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Italy’s Vote Poses Threat To Banks

finimize_news_image_2016_italyreferendum

Image source: Stefano Guidi / Shutterstock.com

What's going on?

Italy voted “No” in its constitutional referendum on Sunday, and so its Prime Minister resigned. Italy’s banks – and its government finances – now face an uncertain future.

What does this mean?

The Prime Minister’s referendum defeat and resignation has kicked up political turmoil in Italy, which will make it much harder for Italian banks that are currently trying to raise money from investors (to cover losses from loans they hold that are unlikely to get paid back) – see some of our previous coverage here. At the top of the list of troubled Italian banks is Banca Monte dei Paschi (BMPS). If BMPS fails to raise the funds, it’s likely that it will be taken over by the Italian government – which could pose some serious problems in the future.

Why should I care?

For markets: Rescuing its banks would increase the risks for Italy’s overall finances.

Taking over some of the country’s banks could prove very expensive for the Italian government (e.g. it might have to give money to the banks to allow them to pay back their loans). As more money is dedicated to its banks, there is less money leftover for the government to pay back its own loans, i.e. Italian government bonds.



The bigger picture: The eurozone as a currency bloc is under threat.

Unlike countries that have their own currencies, Italy (like all other countries in the eurozone) can’t just print its own money to pay back its debt. It’s possible that Italy, which has a lot of debt, just won’t have enough euros to pay back that debt and hence might leave the euro currency union. This all seems rather unlikely at the moment (although it depends on who you ask), but just the risk of it happening has investors paying close attention.

Originally posted as part of the Finimize daily email.

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