by Mish

Please consider Fears Mount of Multiple Bank Failures if Renzi Loses Referendum.

"Up to eight of Italy’s troubled banks risk failing if prime minister Matteo Renzi loses a constitutional referendum next weekend and ensuing market turbulence deters investors from recapitalising them, officials and senior bankers say.

Mr Renzi, who says he will quit if he loses the referendum, had championed a market solution to solve the problems of Italy’s €4tn banking system and avoid a vote-losing “resolution” of Italian banks under new EU rules.

Resolution, a new regulatory mechanism, restructures and, if necessary, winds up a bank by imposing losses on both equity and debt investors, particularly controversial in Italy, where millions of individual investors have bought bank bonds.

The situation is being closely watched by financiers and policymakers across Europe and beyond, who worry that a mass failure of Italian banks could trigger panic across the eurozone banking system.

In the event of a “No” vote and Mr Renzi’s exit, bankers fear protracted uncertainty during the creation of a technocratic government. Lack of clarity over a new finance minister may lethally prolong market jitters about Italy’s banks. Italian lenders have more than halved in value this year on concerns about their non-performing loans

Italy has eight banks known to be in various stages of distress: its third largest by assets, Monte dei Paschi di Siena, mid-sized banks Popolare di Vicenza, Veneto Banca and Carige, and four small banks rescued last year: Banca Etruria, CariChieti, Banca delle Marche, and CariFerrara.

Italy’s banks have €360bn of problem loans versus €225bn of equity on their books after successive regulators and governments failed to tackle a bloated financial system where profitability was weakened by a stagnant economy and exacerbated by fraudulent lending at several institutions.

But the market solutions, including a JPMorgan plan to recapitalise Monte Paschi and the efforts of a government-sponsored private vehicle Atlante to backstop problems at smaller banks, are looking shaky in the face of expected market turbulence if a “No” vote wins, said officials and bankers.

Senior bankers and officials said that the worst-case scenario was where a failure of Monte Paschi’s complex €5bn recapitalisation and bad-debt restructuring demanded by regulators would translate into a wider failure of confidence in Italy and imperil a market solution for its ailing banks.

Under this scenario, officials and senior bankers believe that all eight banks could be put into resolution. They fear that contagion from the small banks could threaten a €13bn capital increase at UniCredit, Italy’s largest bank by assets and its only globally significant financial institution, planned for early 2017."

What’s Going On?

I fully understand how eight Italian banks could and should fail. In fact, I propose they have already failed and are being propped up.

The referendum has nothing to do with banks. It seeks to reduce the power of the Senate.

The banks in question are subject to ECB capitalization and bailout rules, things not under control of the Italian parliament, regardless of the referendum outcome.

Renzi has tried on three occasions to bailout the banks with public funds but the ECB, with Germany agreeing, rejected every attempt.

The best I can come up with is Renzi seeks a scapegoat when the banks do go under.

Renzi hopes to absolve himself of blame, when the referendum, then the banks fail. The sooner the banks fail after the referendum fails the more Renzi can scapegoat the mess, even though the two ideas have nothing to do with each other.

Mike “Mish” Shedlock

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