Wolf Richter: Italians Vote “No,” Renzi to Resign, Banking Crisis Now Looking for Taxpayers

Yves here. The big business story today was the well-anticipated defeat of a referendum in Italy on which prime minister Matteo Renzi had staked his leadership. Due to the distraction of PropOrNot, as you can see from our series of posts today, we are turning over the overview to Wolf Richter. Some additional details from the Financial Times:

Italians rejected the constitutional changes — designed to ease gridlock in the country’s political system — by a wide margin of 59-41 per cent, according to early returns, in a vote marked by a high turnout of nearly 69 per cent…

The political instability triggered by Mr Renzi’s defeat could jeopardise plans by Monte dei Paschi di Siena, Italy’s struggling third-largest bank, to raise up to €5bn by the end of the year. The bank and its advisers are expected to meet on Monday morning to decide whether to go ahead with the plan.

The idea that Monte dei Paschi could raise that much money after the past two rescue efforts wiped out equity investors is quite a stretch. Even though Italians are better than just about anyone in Europe at sweeping things under the rug, the magnitude of the banking mess means that rug is not just mighty lumpy but also starting to move around.

More from the pink paper:

Any new government would either be led by Mr Renzi himself, or another senior member of his centre-left Democratic party — with Pier Carlo Padoan, the finance minister, Pietro Grasso, the president of the Senate, Graziano Delrio, the transport minister, and Dario Franceschini, the culture minister, among the most-frequently mentioned candidates.

They would probably have a narrow mandate to carry the country to the next elections due in early 2018. But if there is no agreement on a new government, Italy would face the prospect of snap elections.

Mr Renzi’s defeat marks a big victory for the Five Star Movement, which has been running neck and neck with the ruling Democratic party in most national polls this year and has been aiming to unseat the prime minister for most of his tenure…

But while the referendum result will embolden Five Star — which has called for another referendum, this time on exiting the euro — it would still have to gain power in parliamentary elections in order to carry out its political programme.

By Wolf Richter, a San Francisco based executive, entrepreneur, start up specialist, and author, with extensive international work experience. Originally published at Wolf Street

A constitutional-reform referendum on tweaking the way a country governs itself, of the type Italy held today, would normally not be a big deal for banks in that country, and particularly not for banks in other countries, and it wouldn’t have much impact on currencies and credit markets. But these are not normal times for Italy, which is in the middle of a vicious banking crisis, and they’re not normal times for the EU either, which has been grappling with a banking crisis of its own, even as it has begun to splinter, after the Brexit vote.

And it still wouldn’t be such a huge deal if Prime Minister Matteo Renzi hadn’t pledged he’d resign in case of a “no” vote.

Now the Italians have voted “no” by a resounding margin, according to preliminary results. Without waiting for final results, Renzi announced in a televised address to his compatriots that he intends to resign.

Renzi admitted that the vote had been a “clear” rejection of the proposed constitutional reform. “The experience of my government ends here,” he said. He’d meet with his cabinet on Monday and then turn in his resignation to President Sergio Mattarella (who might tell Renzi to give it a second thought).

Now all bets on Italy’s political, economic, and financial stability are, once again, off. And by extension, the stability – what remains of it – of the Eurozone.

Renzi’s resignation, if accepted, could lead to new elections later next year. During these elections, opposition parties that had campaigned on the “no” vote could surge, with the 5-Star Movement gaining additional traction. The 5-Star Movement has long campaigned on an anti-euro platform.

While the UK voted to exit the European Union, Italy might try to exit the Eurozone. This will be tough to do, and it will have daunting implications. Alone a serious discussion of this topic at the national level will spread uncertainty and fears of financial mayhem.

But until that election, a caretaker government would have to deal with the white-hot banking crisis, and some banks might collapse entirely.

The already beleaguered euro reacted immediately, dropping 1.17% to $1.0505, the lowest since the low of March 2015, which had been $1.0457. If it slips below that March 2015 low, it will mark the lowest level since 2003. It currently trades down about 1% at $1.056.

The largest 14 Italian banks – not counting the myriad of smaller banks – are sitting on €286 billion of “non-performing exposure,” as the ECB calls it. These loans, debt securities, and off-balance sheet items won’t be repaid. Banks still carry this toxic waste as assets on their books, and writing off this toxic waste and cleaning up their books would crush the banks’ capital officially – though in reality, it got crushed long ago – and take down the banks.

So banks have to find new capital to clean up the horrendous mess, but new capital has become scarce, given the horrendous mess.

The most urgent case is Italy’s third largest bank, Monte dei Paschi. It has already raised new capital twice in recent years, only to re-collapse. The third time is not going to be the charm, investors have decided. They’ve lost their appetite for losing even more money on this morass.

Now, according to the Italian daily Corriere della Sera, reported by Reuters, Italy is in secret discussions with the European Commission to allow a taxpayer bailout of the bank as early as next week. According to the current calculus, the bank needs another €5 billion to stay afloat, or else it might be “resolved” by regulators, which would likely entail some big losses for junior bondholders, which in Italy, are mostly retail investors who’d been suckered into buying these bonds.

This kind of bailout would require that Italy can issue bonds a low interest rates. But yields on its government bonds have been rocketing higher, making these bailout bonds much more expensive.

So sources at the ECB have also told Reuters that the ECB might boost purchases of Italian government bonds in case of a “no” vote and market mayhem that would drive up borrowing costs for Italy’s heavily indebted government. The bond markets will not be allowed to exude a sense of reality.

But the already complex – and ultimately very costly – task of dealing with Italy’s zombie banks, after years of brushing toxic waste under the rug, has become vastly more complex in the absence of a government with a mandate. Instability and uncertainty are likely to ricochet from Italy’s banking crisis to the Eurozone and its teetering banks, and beyond.

This is not to say that Italians won’t get through this. They will. They’ve dealt with crises, uncertainty, and instability before. They know how to get their money out of the country and out of harm’s way. But what they haven’t done before is foot the bill for their banks’ toxic waste.

Italian banks cannot be allowed, at any cost, to suffer the consequences of their own chronic mismanagement, or worse. Read… The Fix Is Already In, as Italy’s Moment of Truth Beckons

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  1. craazyman

    “Even though Italians are better at just about anyone in Europe in sweeping things under the rug, the magnitude of the banking mess means that rug is not just mighty lumpy but also starting to move around”

    This could be a Thomas Friedman moment. :-)

    The Italians seem to have dug three holes for themselves and they need a shovel. Because when the lump moves around, they’ll need to dig fast. The carpet is lumpy, but that doesn’t mean it won’t also be a tough row to hoe. The world may be flat but the road ahead of them isn’t paved, it has holes, and if they try to paper them over — as they usually do — they’ll have to watch their step, because if their foot lands in a hole they might find a shovel handle hits them in the butt. Or three shovel handles!

    1. craazyboy

      That one would make Matt Taibbi proud. I give it the Thomas Friedman “Bloviate Incomprehensible Metaphors Like Blew Cheese All Over Your Moustache Award.”

    2. cnchal

      Those holes can be considered graves. Economists go in first, with a layer of banksters covering them up.

    3. lyman alpha blob

      Such a pessimist craazyman. I’m sure it won’t take more than say, oh I don’t know, six months to work all this out…

  2. H. Alexander Ivey

    This is why providing links is frowned upon in polite society. Once upon a time I would not have understood the Friedman parody, but after following down too many links to Rolling Stone and other Friedman watchers sites, I get it. I get the references and the style. Oh god in heaven, the humanity!

  3. weinerdog43

    I think 1 more Friedman Unit ought to be enough time for the banks to be fixed. Things are bound to be resolved by then. They could even ask Goldman Sachs to help out. What could possibly go wrong?

    1. Bugs Bunny

      As I reaffirmed in a conversation with my taxi driver this morning, the next six months will be crucial for everything from technology to the way people get basic services.

  4. Jim Haygood

    On the referendum news, ailing Banca Monte dei Paschi is down about 5 percent in afternoon trading. Won’t link the chart for fear of triggering Skynet, but the symbol is IT:BMPS on Bigcharts.

    What stuns is that the bank did ANOTHER 1:100 reverse split last week, raising its share price to 20 euros in place of the 20 euro centesimos of the old share basis.

    This makes three reverse splits in the past three years, cumulating to an incredible and likely unprecedented 1:200,000 reverse split. That is, on the original early 2014 share basis, one share then is now worth (20/200,000) or 1/100 of a euro centesimo.

    Crikey, why don’t they just put the poor thing out its misery? The equity capital is scomparso, gents — capisce?

  5. a different chris

    >Now all bets on Italy’s political, economic, and financial stability are, once again, off

    Huh? Who the heck has ever bet on Italy’s political, economic, and financial stability since, I dunno, the Renaissance? Lemme know, I need some easy money!

    1. DJG

      Italy didn’t end up as the fifth or sixth largest economy in the world by accident. There is plenty of continuity.

      Next up? Your analysis of Mexican politics as the Frito Bandito?

      1. craazyboy

        Well, the larger problem is if the assets can’t be paid, they won’t be – to paraphrase a popular truism by Michael Hudson.

        1. BecauseTradition

          Sham liabilities lead to sham assets? Whocouldaguessed?

          But fixing the assets is as simple as handing out new fiat equally to all citizens – at least in nominal terms.

          1. susan the other

            I’d like to hear from Keen and Hudson on this particular catastrophe. On Michael-Hudson.com November 30 there is a chat between Keen and Hudson. They tease us with their proposals to forgive the debt. Keen is concerned first about private debt because sovereign debt is just a formality. Hudson I assume similarly. But the banks have long since chosen to be privateers for the profits. So, lucky for them, they are private. There are rational bail-outs that do not burden taxpayers since the EZ hasn’t killed the very idea of sovereign money (yet – Angela claims it is “shared sovereignty”). It would still be nice to see Italy say Enough and leave. Since Draghi is a fiddler, a twister and a manipulator whose only reason for being is to save the private profits of the big banks, the question of sovereignty might not emerge until the big banks are turned into utilities. So what’s an ordinary Italian to do? Don’t want the EU; don’t want the banksters.

            1. BecauseTradition

              I don’t believe in utility banking since the rich would be the most so-called worthy of what is, in essence, the publics’ credit and not the credit of what should be instead 100% private banks with 100% voluntary depositors – something we’ve never had in the US*.

              You won’t defeat the banks by playing their games – that just legitimatizes them.

              *Because a monetary sovereign like the US has an implicit duty to provide risk-free accounts in its fiat for all citizens, their businesses, etc. and not leave them to the mercy of private banks.

              1. BecauseTradition

                Likewise the ECB has a duty not to leave Eurozone citizens at the mercy of private banks either.

                But then stealing from the poor becomes harder if they’re not forced to lend to private banks – the dirty little secret of government privileges for banks.

    2. bmeisen

      best machine I own is an Italian espresso machine, Silvia from Rancilio, 16 yrs old and 3 repairs costing in total about 300 Euros. I figure at least 10k cappuccinos. Also insist on Campagnola on my road bike, manfactured on the southern shore of Lago di Garda. And who saved Jeep from suv-besity?

      1. David

        Since 2013, Rancilio has been owned by ALI Group; a 73 brand, 10,000+ employee global company. Who knows where the machines are made now?

        Campagnolo is based in Vincenza, about a 100 km east of Lake Garda. They’ve recently had worker strikes as the company moves manufacturing to Romania.

        The trade union objected to the plan, not only for the loss of jobs and partial demolition of the historical site of Campagnolo, but also because, “It does not include any real intention to invest to make the Vicenza plants more efficient and increase its competitiveness, in order to face the new challenges of the global market,” as the press release of the Italian trade union stated.

        Finally, FCA (Fiat Chrysler Automobiles) is headquartered in London and incorporated in the Netherlands.

        1. bmeisen

          I was responding to adifferentchris’s mild slighting of Italian stability – I did not intend to convey the impression that everything is piccobello in industrial relations in Italy. My point is that, especially in manufacturing but surely in other sectors, Italy has been remarkably stable.

          1. David


            From the Independent earlier this year

            Domestic appliances or white goods exemplify Italy’s decline. In 2007, Italy, once a world leader in the sector, produced 24 million appliances. By 2012, it was down to 13 million; output of washing machines, dishwashers, refrigerators and cookers was down by 52 per cent, 59 per cent, 55 per cent and 75 per cent. Italian manufacturers have shifted production to lower cost countries, resulting in large job losses.

            Could you provide a link to the source of your optimism?

      2. redleg

        Saer makes excellent submersible motors and pumps. I’ve spec’d them before, especially for VFD applications when certain Japanese ones burn out when run at/through 52-56 Hz.

    3. Bugs Bunny

      Maybe a few of the people driving around Europe in beautifully designed and reliable Fiat 500s? Italy is full of talented and smart people.

      1. Paul Art

        I remember a very ironic moment during my tenure at GEE (name changed for privacy) Motors. Since Jackster Welch wanted to put more money into his pocket via boosting the share price of GEE he invented the novel technique of ‘we don’t want to be no.2 in anything – so we will sell any division that is no.2 in the market’. Wall Street loved this and loved Jackster and shot the GEE share price over the moon. So they sold off the GEE Drives division. Funny thing is, Drive technology is notoriously difficult to understand. It requires PhD’s steeped in Heavy Electrical Engineering, Software and Vector and Tensor Calculus Math expertise. Very hard to find this talent and also takes a long time to grow this kind of knowledge base and skill. When I wandered into GEE Motors they were desperately and feverishly working on a potential sales order which could not be filled because the customer wanted drives to go along with the motors GEE was going to sell him. They finally found a supplier of the Drives. Want to take a guess from which country they were? Yep, Italy. A couple years later they went and purchased another huge drives company for several billion dollars. It is a little like the George Costanza haggling skill, you negotiate to pay a higher price to the seller.

        1. redleg

          I just posted on that (above). The Italian pumping systems aren’t cheap, but they’re very good.

          It’s amazing how short sighted some people (corporate or carbon based) are when it comes to money.

    1. BillC

      Thanks for the link, DLG. Been living in Emilia-Romagna since 2010 and when making my rounds of the papers, usually forget La Stampa. Pretty heavy irony here, but sounds spot on. IMHO, Renzi’s faction ought exit stage right to re-form the late, not-so-great DC (where Rezi’s heart seemed to me to be) and the real left in the PD should go form a real left party (or join the PSI?) open to a coalition with the M5S aimed at restoring Italy’s monetary sovereignty. I believe nothing less can revive the Italian economy.

  6. bmeisen

    Thanks this is helpful. What does the non performing exposure look like? I bet mortgages and furthermore I bet ABS and checked:
    for details. The authors report that borrowers in Italy need at least 20% down, which defuses the sub-prime bomb.

    1. Yves Smith Post author

      No, Italian banks made loans to Italian businesses. Italy’s economy consists largely of medium and small businesses that depend on banks. The importance of really large enterprises is much lower than in the US.

  7. Hans Suter

    maybe the readers of NC would like to know how the vote was structured age wise ? Here goes: 18 – 34: 19% yes, 81% no; 35 – 54: 33% yes, 67% No; 55 plus: 53% Yes, 47% No. Figures that might explain better what’s going on than spreads, yields etc.

  8. Anonymous2


    Many thanks.

    Can anyone explain to me why Renzi called the referendum in the first place?

    European Prime Ministers seem to be suffering from a death wish, political suicide by unnecessary referendum?

    1. Me

      Italian constitution demands that constitutional reform need either a 3/4 consent of elected officials or a majority in a referendum.

  9. lyman alpha blob

    The most urgent case is Italy’s third largest bank, Monte dei Paschi. It has already raised new capital twice in recent years, only to re-collapse. The third time is not going to be the charm, investors have decided. They’ve lost their appetite for losing even more money on this morass.

    Now, according to the Italian daily Corriere della Sera, reported by Reuters, Italy is in secret discussions with the European Commission to allow a taxpayer bailout of the bank as early as next week. According to the current calculus, the bank needs another €5 billion to stay afloat, or else it might be “resolved” by regulators, which would likely entail some big losses for junior bondholders, which in Italy, are mostly retail investors who’d been suckered into buying these bonds.

    Here’s what I don’t understand – how is it possible to keep finding buyers for this dreck? To me banks like this are basically saying “We made terrible investments and grossly mismanaged our finances but we’d rather not go out of business so more money please.”

    Do retail investors simply not do their due diligence? Is the crap packaged up a la CDOs in an attempt to make it look more attractive to the rubes? Are bankers trying to do favors for each other by essentially kiting checks across their institutions? Who in their right mind would invest in a bank that has essentially failed multiple times in recent years? Do investments like this have any history of actually paying off for investors? From what I’ve learned here, it definitely seems like most people ought to know ahead of time that certain loans are never going to be paid off before any of the paper is ever issued.

    1. PlutoniumKun

      I would guess that there are always investors who think they can spot profits to be made at a ‘bottom’, especially if there is a possibility of a government bail out.

      A true story I know about is an acquaintance who was a senior manager in a major Irish bank. He retired in 2007 at the very peak of the Irish boom and foolishly accepted his pension as a lump sum in shares. 6 months later the bank went technically insolvent in the crash and his pension was wiped out as its share price collapsed. A few months later he took a huge chance – he used his remaining cash savings to buy up shares at a few cent each (he figured he had nothing to lose). The bank was more or less bailed out by the government as it took a major chunk of its rotten assets in into Nama, the state ‘bad bank’ and turned a blind eye to its insolvency (i.e. it was allowed to escape bankruptcy) to let it recover. He made almost all his losses back over 2 years as the share price recovered to a multiple of what he paid for the shares.

      1. OpenThePodBayDoorsHAL

        There’s the answer to Lyman’s question, we have highly-leveraged hedge funds central banks willing to buy anything that’s not nailed down. So we can all continue to pretend for just a little while longer

        1. BecauseTradition

          So we can all continue to pretend for just a little while longer

          Central banks can run forever with negative equity. What they lose is some ability to defend the currency but who says a central bank must be able to extinguish every last liability in order to defend its currency since that would eliminate all currency (bank reserves and physical fiat)? Surely that’s overkill? Given that taxation is another way to defend the value of currency?

          Not that I defend QE. Instead, new fiat should be equally distributed to all Eurozone citizens.

      2. lyman alpha blob

        Thanks – that makes some sense and your first sentence reminded me of another true story which I believe I’ve mentioned here before.

        I myself took a flyer on Enron stock back in the day when it had fallen to penny stock status thinking Georgie would bail out his buddy Ken Lay. I think I bought 200 shares or so and lost the vast majority of what I ‘invested’. I was never so happy to have been proven wrong. Funny thing is even though I purchased the shares well after it had crashed, I still received notice in the mail regarding the class action suit against them. All I had to do was fill out 38 forms in triplicate with turquoise ink, another 74 forms in pentuplicate with unicorn’s blood, etc. etc. and after the lawyer’s took their cut I might get back pennies on the dollar of my pennies on the dollar ‘investment’. I decided my time was worth more than the handful of change I was likely to receive and declined to participate.

        So yeah, I can see some people taking a flyer on a depressed stock but we’re talking billions in bonds here. I guess it’s all a matter of perspective though – as HAL suggests, a few billion here another few billion there is treated like pocket change by these corrupt central banks, especially when they never have to divulge their balance sheets.

  10. Mattski

    Has Five Star taken a hard right turn or is the comparison to LePen and Trump just wishful thinking on the part of some in the MSM? Here I was thinking that this might be a victory for the pickles.

  11. Matthew G. Saroff

    Also note that the Guardian has a telling quote about this, “The immediate task facing the current government – with or without Renzi – will be to pass a change in the electoral law that will make it far more difficult for either the Five Star Movement or the Northern League to win strong majorities in the parliament in the next election.”

    Once again the EU elites see a problem, and they, to quote William J. Lepetomaine, conclude, “We have to protect our phoney baloney jobs here, gentlemen!”

  12. Oregoncharles

    FT describes the referendum as ” designed to ease gridlock in the country’s political system .”
    It got 60% “No.” Could it be Italians LIKE gridlock?

  13. flora

    But while the referendum result will embolden Five Star — which has called for another referendum, this time on exiting the euro — it would still have to gain power in parliamentary elections in order to carry out its political programme.” – FT

    If Five Star gains power I hope they will read last year’s NC posts about why Greece could not change currency quickly.

    1. Oregoncharles

      Unlike Greece, Italy is a very large economy – 4th, I gather – and indispensable. The EZ can’t just stonewall them; or if it does, it will pay a high price. Disintegration, among other things. Italy is right next door to Greece; they were watching. Let’s hope they learned something.

      We have it on good authority it takes several years just to make the transition. The logical strategy would be (repeating the idea, here) to announce your intention as of 2-3 years out, then start the process. At best, you start negotiating; the EZ COULD be reconfigured. At worst, you’re more or less ready when the time comes.

      The big caveat: what does the European Central Bank do in the meantime? With Greece, they were willing to shut down its economy. Could they do that with Italy, especially with more bad news, like Spain or France, waiting in the wings? There is no knowing, but we may find out. things could get seriously ugly.

      Further caveat: as in Greece, polls show little popular support for actually leaving the Euro. We don’t know how firm that is, or how it will affect the election. 5 Star might hold their referendum and lose big, rendering a lot of speculation moot. That would point to renegotiation and remodeling the EZ; but perhaps I’m too optimistic.

      And a further thought: it’s striking how this has come down to the Latin countries (including Greece) vs. the Germanic ones – including Finland, so far. That’s odd, and lends itself to a cultural explanation, but I couldn’t begin to offer one.

  14. Kurt Sperry

    Italy, if it decides to seriously challenge the Fiscal Compact or threaten to reinstate the Lira, will not/cannot be pushed around like Greece was. Unlike Greece, Italy might actually benefit from a return to its own sovereign currency. But even if Cinque Stelle were to lead a coalition, they are by no means united on the matter of leaving the EZ even within the group. I think if Italy leaves the EZ, it will be mostly because they were pushed out rather than chose to leave. And no, M5S have not taken a hard right turn, they are not easily categorized on a 2-D left-right continuum of the conventional sort, but I’d still characterize them as more left than right.

  15. juliania

    Well, John Key, former Wall Street banker and current prime minister of New Zealand has also announced he is stepping down to give a younger chap or chapess a chance at the bright lights – is there handwriting on the wall someplace, maybe on Wall Street itself? ( Perhaps a gathering of the clan.)

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