In the middle of a blossoming banking crisis.
By Don Quijones, Spain & Mexico, editor at WOLF STREET.
Widespread public disaffection and dissatisfaction are not unique to the UK and US; they’re on the rise all over the developed world. It’s not hard to see why. In the words of Mark Blyth, one of an embarrassingly small number of economists to correctly call both Brexit and the victory of Trump, the last 30 years have seen “a huge amount of economic growth but hardly anyone’s benefited from it.” And now the people are “fed up” and have decided at any opportunity to “give their elites notice that they’ve had enough.”
On December 4th, Italy could become the next whistle stop on the global populist doom tour as its people vote in a national referendum on the government’s proposed constitutional reforms, which seek to drastically curb the role of the upper house Senate, a move that Italian premier Matteo Renzi says will simplify decision-making and ensure stable government. Opponents fear it will make the legislative process more complicated and reduce checks and balances.
The referendum would be a virtual non-event if it weren’t for two key factors: Italy’s blossoming banking crisis and Renzi’s pledge, repeated many times (albeit, ironically, not recently), that he would resign if the constitutional reforms are not passed.
The polls in Italy are neck and neck, though the momentum belongs to the reform bill’s opponents. In the latest poll published by Euromedia 52.1% of respondents opposed his reform agenda, compared to 47.9% in favor. With all opposition parties pitted against him and almost every opinion poll over the past two months showing the ‘No’ camp slightly ahead, Renzi has his work cut out — unless, of course, the polls get it completely wrong again!
If the vote does end up going against the government, expect all hell to break loose.
Despite all the imaginative rescue plans put forward over the last few months, none of the existential problems affecting Italy’s banking sector have been addressed, let alone fixed. According to the Wall Street Journal, if Mr. Renzi wins the referendum, he will find it easier to shake up Italy’s “sclerotic” bankruptcy regime and speed up the processing of insolvency cases — two vital steps given that many of the country’s banks and businesses are on the verge of croaking.
If Renzi loses, rather than dying down, the political and economic uncertainty will surge. The pressure on Renzi to resign will be immense and the gathering exodus out of Italian assets will accelerate. As Reuters reported this week, the Bank of Italy’s liabilities towards other euro zone central banks — what is commonly referred to as its target 2 balance — hit a new record high of €355.5 billion ($393 billion) in October, dwarfing levels seen at the height of the euro zone’s debt crisis four years ago.
The Bank of Italy puts the recent surge in funds leaving Italy down to “portfolio adjustments linked to the European Central Bank’s asset-buying program.” It sounds like a perfect case of central banking obfuscation, but even if true, there are plenty of other inauspicious omens for Italy’s economy. In September industrial output dropped 0.8% and the last month has seen Italian 10-year bond yields soar from just over 1% to 2%, their highest level in over a year, despite the ECB’s binge buying of Italian government bonds. The 10-year yield spread between German and Italian bonds, at 1.62%, just reached its highest point since late 2014.
The biggest concern investors have is that a referendum defeat will spark a new period of political strife in a country that enjoys a hard-earned reputation for political instability and paralysis. That, in turn, will make it even more difficult for Italy’s political and monetary authorities to pull off the already impossible mission of cleaning up the balance sheets of Italy’s biggest banks, which are home to roughly one-third of the Eurozone’s non-performing loans, without plunging government finances even further into the red.
JP Morgan Chase’s rescue of Monte dei Paschi, Italy’s third largest and most insolvent bank, is going nowhere, fast. Last month Goldman Sachs warned in a report that if the Italian public vote no in the referendum, the stalled plan would have to be put on ice indefinitely, as 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 cautioned.
As we wrote at the time, Goldman’s report had one main purpose: intimidating Italy’s electorate into following the government — and EU — line. Whether it works or not waits to be seen. If it doesn’t, the result will be seized on as yet further proof that the EU establishment is losing control of the continent.
Beppe Grillo, a former stand-up comic and founder of Italy’s anti-establishment 5-Star Movement, can hardly wait. Last week he hailed Trump’s victory, seeing it as a vindication of his own maverick stance. “It is those who dare, the obstinate, the barbarians who will take the world forward. We are the barbarians! The real idiots, populists and demagogues are the journalists and the establishment intellectuals,” Grillo wrote on his blog.
For the last three years the Italian establishment has had a field day attacking, ridiculing, and vilifying Grillo’s 5-star movement. Europe’s media have tarred him with the brush of populism. In 2013 The Economist labelled him a clown on its front cover. Yet his party still leads the polls. And if it wins the next elections, which could be brought forward to early next year if Renzi resigns, it has pledged to hold a referendum of its own — albeit a non-binding one — on Italy’s membership of the euro.
And that is why the political elite in Rome and Brussels are quietly petrified of a referendum defeat. The EU has already lost three referendums on the trot — in the UK, the Netherlands, and Denmark. An electoral drubbing in Italy, a country in the middle of a banking crisis, whose economy has been stalled for the last two decades and whose mountain of public debt (130% of GDP) is over twice as large as the maximum limit allowed in the Maastricht Treaty, is hardly likely to further Brussels’ suprastate-building program, especially with do-or-die national elections lurking just around the corner in France, Germany and the Netherlands. By Don Quijones, Raging Bull-Shit.
The “Doom Loop” resurges. Read… Italy’s Banking System on Verge of Nervous Breakdown
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