Country’s lenders lead selling across European financial sector

Stop me if you think you’ve heard this one before.

Italian bank stocks are being hit hard this morning, leading declines across European financials ahead of a key referendum on December 4 that could have major consequences for plans to revive Italy’s troubled financial system.

UniCredit – Italy’s most systemically important bank – is the biggest loser, falling 4 per cent, while Banco Popolare, Banca Popolare di Milano and Banco Emilia are down more than 3 per cent in early morning trading.

Italy’s main banking index has now slumped to a two-month low with all the stocks in the Euro Stoxx banks index in the red on Monday.

Investors are settling stocks as Italians prepare to go to the polls in six days’ time to decide on a reform to the country’s constitution in a vote that has become referendum on the leadership of Rome’s centre-left prime minister Matteo Renzi.

Should the reform be rejected – as tight polling indicates – Mr Renzi has vowed to step down in a move that could throw plans to clean up Italy’s oldest bank Monte Dei Paschi into turmoil, and spark contagion fears in the eurozone’s third largest economy (read more from the FT’s Rachel Sanderson here).

Italy has eight banks known to be in various stages of distress. As well as Monte dei Paschi, they include mid-sized lenders Popolare di Vicenza, Veneto Banca and Carige, and four small banks rescued last year: Banca Etruria, CariChieti, Banca delle Marche, and CariFerrara.

Senior bankers have told the FT they fear Mr Renzi’s resignation would deter private investors from pumping fresh funds to recapitalise lenders, leading to fears they will need to be put under a new EU “resolution” mechanism that would force losses on creditors.

A ‘No’ vote “would likely usher in a period of increased political uncertainty in Italy and would represent a major set-back for economic reform efforts”, notes Elsa Lignos at RBC Capital Markets

“Italy continues to be a long-term risk for the euro area, but that is a two-year rather than a two-month trade”, said Ms Lignos.

Chart courtesy of Bloomberg