Italy's Prime Minister, Matteo Renzi, is getting desperate, and with good reason.
As we reported this morning, the rally in European stocks fizzled and Italian banks tumbled after Italy's 3rd largest (and the world's oldest) bank, Monte Paschi cratered after it confirmed receipt of a letter from the ECB which had asked the troubled lender to cut its bad debts by 40% within three years, or to €14.6 billion 2018 from €24.2 billion at the end of 2015.
And since there are no natural buyers for these NPLs (at least not at the prices demanded by the insolvent bank), the ECB has effectively heaped even more pressure on Rome to stabilize its banking system at a time when Rome itself was hoping that Europe would help bail out its banks. This means that instead of being allowed to inject public - or rather European - funds into its banks while bypassing the much dreaded bail-in which could result in a panicked bank run as depositors scramble to avoid haicuts, Italian banks may have no choice but to dilute themselves to death, hence today's abysmal price action which saw Monte Paschi's stock price drop to an all time low.
All of this appears to have been too much for Renzi, and Italy's troubled premier, who as Citi wrote over the weekend is now facing a very shaky future as a result of the upcoming October constitutional referendum...
... has lashed out at Mario Draghi, the very man who was supposed to be on Renzi's side and protect him from the animosity of Merkel et al, in what Reuters dubs a very rare instance of public criticism.
As Reuters reports, Matteo Renzi criticized European Central Bank Governor Mario Draghi for not having done more to resolve Italy's banking woes when he held a key Treasury job in Rome in the 1990s.
After taking power in 2014, Renzi's government introduced reforms aimed at strengthening the country's cooperative banks, but several are struggling to stay afloat and a bailout fund took control of Veneto Banca last week after the ECB said it had to raise capital or close.
"If the measures concerning the cooperatives had not been taken by us but by the centre-left government that first put them forward, but was not strong enough to enact them in 1998 ... then we would not have this problem," Renzi said.
The prime minister said that Draghi was director general of the Treasury at that time, with Carlo Azeglio Ciampi serving as economy minister.
But the punchline, and the most damning quote was Renzi's unexpected outburst saying that "if people had the strength and intelligence to keep politics out of the banking system a bit before we did it ... we would not have had cases like Monte dei Paschi di Siena," Renzi told a meeting of his centre-left Democratic Party (PD).
In short, just as we explained last week, a failure by any one major Italian bank, or the entire banking system, will be seen not so much as a failure of Renzi, but of Draghi, who not only had a key role in Italy's Treasury, but between 2005 and 2011 was head of the Bank of Italy, making the financial plight of Italy's banks from bad to worse.
Meanwhile, Monte dei Paschi has been in crisis mode for years, hit by a disastrous acquisition on the eve of the financial crisis, losses from risky derivatives trades and bad debts accumulated during Italy's worst recession since the Second World War. And, as many suspect, somewhere in there are Draghi's fingerprints all over the events that have doomed the bank. As such its failure would only accelerate the discovery of the fact that highlight it was Draghi's failure all along to fix Italy's banking sector, whose insolvency has ironically been re-exposed in the aftermath of Brexit - an event Renzi had hoped to use as a scapegoat for more bailouts yet which backfire massively after Merkel said "nein."
Then again, Merkel's position on the matter has been clear all along. What we are far more interested in is how the sudden scandal between Renzi and Draghi will play out, and whether in the coming days we may not all witness the modern version of the "Night of the Long Knives." The only question is who will go down and just who will have oredered said night...