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2016-12-07 00:00

Euro Falls to 20-Month Low After Italian Referendum (JPM)



In a tearful speech on Monday, Italian Prime Minister Matteo Renzi said he would submit his resignation after citizens voted against constitutional reform in a national referendum. Voter turnout was at 65 percent and 60 percent of the votes were cast for "no." Although the referendum had nothing to do with EU membership, since Renzi is viewed as a pro-EU member of the establishment, the result is seen as a victory by populist groups in Italy critical of the Eurozone. Far-right leaders from across Europe tweeted their support for the Italian people's decision.


The response of the Euro was immediate as it fell as much as 1.4 percent to a 20-month low against the U.S. dollar before sharply pulling out of its dive and trading 0.36% higher by mid-morning. Only nine of 53 forecasters surveyed by Bloomberg estimate that the euro will reach parity with the U.S. dollar by the end of 2017.


Besides the brief wobble of the euro, however, markets held their nerve. Although the margin by which Renzi lost was higher than expected, it appeared markets had already priced in the outcome. Fears were allayed by media reports that Mario Draghi and the European Central Bank were ready to step in if required. Reuters reported that the European Central Bank would increase its purchases of Italian bonds in the case of political instability and market volatility, driving up Italian bond yields.


The euro is now recovering from earlier losses, digesting the #Renzi exit. Markets adopting a 'I've seen worse' attitude. This is so 2016.

— Maxime Sbaihi (@MxSba) December 5, 2016


—— Maxime Sbaihi  (@MxSba) ,2016年12月5日

Why would a referendum about an internal political matter make markets nervous? Because Italy is sitting on 286 billion euros of bad debt, and political instability in the country could trigger a European banking crisis.


"The referendum outcome is negative for Italian banks," said Deutsche Bank analysts   in a note, according to MarketWatch. Author Wolf Richter mused on his blog, "..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."

据市场观察网站,德意志银行分析师在报告中指出,公投结果对意大利银行是利空的。作家Wolf Richer在博客中作了深刻思考,认为意大利的僵尸银行问题十分棘手。动荡和不确定性可能导致意大利银行危机传导到整个欧元区,累及欧元区的银行业和其他行业。

The Economist expects a banking crisis to be averted but said, "The main risk stems from the banking sector, particularly the rescue of Monte dei Paschi di Siena (MPS), which could render capital increases at several smaller banks impracticable if it fails. The situation at MPS will therefore require delicate handling by the interim government, the ECB and the European Commission.


Elsewhere in Europe, the rightwing suffered a brutal defeat in the presidential elections in Austria, and Britain's Supreme Court will begin to hear the government's appeal in the Brexit case.



What Happens Next ?



All eyes will now be on the European Central Bank's meeting on Thursday when it will be decided if they are to extend the QE bond-purchasing program. If the Italian government decides to bailout its own banks, its bond holders will have to take losses first. Unlike the U.S., the EU strictly forbids bailouts with taxpayer money.


Despite celebrations from the far-right, there is no reason to believe that Italy will leave the European Union or the euro anytime soon. It's unclear if snap elections will be held in Italy following the Prime Minister's resignation. Drawn out political uncertainty, however, will mean Italy's banks will find it difficult to raise capital from investors. A consortium that includes JP Morgan (JPM) was planning to recapitalize the country's most embattled bank, and will meet today to decide their next steps, according to sources speaking with The Financial Times.