No Roman Holiday for Investors in Italy

Italian banks rose 2.5 percent, with Reuters exclusively reporting Italy was preparing to take a 2 billion euros controlling stake in Monte dei Paschi di Siena as the bank’s hopes of a private funding rescue faded following Prime Minister Matteo Renzi’s decision to quit.

The Italian bank has lost almost 85 percent of its market capitalisation since the start of the year.

Italian Prime Minister Matteo Renzi said early yesterday he would resign after suffering a crushing defeat in a weekend referendum on constitutional reform, tipping the eurozone’s third-largest economy into turmoil and serving another blow to European Union, which is struggling to overcome anti-establishment forces.

Political risk matters, but as long as Italy’s banking sector can scrape together some foreign investment, mixed with a sweetened nationalised deal for Monte dei Paschi then we can’t see how Italy’s political woes can have anything other than a temporary impact on risk sentiment in global financial markets.

Monte dei Paschi said on Friday investor take-up of a debt-to-equity swap offer had topped 1 billion euros based on preliminary data.

But with little clarity on what the next government might bring, investors will be wary.

Shares in Italian banks suffered sharp falls on 5 December amid speculation that the government will have to prop up Monte dei Paschi, the world’s oldest surviving bank.

That would trigger a so called “bail in” which means people who lent the bank money would have to write it off. In Italy, that includes a lot of pensioners and small savers, said Hewson.

Such a move to pump in state cash could happen within days, banking and government sources say.

The head of state has three choices: asking Renzi to soldier on, picking someone close to him like economy minister Pier Carlo Padoan or foreign minister Paolo Gentiloni, or relying on a less partisan figure like Senate president Pietro Grasso.

True, Italian stocks suffered, and their banks more so.

And another 12,500 investors lost around 430 million euros when four more small central Italian banks were rescued a year ago.

Should the ECB reject the extension, the Italian government is expected to intervene to recapitalise the country’s third-biggest bank to avert the risk of it being wound down.

Plans by leading Italian banks to raise billions of euros from investors to boost their financial strength have been damaged by the outcome of Sunday’s referendum, a leading ratings agency said on Tuesday as it downgraded its outlook for the sector.