News that Italy’s prime minister Matteo Renzi is to resign following his loss in the referendum on 4 December, is being treated as a possible trigger for another European banking crisis, according to analysis from Nordic sources this morning.
Sweden’s biggest business daily Dagens Industri cites Robert Bergqvist, chief economist at SEB, who noted that the outcome had to a large degree been already priced in by the market, but that it could lead to a drawn out political crisis. But Joakim Bornold, financial economist at Nordnet, adds that the risk is Italy’s banks cannot raise the capital they need from investors if there is too much political uncertainty. And if a banking crisis is sparked in Italy, it could spread to trigger a broader crisis across the region.
Børge Brende, Norway’s foreign minister, warned against reacting too much to the outcome of the referendum, even if the relatively high turnout means that Italian voters have sent a clear message about their views on the constitutional arrangement in the country, reports Norwegian daily Dagens Næringsliv.
“The European political and economic system is robust, even if Italy’s economic situation is demanding,” Brende is quoted saying.
Nordea Markets said in its morning note on 5 December simply that: “No marks a blow to the Italian outlook”.
A key challenge is that should elections be triggered, it could result in complete gridlock in terms of policy development.
“Under current law, the lower house would be elected in a two-round system with a big bonus for the strongest party. That could be the anti-establishment Five Star Movement’s (M5S), but it has basically no chance to win the Senate in a proportional vote. So the result would be an almost complete blockage of the country,” Nordea Markets states, adding that becuase of events taking place in early 2017, such as a G7 meeting in May, it does not see elections taking place before June. It too sees a risk of a banking crisis in the country.
“In addition to government formation talks, the immediate market focus will be on the struggling banking sector. Not least because the new resolution regime makes government support much harder, Italy has been desperate to find capital via the private sector. The fate of the ongoing capital raising of Monde dei Paschi di Siena is first on the line, and its success or failure will have material consequences for the other banks.”
There is also a broader risk at hand; if the ECB fails to put a lid on significant spikes in Italian bond spreads through its QE programme, then markets could start to shed some of the faith built up in the ECB’s ability to provide succour to Europe’s financial markets, Nordea Markets suggests. Italy will not, however, be kicked out of the eurozone – a development that Nordea Markets labels “widely exaggerated”.
A year ago in early October 2015, SEB warned in a country report on Italy that: “Fiscal consoldation and growth are nwo key to maintain investor confidence and bar any return to the days of the euro-crisis three years ago. As such, Italy remains vulnerable to events beyond the government’s control from within or outside the eurozone. To accelerate growth, the government has launched several ambitious reform efforts. But the hoped-for effects of those may not show up soon and could rather stumble against vested interests and political resistance.”