In the run-up to Sunday’s referendum in Italy, the bankers working on the vexed €5bn capital-raising programme for Monte dei Paschi di Siena, the country’s third-largest bank, had talked of three potential outcomes.
A Yes vote in favour of Prime Minister Matteo Renzi’s constitutional reforms would, they said, have allowed MPS to proceed to the next stage of its equity plan. A narrow No might still have allowed Mr Renzi to cling to power, and that in turn might have given institutional investors the confidence to buy into Italy’s oldest bank nonetheless.
Predictably, amid the global pattern of anti-establishment votes this year, the third outcome — a categorical No — was the one that materialised. With it came Mr Renzi’s promised resignation. And in tandem, any chance of MPS completing its recapitalisation in the markets evaporated.
Bankers have a tendency to see the world through a financial lens, even when such issues are relatively unimportant. But the plight of Italy’s banks — with non-performing loans of more than €350bn and some of the weakest capital levels in the system — is the issue that should most concern any observers of the country’s political maelstrom. Without a stable political foundation, investors will lose faith in buying Italian banks’ shares and bonds, rattling both the domestic economy and the broader eurozone financial system.
People close to the MPS transaction had admitted in the days preceding the vote that securing the €5bn it needs — via a complex sequence of a debt-for-equity swap, a new anchor investor and an accelerated shares issue — was a 50-50 bet even in the event of a Yes vote.
With a decisive No, and Renzi the Reformist going, Qatar or any other investment big beast is expected to lose interest in being MPS’s new anchor shareholder. The mainstream funds that might have been reassured by a reformist prime minister and a stable government will scatter.
MPS’s already dismal share price can only weaken further, dragging the likes of UniCredit with it — dreadful news for Italy’s biggest bank which is preparing to announce a large capital raising of its own next week. Investor nervousness is likely to spread to the likes of Portugal and Germany, where banks such as Deutsche are similarly feeble, but much more systemically relevant for the world.
And yet, there are two reasons to remain hopeful for Italy’s banks. First, the country loves opera. In other words, this apparently dramatic turn of events — unlike the UK’s Brexit vote and Donald Trump’s election in the US — is almost the norm in Italy, where the average tenure of a government since the second world war has been little more than a year.
Second, the instability caused by the referendum and Mr Renzi’s resignation may be the shock treatment needed for a decisive resolution of the capital deficiencies of MPS and Italy’s other weak banks. In some circumstances, that will mean wiping out junior bondholders and making up the capital shortfall with state funds — a scenario that Italy and the European Commission have always been desperate to avoid.
It is time for the authorities to work together and stop pretending they can muddle through. At stake is not only Italy’s banking system but the financial fortunes of the whole EU.
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