Shares in Italian banks opened sharply lower Monday morning after voters rejected the country’s constitutional reform referendum, with investors questioning whether some of Italy’s largest financial institutions will now be able to raise capital needed to shore up their finances.
Milan’s stock market benchmark, the FTSE Mib, was down 1.4 per cent to 16,857.0 in opening trading, led lower by its banks after Matteo Renzi, Italy’s prime minister, said he would resign following the referendum result.
UniCredit, Italy’s only systemically important bank, was the biggest loser in the sector, down 5.3 per cent in opening trading. Intesa Sanpaolo was 2.1 per cent weaker, while Banca Monte dei Paschi di Siena, regarded as Europe’s most troubled large bank, fell 2.6 per cent. The index tracking Europe’s banking sector fell 0.7 per cent
Italian banks, which have lost nearly half of their stock market value this year amid rising concerns over their stability, had rallied last week ahead of the referendum, with analysts suggesting a “no” vote had been largely priced in.
Final results released Monday morning showed Italian voters had rejected the reforms by a wide margin of 59-41 per cent, far more emphatically than opinion polls had suggested and catapulting political risk in Europe back to the centre of investors’ radars.
“The margin looks to be clearly bigger than expected,” said Steve Englander, head of G10 FX strategy at Citigroup. “Bottom line: bad for the euro, bad for peripheral spreads, probably bad for equities.”
The country’s banks are weighed down with around €360bn of non-performing loans, by far the largest in the eurozone, and have suffered from broader concerns over the impact of low-interest rates and anaemic growth on the banking business model.
Analysts are closely watching the planned €5bn recapitalisation of Monte dei Paschi, which was thrown into doubt immediately after Mr Renzi lost the referendum. One possibility is that the Italian state will step in to prop up the lender, which also needs to offload nearly €30bn of bad loans.
Investors in non-performing loans have paid close attention to the political climate in Italy, with slow recovery times on defaulted loans discouraging investment. A special government scheme to package up and sell off the debt through securitisation has also attracted scepticism from market participants.
The euro also was hit by the Italian result, falling to its lowest in more than a year in Asian trading before recovering in early European trading. The single currency fell as much 1.5 per cent to $1.0503, its weakest level against the dollar since March 2015, before paring much of its losses. In morning European trading, it was down only 0.16 per cent to $1.0647.
The scale of Mr Renzi’s defeat is likely to put investors on guard for any further political upsets in the eurozone. Italy’s referendum is followed by French presidential elections in the spring in which Marine Le Pen, the leader of the far-right National Front, is expected to make it through to the final round.
“What was initially a rather technical question has turned into a litmus test for the capacity of Italians to reform and the rise of populism in the continent,” according to analysts at Oxford Economics.
Analysts at Deutsche Bank had said before the vote that in the event of Mr Renzi’s resignation the worst scenario for markets would be an immediate election that could be to the advantage of populist, anti-euro parties.
“In the currency world, the big level everyone is watching is the cycle low at $1.0458,” touched in March last year, said Alan Ruskin, a currency strategist at Deutsche. “If we break this level the euro will slide lower quickly.”
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