Italy Had A Rough Monday


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What's going on?

Italy had a rough day on Monday as one of its main banks attempts to raise more money from investors and political risks loom large.

What does this mean?

Banca Monte dei Paschi di Siena (BMPS), the world’s oldest bank, has a big problem: it’s made a bunch of loans that are very unlikely to get paid back in full. It must now raise fresh money from investors in order to be able to pay back those that have lent it money. And BMPS is not just short a few euros, it’s short billions: it is aiming to raise funding worth about 7-times the current value of its shares. Many other Italian banks are in the same position and looking to execute similar plans – so there’s a lot riding on BMPS’s outcome.

Why should I care?

The bigger picture: Italy is at risk of dropping the euro as its currency. (tweet this)

A loss for the Italian Prime Minister this coming Sunday could lead to more political power for Italy’s Five Star Movement, which is pushing for a referendum on the country’s use of the euro. Italy’s not alone: anti-euro parties are gaining in popularity across Europe and calling for their respective countries to stop using the euro as their currency (France’s National Front is another example). A banking crisis could boost the popularity of populist political policies that are already gaining momentum. The resulting uncertainty could be very painful for investors.

For markets: This has the potential to have a big impact beyond Italy.

Nobody likes a banking crisis, especially in a country that uses the euro as its currency (remember Greece?!). Having a strong government to help sort out the mess would help, but there’s a good chance Italy’s Prime Minister will resign if he loses Sunday’s referendum. This would leave Italy with seriously troubled banks and unstable political leadership – and the resulting instability could affect other eurozone countries and markets globally.

Originally posted as part of the Finimize daily email.

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