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Italian Banks’ Referendum Reaction May Be Just Starting

Dec. 5, 2016 (EIRNS)—Despite early-morning claims from financial media that "everything is calm, everything is fine" in the Italian banking system after the defeat of Renzi and his referendum, the "calm" did not last the day. Large losses in Italian bank stocks piled up, ranging from 4% for Monte dei Paschi (MPS), to 6% for the country’s biggest, Unicredit, to 8% for numerous other large and small banks. Their bonds also fell, with MPS bonds falling to an average of 59 cents on the dollar; and Italy’s 10-year government bond interest rate rose sharply from 1.89% to 2.03% during Monday.

Other European banks, Deutsche Bank’s CEO John Cryan included, warned that there could be a "contagious" Italian banking system crisis.

An immediate problem following from the electorate’s rejection of EU zero-growth regulations, is that the long-attempted 5-billion-euro recapitalization of MPS, which had to be completed this month, is probably now not possible—if it ever was. An emergency nationalization of the bank, instead, would likely lead to a bail-in of MPS’s bondholders to "create" capital, and that could set off bank runs in Italy or beyond.

More generally, Mario Draghi and the European Central Bank are now in charge of maintaining the big Italian banks by buying Italian government and corporate bonds from them—as they were already doing on Monday. On Thursday Draghi will almost certainly announce an extension of the ECB’s "quantitative easing" program through 2017.

But this is included in what Italian voters have just rejected decisively—European Union support for big banks at the expense of the economy and people of Italy and other EU nations. So, the bigger problem for these "zombie" banks is that the next Italian elections are likely to bring the Five-Star Movement to power, along with other parties which reject the euro and/or the UE.

Then the endless Draghi bailout of Italy’s zombie banks will end; and that, hopefully, in an orderly way through the institution of the Glass-Steagall legislation which the failed Renzi government has been blocking.

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