talian bank stocks fell, euro swung wildly after PM Renzi resigns
The euro swung wildly against the dollar and bank stocks in Italy slumped as the country appeared headed for a period of political and financial turmoil.
Prime Minister Matteo Renzi said Monday that he would resign after his program of constitutional reform was rejected by Italians in a referendum, with the ‘No’ campaign winning nearly 60% of the vote.
The prospect of instability in the eurozone’s third biggest economy saw the euro initially drop about 1% against the dollar to its lowest level in 20 months. But it bounced back strongly in early U.S. trading.
Italy’s main stock market index fell by about 1%, but European stocks were otherwise trading slightly firmer and U.S. stock futures were also positive.
Global market reaction was relatively muted, perhaps because Renzi’s defeat was expected.
“Nonetheless, Italy’s financial markets, its underfunded banks and its overall economy could suffer unless Italy resolves its political crisis fast,” noted analysts at Berenberg bank.
It’s unclear what happens next in Italy. Renzi’s party may be asked to form a new government, perhaps in coalition with the center right. If all else fails, there may be early elections in 2017.
An extended period of political uncertainty would trouble investors for several reasons.
Bank bailout?
The most immediate concern is a potential banking crisis. Some of Italy’s banks are drowning in bad debt — a legacy of years of economic stagnation — and urgently need to raise new funds.
The world’s oldest operating bank, Monte dei Paschi (BMDPF), is the weakest link. It needs 5 billion euros after failing a test of its financial health earlier this year.
“Due to a likely deteriorating sentiment, some of the ongoing bank recapitalization plans might be more difficult and could be postponed, opening a period of high volatility,” wrote Deutsche Bank analyst Paola Sabbione in a report on Monday.
If investors won’t back capital increases, then some banks may need a government bailout.
Shares in Monte dei Paschi fell nearly 4% — they’ve lost about 86% of their value this year — while Unicredit (UNCFF) dropped nearly 6%. Shares in Banco Popolare di Milano fell 7%.
Unicredit said Monday it was in exclusive talks to sell its asset management arm to Amundi of France — a deal that could bolster its finances.
