Up To Eight Italian Banks May Fail If Renzi Loses Referendum

Tyler Durden's picture

Just as we were concluding our write up on the return of Europe's solvency crisis, facilitated by Donald Trump's NATO funding demands and the end of the ECB's unprecedented can kicking exercise, the FT reported that as many as eight of Italy’s troubled banks "risk failing" if prime minister Renzi loses next weekend's constitutional referendum and ensuing market turbulence deters investors from recapitalizing them, citing senior bankers.

This particular rather adverse outcome is captured by the lower-right, glowing red box in the Danske Research flowchart shown below

Renzi, who has previous said he will quit if he loses the referendum although has since changed his tune, has championed a market solution to solve the problems of Italy’s €4tn banking system and avoid a vote-losing “resolution” of Italian banks under new EU rules. A resolution restructures and, if necessary, winds up a bank by imposing losses on both equity and debt investors, particularly controversial in Italy, where millions of individual investors have bought bank bonds.

The following chart from the ECB demonstrates why a bail-in of Italian banks would be the equivalent of political suicide: the vast majority of bail-inable Italian debt is held domestically, read savers and pensioners. Should they be impaired, it would lead to an overnight social crisis.

 

However, if Renzi is already on his way out post a "No" vote, which most polls have assured is the most likely outcome, he will have far less motivation to seek a private bail-out, making a bail-in far more likely, boosting the chances of an adverse social reaction. As the FT adds, in the event of a “No” vote and Mr Renzi’s exit, bankers fear protracted uncertainty during the creation of a technocratic government. Lack of clarity over a new finance minister may lethally prolong market jitters about Italy’s banks. Italian lenders have more than halved in value this year on concerns about their non-performing loans.

For those who have followed the neverending saga of Italy's insolvent banks, the details are familiar: the "boot" has eight banks known to be in various stages of distress: its third largest by assets, Monte dei Paschi di Siena, mid-sized banks Popolare di Vicenza, Veneto Banca and Carige, and four small banks rescued last year: Banca Etruria, CariChieti, Banca delle Marche, and CariFerrara.

As warned here since 2011, the biggest problem facing Italy's (and Europe's banks) is the inordinate share of NPLs: Italy’s banks have €360bn of problem loans versus €225bn of equity on their books after successive regulators and governments failed to tackle a bloated financial system where profitability was weakened by a stagnant economy and exacerbated by fraudulent lending at several institutions.

The problem is that a market rescue of the insolvent banks has proven nearly impossible due to fears over the full magnitude of the bad debt problem: 

But the market solutions, including a JPMorgan plan to recapitalise Monte Paschi and the efforts of a government-sponsored private vehicle Atlante to backstop problems at smaller banks, are looking shaky in the face of expected market turbulence if a “No” vote wins, said officials and bankers.

 

Lorenzo Codogno, a former chief economist at the Italian Treasury and founder of LC Macro Advisors, argued that the “biggest concern” in the aftermath of the referendum is its impact on “the banking sector and implications for financial stability”.

 

“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.

What is the worst case scenario (for now)? The answer: the third consecutive failure of Monte Paschi (which would likely have significant downstream consequences on all other Italian banks). 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.

Should the Monte Paschi bailout 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, according to the FT. Indeed, the prospectus for the recapitalisation of Monte Paschi, which includes a debt for equity swap that begins on Monday, warns that the vote weighs on its chances of success. The Bank of Italy has warned of market volatility around the vote. Critics of Mr Renzi have accused the central bank of fear-mongering ahead of the vote.

No matter what, a renewed focus on BMPS would likely be the catalyst for the next Italian, and shortly after, Europen banking crisis. At that point the Italian dominos would - once again - be in free fall.

To be sure, the market has already sniffed out much of the risks with spreads on Italian government bonds versus German Bunds rising above 190 points on Friday, a level not seen since October 2014, as markets priced in expectations of turbulence.

One possibility is bailing out any domestic investors who get bailed in as a last ditch workaround to prevent a full-blown banking panic:

Bankers and officials can envisage a technocratic government agreeing with Brussels and Frankfurt a systemic “bail-in” of vulnerable Italian banks which emerged among Europe’s weakest in stress tests two years ago and again this summer. Under a bail-in, which forces losses on bond holders, Brussels could allow for some compensation for vulnerable retail investors, officials said.

Germany, however, would be less than enthused by such an outcome. Unfortunately, no matter the political framworks, Italy's banks are only going to deteriorate following next Sunday's vote:

Nicolas Véron, senior fellow at think tank Bruegel, argued that “if anything the ECB has been very lenient in addressing the system-wide banking situation [in Italy] that has been very visible since the comprehensive assessment two years ago”. “It is a very difficult moment but it is not sustainable. The problem of banking fragility is not going away. It is not something that resolves itself with time,” Mr Veron said.

All hope is not lost, however. The Economist, the once reputable economic and financial publication half-owned by the Rothschilds, has had a terrible track record of advising its declining readers on how to vote in critical political events: from urging a "Bremain" vote this past June, to begging for a vote for Hillary on November 8, the Economist has gotten virtually every major political event wrong. Which is why the fact that over the weekend the publication came out with an article "Why Italy should vote no in its referendum" may be the best hope Renzi has to remain in power.

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Shlomo Schwartzman's picture
Shlomo Schwartzman (not verified) Nov 27, 2016 9:49 PM

(((Italian))) banks

nmewn's picture

No one could have ever seen it coming...lol.

gatorengineer's picture

This is worse than brexit.... don't get suckered in by the alarmists for fucktard sake.  Mario's got it.

OverTheHedge's picture

"If you vote the wrong way, all your banks will fail, all your money will be gone, your economy will collapse, your children will be sold into slavery, your wives will sell their bodies for the last espresso in the country, there will be rains of frogs, plagues, pestilence and divers signs and wonders. The sky will fall, the world will end, and frankly, I will be jolly upset. So, vote carefully"

Is this not a theme we have seen before?

GreatUncle's picture

It is the only theme policians can offer.

In an ever collapsing world you ain't got the ability to offer a better future only a world that is not so bad if you vote for me instead of the other.

Could be argued when they start offering a better future instead of fear the economy may have been turned around but in the grand scheme of things in a fraudulent economy NOT GOING TO HAPPEN.

More fear needed!

JRobby's picture

Fear has held the economy back for 8+ years.

So of course they keep pushing it. All by design while they issue more debt.

withglee's picture

If you read the Federalist Papers you see this is exactly how they got the USA Constitution passed. And if you read the corresponding Anti-Federalist Papers written at the same time, you see that everything the Anti-Federalists predicted has come to pass.

Iterative secession. Its time has come.

chubbar's picture

Like the economist is actually forecasting as opposed to recommending a course of action that would best suit the Rothschilds.

Regardless, Italy should never have been allowed into the EU if one believes the revelations/rumors that Goldman Sachs fudged the debt numbers for them and LTCM was involved with hypothecating 400 tonnes of their gold to help cover that up (which is reportedly lost, probably to GS).

I say lets get the ball rolling on this default nonsense. The longer this lingers the longer it'll take for Italy to go back to the Lira and throw out Brussels.

scoutshonor's picture

Cliff's note version: 

"Give us your money."

 

Bankers everywhere, all the same.  We don't need no water...

BennyBoy's picture

 

Let the stockholders take the hit. Then the bond holders.

Those assholes knew the risks and took the risks.

gatorengineer's picture

They have been insolvent for at least a decade what is different the day after the election?

With the 30 yr mortgage over 4 percent now how many us banks would be solvent if it weren't for Mark to unicorn?

Haus-Targaryen's picture

"mark to unicorn" 

haha, I love it.  I'm stealing that BTW. 

Able Ape's picture

Quick, everbody grab a fistful of lira...

nmewn's picture

Now just think of the deliciously sublime elegance of paradox (and cognitive dissonance) they are confronted with, if one certain politician doesn't win, the greater part of €4tn is in peril and yet, the banks are said to be solvent ;-)

JackT's picture

Great point. The paradox is bone chilling.

It's almost as if time is slowing down as it all approaches. Maybe it's the Doppler effect as the shit hits the fan?

quasi_verbatim's picture

Confucius he say: Doppler no usey when SHTF. Every schmuck know only crap move faster than light.

nmewn's picture

Yes, time distortion.

The best way I know how to describe it to someone who has never gone through "a wave" like that is, if they've ever been in a car crash where their window shatters & showers them with glass they can recall from memory how slow those particles of glass seem to be moving. The speed of the glass pelting them didn't change but their perception (their memory of it hitting them) is as if the glass moved toward them in slow motion...they can almost count how many little pieces are suspended (almost) in mid-air moving toward them.

Of course, obviously some see only what they want to see and block out everything else not comporting with what they want to see, presently these banks are all solvent in their minds, thats why they need a sugar daddy ;-)

Yen Cross's picture

   Italy was already failed and people need to realize this is NOT a referendum vote. This vote is Constitutional, and opens the door for a referendum vote later.

MiddleLeg's picture

NAh, the Italians will vote on a constitution amendment (47 articles). Constitutional amendments must be submitted to the people for approval.

wildbad's picture

and the biggest flaw?  that Mario can't play the savior.  despite his billions of whatever it takes fiat, lil ol Italy cannot and will not be 'saved''.   renzi called for this himself and is now in the unenviable position of having his stupid bluff called in front of god and the world.

 

whatever the outcome, the man on the appian way loses and big.  the man on the appian way believed that bonds were safer than equities as a retirement instrument.  the shifting sands of banking regulations saw to it that nothing is safe and stable.

 

they all fall down.  so yes, the banks will make the panic predicions ala Brexit albeit for other reasons.  the italians will throw the bum out, and the collapse will take place regardless of the position of the deck chairs.

buzzsaw99's picture

just more extortion by the bankers. vote the way we say or else. democracy in action bitchez.

Omen IV's picture

giving up the peoples long term vote for direct selection of legislators to be replaced by appointments by ??? - in part to solve an immediate problem for the banks and its investors with a gun held by the Germans  -  for which the probability is -  it wont be the final solution   - means you have an external force appointing your country's decision makers forever  - the nation is lost

the bankers will chose their own pocket irrespective of their shareholders / bondholders losses -so blow up the banks / EU!

Renzi is Obama in whiteface - another lyin liar who lies for a living

 

we are all Sparticus

RawPawg's picture

So,We have a week in order to get all those last preps locked in

Wow,An Early Xmas

Keep Stacking.....fwi...Silver Rules My Lake(if anybody cares)

JackT's picture

Don't forget the scuba gear and extra air tanks

zippedydoodah's picture

Can you buy waterproof popcorn?

natxlaw's picture

We've got longer than a week. They'll kick this can down the road for at least another 3 months.

chubbar's picture

They've got to have enough time to get Trump into office in order to take the blame for what happens here in the US when all this comes cascading down.

Seasmoke's picture

You think they would have learned in 2016 not to try and extort and use intimidation to get the vote they want.

navy62802's picture

Because you should always pin your economic system on a referendum. Fucking assholes.

gatorengineer's picture

Did a soros  company supply the voting machines?

Billy Shears's picture

Easy, you could have every banker in Italy arrested (board and executive members), put on trial and then appropriately sentenced. What is so radical about that?

Yen Cross's picture

  Should we call this dive in $usdx, " Jill Stein Effects"?   lol

larz's picture

Italian banks gone wild.  Bankers suck

the.ghost.of.22wmr's picture
the.ghost.of.22wmr (not verified) Nov 27, 2016 10:31 PM

Trumpnado pretty much assures Italexit.

Orly's picture

Italeave.

 

 

If you please.

"/

OverTheHedge's picture

Is that like an ex-parrot? Gone to meet 'is maker? 

The politicians would have it that Italy is merely pinin' for the fiords, but I think we know better: This parrot is dead.

tarabel's picture

 

 

And how many banks are gonna fail if he wins the referendum.

Survey says....

Ding

Eight!

The real question isn't how many will fail but what methods are available for their recapitalization (read: plundering of their depositors).

Tom Green Swedish's picture

redundant article everbody knew the euro was a failure at least 12 years ago. They pay more for a Big Mac then us? Good one. HahA. The funnieat thjng is they threw more crap countries into it. There should have been a good country euro and a crap country euro.

CHoward's picture

I have always found failing banks - the ones that lose money - to be not just ironic as hell but also terribly hillarious!  Funny world we live in.  :)

brooklinite8's picture

It's funny how it begins and ends with the banks every where...

gregga777's picture

Italy's economy has actually been shrinking and will continue shrinking under the Neo-Deutschemark currency regime championed by Deutscheland Uber Alles. Until Italy regains their sovereignty from Deutscheland and once again controls their own currency there will be no hope for them.

gregga777's picture

The greatest trick ever pulled by Deutscheland was getting so many countries to use the Neo-Deutschemark (the Euro) as their own currency. The U.K. was too smart for them though.

Tom Green Swedish's picture

if JP morgan wont touch it be assured it is beyond toast. They bought crap wamu and bear which were even more levered. But thenproblem isnitaly ianrootednin corruption. They dont have a prayer. Look up Franklin Bank.

ecrtr's picture

Italy may be beating the USA in the race to poverty. We will have to redouble our efforts. We do not want the 0.1% to be unhappy with our country.