The Contrarian

“In the investment markets, what everyone knows is usually not worth knowing.”

Will Italy Incur A Banking Crisis?

This weekend Italy will have a “do or die” referendum. The current prime minister, Matteo Renzi, says he will resign if it doesn’t pass. Many Italians can’t wait for that to occur.

However, there are analysts who say that perhaps eight Italian banks will fail if the referendum doesn’t pass. These are said to be the following: Monte dei Paschi di Siena, Popolare di Vicenza, Veneto Banca and Carige, and four small banks rescued last year: Banca Etruria, CariChieti, Banca delle Marche, and CariFerrara.

The Financial Times says that “Italy’s banks have €360bn of problem loans versus €225bn of equity on their books…”

After the referendum vote, the Italian banks will face increases in capital requirements.

According to Financial Times,

The capital increases of Italian banks due to be announced right after the referendum may become even trickier than currently perceived in the case of a ‘No’ vote”,” Mr. Codogno said.

Senior bankers and officials said that the worst-case scenario was where a failure of Monte Paschi’s complex €5bn recapitalisation and bad-debt restructuring demanded by regulators would translate into a wider failure of confidence in Italy and imperil a market solution for its ailing banks.

Under this scenario, officials and senior bankers believe that all eight banks could be put into resolution. They fear that contagion from the small banks could threaten a €13bn capital increase at UniCredit, Italy’s largest bank by assets and its only globally significant financial institution, planned for early 2017.

Senior bankers argue that, irrespective of the referendum result, there is little incentive for investors to put fresh capital into Monte Paschi, Carige or the Veneto banks when Italian listed mid-sized banks are on average only trading at about a quarter of tangible book value.

“The issue is whether Siena gets done or not,” said a senior official, reflecting how Monte Paschi has become a proxy for the Italian financial system. “Without Siena on the line, I am not worried. With Siena on the line, I am worried.”

This person added that, should Monte Paschi’s deal fail, “all theories are possible” including “a resolution of the eight banks”, especially if a “No” vote led to Mr. Renzi quitting office and a period of protracted political uncertainty.

Could this be just one more “canary in the mine” for the state of the global economies?