Author: Silvia Sciorilli Borrelli
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.”
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 populismacross 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.