Things could get very ugly, very fast, if those bank bonds collapse.
By Don Quijones, Spain & Mexico, editor at WOLF STREET.
Project Fear began two years ago in the run up to Scotland’s national referendum. It then spread to the rest of the UK in the lead up to this summer´s Brexit referendum. But it keeps on moving. Its latest destination is Italy, where the campaign to instill fear and trepidation in the hearts and souls of Italy’s voters was just inaugurated by the world’s most influential investment bank, Goldman Sachs.
It just released a 14-page report warning about the potentially dire consequences of a “no” vote in Italy’s upcoming referendum on the government’s proposed constitutional reforms. The reforms seek, among other things, to streamline Italy’s government process by dramatically restricting the powers of the senate, a major source of political gridlock, while also handing more power to the executive.
The polls in Italy are currently neck and neck, though the momentum belongs to the reform bill’s opponents.
If the Italian public vote against the bill, the response of the markets could be extremely negative, warns Goldman, putting in jeopardy the latest attempt to rescue Italy’s third largest and most insolvent bank, Monte dei Paschi di Siena. The rescue is being led by JP Morgan Chase and Italian lender Mediobanca, and includes the participation of a select group of global megabanks that are desperate to prevent contagion spreading from Italy’s banking system to other European markets, and beyond. They include Goldman Sachs [Big European Banks Try to Block Contagion from Italian Banking Crisis (Before it Sinks them)].
In the event of a “no” vote, MPS’ planned €5 billion capital increase would have to be put on ice, while investors wait for the political uncertainty to clear before pledging further funds. This being Italy, the wait could be interminable and the delay fatal for Monte dei Paschi and other Italian banks, Goldman warns. It also points out that Italy is the only European country where a substantial portion of its bank bonds are held in household portfolios (about 40% according to data from Moody’s, four times more than Germany and eight times more than France and Spain).
In other words, things could get very ugly, very fast, if those bank bonds collapse! As for Italian government bonds and Europe’s broader debt markets, they would be insulated from any fallout by former Goldmanite Mario Draghi’s bond binge buying.
Goldman’s report has one main purpose: intimidating Italy’s electorate into following the government — and EU — line. Failure to do so would be tantamount to economic suicide, since it would trigger the collapse of the banking system and the mass destruction of billions of euros of Italian household wealth.
That may well be what happens in the end, but it won’t be due to the voting preferences of Italy’s electorate, whatever Goldman may claim. After all, it’s not like investors are not already perfectly aware of the chronic weaknesses of Italian banks. Italian banking shares have crashed. Just as ominous, the Bank of Italy’s liabilities towards other Eurozone central banks rose to a record high of 326.95 billion euros in August, above levels not seen since the height of the euro sovereign debt crisis four years ago.
In other words, investors and depositors — both foreign and domestic — appear to be voting with their feet.
You can hardly blame them! Monte dei Paschi has needed two bailouts just to make it this far, and it’s still the weakest lender in Europe, according to the ECB’s latest stress tests, and needs a third bailout. To make matters worse, its CEO just stood down following allegations of false accounting and market manipulation. Since the announcement of the latest rescue attempt, MPS’s penny-stock continues to languish in the €o.23-€0.26 range, just over one-tenth of its value a year ago. It’s hardly what you’d call confidence-inspiring!
Failure to pass the reforms in October may end up exacerbating an already impossible situation, especially if Italian premier Matteo Renzi chooses to resign, as he said he would when he called the referendum, though he has since backtracked. The biggest beneficiary of a no-vote would be the increasingly popular euro-skeptic Five-Star Movement, which has promised to hold a non-binding referendum on membership of the euro if it wins the next elections — a nightmare scenario for both Brussels and Goldman Sachs.
Whether the reforms pass or not, the chances are that a very large Troika-funded bailout will be needed to stabilize Italy’s banking system, as La Stampa suggested on Monday.
In the meantime, Goldman Sachs, a bank whose alumni include two former Italian prime ministers (Romani Prodi and the Troika-imposed Mario Monti) and a former governor of the Bank of Italy and current president of the ECB (Mario Draghi), will continue to sow the seeds of fear. It will also use all the useful contacts it can glean from the address books of former European Commission President and recent Goldman recruit Manual Barroso to gain even more leverage over European policy making.
But as Brexit has shown, fear and top-down control are not always enough to inspire allegiance or impose obedience in a semi-functioning democracy, especially when the chips are down and a majority of the people are losing faith in an economic and political system that abandoned them long ago. By Don Quijones, Raging Bull-Shit.
The Italian Banking Crisis would complete Europe’s “Doom Loop.” Read… The Impossible Italian Job