European unity and some of its banks are back to threaten the stability of the global banking and financial systems.
We have already seen markets roiled this year the Brexit vote in Britain, the election of Donald Trump and the battle (now settled) for the conservative candidate for the French Presidency.
Next Sunday sees the greater problems for markets – the re-run of the election for the Austrian presidency (the lesser concern which may be won by a hard right candidate) and the big concern, the key referendum in Italy which if lost, will plunge the country into crisis and possibly expose its already tottering banks to renewed pressures.
As a result of rising concerns the Italian vote may be lost and Prime Minister Matteo Renzi follow his promise to quit, Italian bank shares were again hit hard overnight by nervy investors voting with their selling orders.
That in turn saw a sell off across many European markets – especially in financial stocks. European markets sold off overnight, helped also by confusion in oil markets with wild swings seen. But the bank fears in Italy were the major negative.
Italy’s main banking index slumped to a two-month low and the wider market lost 1.8%. The Euro Stoxx banking index shed 2.2% thanks to the sell off in Italian banks.
Banks were hit hard with shares of Italy’s largest lender, UniCredit SpA slumping 4.5%. Banco Popolare Societa Cooperativa SCRL lost 5.1%, Banca Popolare dell’Emilia Romagna plunged 6.6%, and Banca Popolare di Milano lost 5%. Mediobanca SpA shed almost 3% in value.
So far the selling hasn’t had much of an impact outside of Italy, but it will as the week goes on and there is no sign of a win for the Renzi government in Sunday’s polls. If that happens, the nervousness could infect Australian bank shares next week.
Investors are selling ahead of next Sunday’s election to decide on reform of the country’s constitution in a vote that has become referendum on the leadership prime minister Renzi – and one that he looks like losing.
Those opposing the referendum claim to be similar in thought to the Brexiteers in Britain and those who voted in Donald Trump in the US – in other words, populists with no idea about the impact of their vote.
Should the referendum be defeated Mr Renzi has said he will step down – a move that could throw plans to clean up Italy’s oldest bank Monte Dei Paschi into turmoil, and trigger problems elsewhere among Italy’s banks and those in other countries.
Italy has eight banks on the edge of financial strain. As well as Monte Dei Paschi, these include lenders Popolare di Vicenza, Veneto Banca and Carige, and four small banks rescued last year: Banca Etruria, CariChieti, Banca delle Marche, and CariFerrara.
The fear for investors is that Mr Renzi’s resignation would see private investors failing to recapitalise lenders, and in turn leading to fears they will need to be put under a new EU “resolution” mechanism that would force losses on all creditors, including millions of ordinary Italians.
Italy’s banks have a reported 360 billion euros of bank debts against just 225 billion of equity. If that situation is crystalised, then the problem banks and others could collapse or be forced into mergers that generate more losses. Monte Paschi is the flash point – its recapitalisation was supposed to start yesterday but there is growing doubt the 5 billion euro capital injection and bad debt restructure will be completed if the referendum is defeated next Sunday. In turn the fear is that any contagion from the small banks could halt the 13 billion euro capital increase planned Unicredit, Italy’s largest bank (by assets) by early next year that is thought vital for its viability.
Opponents of the referendum ad the proposed changes claim Mr Renzi is crying wolf, but will they test that theory by rallying the ’no’ vote and then seeing what will happen?
