Global Financial Markets Plunged Into Chaos in December 2016, as Italy Overwhelmingly Voted «No»

Italian voters have embraced the global trend of rejecting the established world order, but the “No” vote in December 2016 has plunged global financial markets into a state of utter chaos. The euro had fallen, Italian government bonds were poised for a tremendous crash, and futures markets were indicating that both U.S. and European stock markets would be way down after the Italian vote. Italian Prime Minister Matteo Renzi’s constitutional reforms were defeated as 59.11% of voters voted against it in the referendum on December 4th, and Renzi resigned as a result on December 12th.

Paolo Gentiloni Silveri has been Prime Minister of Italy since Renzi’s resignation.
Gentiloni, a member of the Democratic Party, served as Minister of Foreign Affairs until December 2016.

A serious competitor for the job was comedian Beppe Grillo, and it looked like his Five-Star movement would come to power. As he is getting more and more popular in Italy, the European establishment is extremely alarmed because Grillo wants to take his country out of the Eurozone. In the long run Italy would be much better off without the euro, but in the short-term the only thing propping up Italy’s failing banking system is support from Europe. Without that support, the 8th largest economy on the entire planet would already be in the midst of an unprecedented financial crisis.

This “No” vote virtually guarantees a major banking crisis for Italy, and many analysts fear that it could trigger a broader financial crisis all across the rest of the continent as well.

In the referendum day, even before the results were announced, the euro dropped 1.3 percent to $1.0505, falling below its 1 1/2-year low of $1.0518 touched in November 2016, and testing its key support levels where the currency has managed to rebound in the past couple of years.

A break below its 2015 March low of $1.0457 would send the currency to its lowest level since early 2003, opening a way for a test of $1, or parity against the dollar, a scenario which many market players now see as a real possibility.

In early 2014, there were times when one euro was trading for almost $1.40. For a very long time analysts said the euro was eventually heading for parity with the U.S. dollar, and now we are almost there.

Meanwhile, Italian government bonds crashed, which made it even more difficult for the Italian government to borrow money, and that aggravated their ongoing financial troubles.

But the big problem in Italy is the banks. At this moment there are eight banks in imminent danger of collapsing, and virtually all of the rest of them are in some stage of trouble. The following comes from a Bloomberg article about the crisis that Italian banks are facing:

“They’re burdened with a mountain of bad loans. Their stocks have cratered. And they have to operate in an economy prone to recession and political upheaval.

Signs have been mounting for months (since 2016) that Italy’s weakest lenders, and in particular Banca Monte dei Paschi di Siena SpA, were sliding toward the precipice, threatening to reignite a broader crisis.”

The Italian government is actually expected to inject around 6.6 billion euros in Monte dei Paschi, taking a 70 percent stake in the bank after it failed to raise money from private investors in December 2016. Other twenty billion euros ($21.4 billion) earmarked by the Italian government is to be used to help recapitalize other weak banks, according to the Bank of Italy governor.

The government is doing its best to save the giant bank of Italy, as if Banca Monte dei Paschi di Siena fails, major banks all over Italy (and all over the rest of Europe) could start going down like dominoes.

So what were Italians voting on anyway?

Well, the truth is that the constitutional reforms that were proposed actually sound quite boring…

“The changes involve sharply reducing the size of one of the chambers of Parliament – the Senate – shifting its powers to the executive, and eliminating the Senate’s power to bring down government coalitions.”

“The amendments also shift some powers now held by the regions to the central government, thereby reducing frequent and lengthy court battles between Rome and the regional governments.”

The reason why this vote was ultimately so important is because it became a referendum on Renzi’s administration. The fact that he announced in advance that he would resign if it did not get approved gave a tremendous amount of fuel to the opposition.

As for Beppe Grillo’s Five-Star Movement, which stood poised to come to power – the following is how NPR summarized its main goals:
“It calls for a government-guaranteed, universal income, abolishing Italy’s fiscal commitments to the European Union and a referendum on Italy’s membership in the Euro – a prospect that could unravel the entire single currency Eurozone.”
The “five stars” are a reference to five key issues for the party: public water, sustainable transport, sustainable development, right to Internet access, and environmentalism.

Currently the Five-Star Movement has 91 seats in the Chamber of Deputies (out of 630) and 35 in the Senate (out of 315).
Even if the political scene is more stable right now in Italy, should it choose to leave the euro, it would probably mean the end of the common currency, and the continued existence of the entire European Union would be called into question.

So this vote on December 4th was huge. The Brexit had already done a tremendous amount of damage to the long-term prospects for the European Union, and then the December 2016 crisis in Italy sent political and financial shockwaves throughout the entire continent.

And what happens in Europe definitely does not stay in Europe.
If Europe goes down, USA are going to go down too.

And 2017 is shaping up to be a very troubling year. As always, let us hope for the best, but let us also keep preparing for the worst.


March 29, 2017

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