that the bank didn't have the resources to cope with the difficult economic situation in Italy and approved a multi-billion rescue for the lender.

The bank announced back in July, reports CNN Money, that it had come up with a "definitive solution" to the problem of bad loans. Monte dei Paschi's plan was to raise €5 billion of new capital, which is higher than the bank's own capitalization, to compensate for the losses of €28 billion from bad loans. Similarly, Italy's largest bank UniCredit (MI: UCG) plans to raise €13 billion through shares and assets to address the loans problem.

“Recapitalization plans for Italian banks will become more difficult, given the strong ‘No’ and pending political paralysis. Most likely, banks will be given more time in order to avoid a bail-in of sub-debt, which is largely held by retail and would thus further strengthen the populist movement,” a Commerzbank analyst Christoph Rieger said in a note, as reported by Bloomberg.

To understand where Italian banks stand in a bigger context, it is enough to have a glimpse at STOXX Europe 600 Index. Bloomberg said that four out of five biggest decliners among the financials included in the index are Italian lenders. Monte Paschi, with a loss of 80% of its market capitalization, is the worst performer of the sector. Likewise, UniCredit stock dropped 55% since the beginning of the year, with smaller banks following in a similar manner. In general, Italian banks have fallen 40% since January, as compared to other European lenders that slumped by 14% in the same period.

A "No" vote and resignation of Matteo Renzi will unavoidably drive Italy into the period of market instability, which is the last thing the struggling Italian lenders need right now.

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