Italian Banks Could Drag Europe into a Market Collapse
“Fallimento” is the word that Italians use to describe failure, including bankruptcy. On Monday, December 5, many Italians might use that word to describe what could happen to eight Italian banks. This is because, on December 4, Italians will vote in a crucial referendum to alter the constitution. A rejection of the plan could trigger economic collapse.
Should the “No” vote emerge victorious, it would put the pro-“Yes” camp, headed by Prime Minister Matteo Renzi himself, in a precarious position. Renzi might be forced to resign, delivering Italy to the second caretaker government of the current decade. This would signal an end to economic and political reforms that could send the markets into a tailspin and market collapse.
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In a sense, the Italian referendum could produce a similar effect on the markets as Brexit did. The Financial Times has warned that no fewer than eight Italian banks would suffer. They face the very prospect of bankruptcy. (Source: “Fears mount of multiple bank failures if Renzi loses referendum,” Financial Times, November 27, 2016.)
The Financial Times warns that the “No” vote in the referendum would indicate the overall rejection of the government. It would not simply limit itself to refuting the constitutional amendments to lower the number of senators. The ensuing political instability, therefore, could discourage investors from participating in bank recapitalizations.
It’s no wonder that Italian banks have been hammered lately. In Milan, Monte dei Paschi di Siena SpA dropped 16.5% during the session. UniCredit SpA, Mediobanca Group (BIT:MB), Banco Popolare, and Banca Popolare di Milano Scarl (BIT:PM) are also in the red. The polls, however reliable they might be, suggest the “No” vote is winning. The opposition has rallied behind the “No,” hinting at the political capital at stake.
Why should you care about Italian banks? If they fail, analysts fear that the troubles of the Italian banking system will spread like a virus, infecting the entire eurozone. That would have an effect on global markets in general. Non-performing loans have tripled since 2007 and have left the Italian banking sector vulnerable to shocks—political ones included.
In a sense, something similar happened with the sub-prime crisis. Except, in that case, the trigger came from the free market. As for the 2008 financial crisis, the European Union (EU) decided that taxpayers would not have to bail out banks any longer. Shareholders, creditors and, ultimately, account holders will have that sorry task.
