Italy’s
€360 billion referendum
A
major political shock is sure destabilize the banking system — and
there seems to be one coming right around this weekend.
By SILVIA SCIORILLI
BORRELLI 11/29/16, 5:37 AM CET Updated 11/29/16, 7:41 AM CET
Sunday’s
referendum in Italy could derail Prime Minister Matteo Renzi’s
political career. But what really worries the rest of Europe is the
fate of the country’s banks.
Italy’s banking
system is staggering under €360 billion in bad loans. Almost any
outcome that destabilizes Italian politics would send tremors through
the country’s rickety financial system. While the long-term
consequences could be dramatic — in a worse case scenario perhaps
leading to the collapse of the eurozone — the first victims could
be efforts to rescue two of Italy’s largest lenders.
Renzi has pledged to
step down if he loses the referendum — as polls indicate he is
likely to do. A change in government will unnerve investors and
jeopardize a plan to use private money to revitalize Monte dei Paschi
di Siena (MPS) and UniCredit — the country’s third-largest and
largest bank, respectively.
MPS, in particular,
would face a rocky future. The Tuscan-based bank was spared a
government bailout over the summer when Renzi drew up a last-minute
€5 billion recapitalization plan with JPMorgan and Mediobanca, an
Italian investment bank. The success of the operation is now
contingent on the outcome of Renzi’s referendum.
In a document
presented to the bank’s shareholders at their last meeting in Siena
on November 24 and seen by POLITICO, the Tuscan lender said: “The
feedback given by the banks overseeing the recapitalization operation
highlight the substantial unavailability of institutional investors
to take important decisions relating to investments in Italian
companies before knowing the outcome of the constitutional
referendum.”
Headquarters of the
Monte dei Paschi di Siena bank | Giuseppe Cacace/AFP via Getty Images
Headquarters of the
Monte dei Paschi di Siena bank | Giuseppe Cacace/AFP via Getty Images
According to
sources, JPMorgan and Mediobanca have retained the right to withdraw
from the operation in case of any political or financial event that
would prejudice the success of the recapitalization effort.
Meanwhile, the nearly bankrupt Italian lender has struggled to
attract other investors.
Sources say the
Qatar Investment Authority, a government fund, could be willing to
contribute €1 billion to the recapitalization, but won’t commit
until the outcome of the referendum is known.
If private investors
walk away, MPS will likely face a harsher “resolution” process
based on EU rules, which will force shareholders and bondholders,
including many mom-and-pop investors, to swallow big losses. Such an
approach would be politically toxic in Italy and give wings to the
anti-establishment 5Star movement, fueling Euroskepticism at a time
when Brussels is struggling to hold back the tide of populism across
the Continent.
The 5Star movement’s
founder, comedian Beppe Grillo, has called for a referendum on
staying in the single currency. The Italian system doesn’t allow
voters to have their say on international accords, but polls indicate
at least 30 percent of Italians favor a return to the lira.
The failure to bring
MPS back to health could also cast doubt on UniCredit’s ability to
attract investors for its own €10-€13 billion recapitalization
plan, its fourth in five years. While few investors believe Italy’s
only systemically important bank will end up short of cash, the
operation would undoubtedly become more difficult and expensive.
“Renzi was the
first person who failed to understand the risks he exposed the
country to by linking the referendum to his government’s fate,”
one person familiar with the bank’s plans said.
The outlook for
market solutions to the problems of six other smaller banks would
look similarly grim.
To be sure, not all
investors agree that the referendum’s failure would necessarily
spell the end of the deal. One banker involved in the discussions
between banks and investors, who did not wish to be identified
because they are meant to be private, described the success of the
referendum as a “necessary but not sufficient condition” for MPS’
capital raise to succeed.
And some industry
observers — including the ratings agency S&P — say they don’t
believe the referendum will affect the country’s creditworthiness,
unless it leads to a substantial reversal of structural reforms.
“It is a
reasonable guess that very little will change in Italy’s economic
fundamentals starting from December 5, irrespective of who wins the
referendum,” said Marco Sonsini of public affairs consultancy
Telos. “This won’t be chaos. Just democracy.”
The replacement of
Renzi with a technocratic government — with new elections slated
for late 2017 or early 2018 — could ease fears. “[If Renzi were
to make way] a caretaker government headed by, say, current Finance
Minister Pier Carlo Padoan, it is possible that international
investors may still be interested,” said Alberto Gallo, head of
macro strategy at Algebris Investments in London.
One thing is
certain. As Padoan said at a press conference in Rome on Monday,
“International markets don’t love uncertainty.” Should Renzi’s
referendum fail, very little will be certain about the Italian
economy.
Authors:
Silvia Sciorilli
Borrelli
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