December 12, 2016
Refer-Ending Renzi's Government
By Filippos Letsas
Banca Monte dei Paschi di Siena, Italy’s oldest and third-largest bank, put forward a restructuring plan to raise €5 billion by the end of 2016 to reduce the percentage of NPLs on its balance sheet from 44 to 16 percent. However, the growing political uncertainty is contributing to investors’ increasing doubts whether Monte dei Paschi can raise the necessary capital despite having €20 billion in non-performing loans on its books. If Monte dei Paschi fails to raise €5 billion by the end of the year, the Italian government would likely be forced to bail it out. It remains unclear whether the European Union’s bail-in rules would affect Monte dei Paschi’s retail investors who hold €2 billion in subordinated bonds.
On Thursday, December 8, European Central Bank (ECB) President Mario Draghi calmed markets’ nerves by announcing that the ECB would continue its quantitative easing program until December 2017. The bond-buying scheme by the ECB supports Italian banks in their efforts to reduce their NPL ratio and boost profitability. The next day, however, Monte dei Paschi’s shares plummeted more than 10 percent after the ECB rejected its request to extend the recapitalization period past the December 31 deadline.
In our view, growth is at the core of Italy’s economic and banking problems. Without higher and more inclusive growth, future Italian governments will find it significantly harder to control the national debt – accounting for 133 percent of Italy’s GDP, reduce unemployment, and contain the spread of populism and anti-establishment sentiment. The next administration must continue Renzi’s reform efforts and push through further structural reforms to restore investors’ confidence and allow banks to access much-needed fresh capital.