Eight separate Italian banks face the prospect of failure in the coming months should a “no” vote prevail in Sunday’s nationwide referendum on constitutional reforms proposed by Prime Minister Matteo Renzi.
If “no” wins, which is currently looking highly likely — most polls put it around six points ahead of the “yes” camp — market turmoil and turbulence should follow, “officials and senior bankers” cited by the Financial Times on Sunday say.
The world’s oldest bank Monte dei Paschi di Siena, along with Popolare di Vicenza, Veneto Banca, Carige, Banca Etruria, CariChieti, Banca delle Marche, and CariFerrara, could all end up at risk if market turbulence prevails.
Market turbulence will stem from the likely resignation of Renzi as prime minister if he loses the vote. It is unclear whether or not Renzi will stand down, as he has repeatedly changed his stance in the lead up to the referendum, seemingly finding it impossible to decide what to do after the vote.
Based on the assumption that Renzi does step down, Italy will enter a period of great uncertainty as it tries to form a transitional government and find a new prime minister. As we all know, markets hate uncertainty, meaning that turbulence in Italian equities, bonds, and other asset classes is almost certain to follow.
This, in turn, will make it less likely that investors will want to help recapitalise Italy’s risky banks, those cited by the Financial Times argue.
“Senior bankers and officials said that the worst-case scenario was where a failure of Monte Paschi’s complex €5bn recapitalisation and bad-debt restructuring demanded by regulators would translate into a wider failure of confidence in Italy and imperil a market solution for its ailing banks,” the article says.
The country’s financial sector is plagued by an enormous surfeit of bad loans so great that the government was, in April, forced into rallying bank executives, insurers and investors to put €5 billion (£4.2 billion, $5.57 billion) behind a rescue fund for its weakest banks. The Atalante fund is designed to buy so-called bad loans from lenders and invest in their shares in the hope that the re-energised banks will lend more to businesses and spur growth.
Monte dei Paschi di Siena is the worst affected, and at one point this year held bad loans equivalent to almost 50 times its market capitalisation. The bank managed to agree a rescue package involving the likes of JP Morgan, Deutsche Bank, and HSBC at the end of July. That package and other recapitalisations could be at risk after a “no” vote.
“The capital increases of Italian banks due to be announced right after the referendum may become even trickier than currently perceived in the case of a ‘No’ vote,” Lorenzo Codogno, the former chief economist of Italy’s Treasury told the FT.