Italian Prime Minister, Matteo Renzi, saw his proposals for constitutional reform defeated by popular referendum on December 4. The result – which was keenly observed by the markets following the prime minister’s promise to step down in the event of defeat – is the latest in a long line of scares regarding the weakness of the Italian banking sector.
Renzi confirmed his resignation on the morning of the result; sending shares in Italian banks plummeting as the country’s future financial landscape was thrown into uncertainty. The euro also experienced a dip in the immediate aftermath of the result; briefly touching 20-month lows before rebounding as markets factored in the result.
Economists have continued to worry about the state of Italy’s shaky banking sector, which has struggled to show any signs of reliable recovery under the burden of bad debts. Indeed, over the past year, Italian banks have lost almost half of their stock market value over fears regarding the weakness of the sector. Most notably, Italy’s third largest bank, Banca Monte dei Paschi, is on the brink of collapse – sparking fears of a wider crisis.
Italian banks have lost almost half of their stock market value over fears regarding the weakness of the sector
Efforts to save Banca Monte dei Paschi have revolved around an ambitious plan to raise enough capital to sell off €30bn ($32.2bn) in sour debts – but this proposal has struggled to attract any investors. The bank’s shares were down 2.6 percent in opening trading, despite the referendum’s result being largely expected. Meanwhile, Unicredit, which has been labeled systemically important by the Financial Stability Board, fell 5.3 percent.
The prospect of Renzi’s resignation has also given rise to speculation regarding the country’s political future. Francesco Garzarelli, a financial researcher at Goldman Sachs, said: “The rejection of the constitutional amendments does not represent an institutional trauma… what is more relevant for market participants are the political scenarios that open up from here. Indeed, the vote was seen as a test of the popular support still enjoyed by the moderate, reformist and pro-European government of Mr Renzi and the larger than expected defeat will not be without consequences.”
One such scenario could see a populist government mobilise an anti-euro sentiment, possibly culminating in Italy leaving the eurozone. However, Antonio Villafranca, an analyst at the Italian Institute for International Political Studies, disagrees. Villafranca told Bloomberg: “The idea that Italy is going to leave the euro the day after the referendum, or even quite some time after, is really exaggerated.”
There are many political and legal hurdles that make this particularly difficult. For example, Five Star – the Italian populist party currently campaigning for a referendum on eurozone membership – would face many obstacles even in the event of winning an election. Villafranca noted: “[The party] could have a hard time finding enough allies to form a parliamentary majority.” Even upon gaining such an unlikely majority, the party would need to find a way to implement such a vote, with the referendum currently unlawful in the eyes of the Italian constitution.