Comment by Luca Raffellini, Head of Business and Financial Services, Frost & Sullivan
LONDON – 29 November 2016 – “Currently, there is no clear line of sight between the results of Italy’s constitutional referendum and the ultimate destiny of Italian banks. Many plausible scenarios point to a narrowing of options for the banks in distress, and broadly bad news should NO prevail – but the question is, how bad?”
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“The worst case scenario, a failure of Monte dei Paschi di Siena triggering a cascade of other bank failures, would require at least three strong assumptions. The first is that the current government would be replaced and that such replacement would take a long time. The second is that the new government would be “technocratic”, with a Minister of Finance either unsympathetic to the banking sector, or unable to avoid the enacting of the EU resolution mechanism. Finally, one would have to assume that investors’ disaffection will spread to other large and better capitalised banks such as Unicredit.
That unlucky combination is possible, of course, but by no means certain. In recent Italian political history, government succession has been relatively quick and painless, compared for instance to Belgium. Therefore, assuming Prime Minister Renzi does indeed resign, the period of political uncertainty need not be protracted. Also, a new government would conceivably do whatever is in its power to protect junior bondholders (small, private savers), and is likely to take an even firmer stance towards Europe and the BRRD.
As for a possible “financial contagion”, Monte dei Paschi di Siena’s 5 billion Euro of subordinate debt is not going away any time soon, and neither are the NPLs (non-performing loans) in other banks. However, let’s not forget that some of the other large Italian banks are intrinsically robust – they did no worse than some of their European peers in the EBA stress test in July.
On balance, other external factors, unrelated to the Italian referendum, may prove to have a greater impact on banks’ stability: Brexit, the new US presidency, the French elections, and volatility in international capital markets, to name a few. The outlook is still quite open.”
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