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Thought be a good idea to start this blog since their has been talk about this and its political implications it will have in Europe. We have already seen a significant sell of in Bond's in general this week, but most notably the italian yields have sharply increased to a 1 year high, so clearly the Trump victory has implications for Renzi to keep his word.

Post from the economist:  The next big test of the establishment, however, will come in Italy on December 4th. Matteo Renzi who has called a referendum asking voters to approve proposed changes to the constitution. The idea is to reform the Senate—making the lower chamber decisively more powerful than the upper one—and to bring back many decision-making powers from the regions to the central government. A stronger central government would be expected to be pro-business and bring about further reforms, such as speeding up the civil judiciary, cutting bureaucracy and unleashing more competition into Italian markets so that productive capital can flow in. Mr Renzi’s referendum thus looks like a call for Italy to open up for more globalisation—just when a backlash against such ideas is in full swing.


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If Trump sticks to his word, then you would see potentially a huge inflow of stacked offshore money come back into the country, therefore see the dollar skyrocket, which will make their money go further when they invest overseas. So between that and potential fiscal stimulus you will a strong rise in inflation therefore a significant increase in bond yields. But I would presume this effect would not be magnified to the same proportions in relation to German Bunds compared to 10 year treasuries, unless Dragui really starts tapering his QE program. I cannot possibly imagine for a very long time see rise in rates in Europe. Its a shame IG does not offer Italian Bonds, all you have is the FTSEMIB, but that in itself has been heavily battered to almost all 10-15y lows.

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Bonds getting hammered again today along with emerging market currencies. With fears of protectionist approach from Trump and political instabiluity from Italy, then France possibly Germany thereafter we could see the Dollar develop extreme bullish momentum. German bund also broken a significant suppport level. If we continue to see increase pressure on rising bond yields, this could impact Yellen's decision of fed rate hikes, therefore one can become skeptical if this continues.




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Interesting article from the FT: EUR DOLLAR will be heavily in focus up until the referendum.

Italy’s 50-year government bond is emerging as one of the biggest casualties of the global sell-off in debt markets, as fears rise that a year of political upheavals will extend to the country’s forthcoming referendum on constitutional reform.


Prices for Italy’s longest-dated government debt have fallen 14 per cent since its sale in early October, inflicting a paper loss of €140,000 for every €1m bought by investors.

The shunning of the bond comes as polls point to a potential defeat in the December 4 vote for Matteo Renzi, the centre left prime minister, who has staked his political future on Italian voters approving the reforms.

A growing number of polls in recent weeks have shown that Italians are likely to reject the reform by a small margin, though a large number of undecided voters still leave hope for Mr Renzi of a victory. The Italian prime minister received a boost this week when third-quarter gross domestic product figures showed better than expected growth of 0.3 per cent. But for most Italians the recovery remains disappointingly sluggish.

During a day of campaigning in Sicily on Tuesday, Mr Renzi suggested some of the nerves in the bond market were down to fears of his defeat, which would probably lead to his resignation and a collapse of the government.

“GDP goes up with reforms, the spread goes up without reforms,” Mr Renzi tweeted, referring to the rise in Italian borrowing costs over German. Throughout his tenure, Mr Renzi has avoided any big market turmoil connected to Italy’s sovereign debt akin to that of 2011, but has been hurt by the financial difficulties of Italy’s struggling banks.

Given the worldwide tumble in bond prices following the US presidential election, investors say they are no longer willing to overlook political and economic risks in holding the debt of a country with one of the highest debt-to-GDP ratios in the world and a history of fiscal excess.

“We cut our long-dated position as soon as Donald Trump won the US election,” said Tanguy Le Saout, head of European fixed income at Pioneer Investments. “If Renzi wins the vote we may go back in, but right now there is no need to own that debt.”

BlackRock, the world’s largest asset manager, said the political risk in Italy had left it “neutral” on the country’s bonds.

At the time of its sale, Italy’s 50-year bond was seen as an extraordinary success — drawing €18bn of investor bids for a €5bn issue.

Investors then chose to look beyond Italy’s bad loans, stagnant economy and the referendum in order to secure positive yields. That enabled Italy to pay just 2.85 per cent to borrow for half a century — a lower rate than the government was able to borrow at for just two years at the height of the eurozone crisis.

As investors bet on a benign inflation outlook over the long term, France, Belgium, Spain and Italy have all sold 50-year debt this year, while Austria issued a 70-year bond. Ireland and Belgium sold €100m of 100-year bonds in privately placed deals as governments took advantage of low bond yields to extend the length of their debt.

However, the value of such long-dated debt is extremely sensitive to movements in bond yields, falling sharply in price as interest rates rise and leaving the investors who bought the bonds facing large losses.


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If you look below at the following charts you will notice a similar correlation between the DAX and STOXX 50 with the difference of being much more pronounced in terms of gains in the DAX VS STOXX 50. If a no vote was to occur then it would be sensible to think that the € $ would come under further pressure, but also because of a rising populist movement lead to pressure across these key indexes. 

With the EURO STOXX 50 we have got a base level of support on the weekly time frame on a perfect 61.8% fib level, but on a daily a multiple rejection of a 0.88%fib level from a minor wave a with a descending trend line resistance.

With Dax we have failed to make progress beyond a 0.786% fib level, however the dax appears to be making a possible abc zigzag of which if a potential yes vote where to occur, then this could continue you higher, but my guess would be a short period, unless a market extention is on the cards.

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Another insightful article from the FT:

Italy’s referendum holds the key to the future of the euro.

After Brexit and Donald Trump, prepare for the return of the eurozone crisis. If Matteo Renzi, Italian prime minister, loses his constitutional referendum on December 4, I would expect a sequence of events that would raise questions of Italy’s participation in the eurozone.


The underlying causes of this extremely disturbing possibility have nothing to do with the referendum itself. The most important was Italy’s economic performance since it adopted the euro in 1999. Total factor productivity, the portion of economic output not explained by labour and capital, has fallen in Italy by about 5 per cent since then whereas in Germany and France it went up by about 10 per cent.

The second source was the failure by the EU to construct a proper economic and banking union after the eurozone crisis of 2010-2012 and to impose austerity instead. If you want to know why Angela Merkel cannot be the leader of the free world, look no further. The German chancellor could not even lead Europe when it mattered.

The combination of those two factors are the biggest causes for the incremental rise in populism in Europe. Italy has three opposition parties, all of which favour exiting the euro. The largest and most important is the Five Star Movement, a party that defies the usual left-right classification. The second is Forza Italia, Silvio Berlusconi’s party, which has turned rabidly anti-euro after the former prime minister was forced out of office in 2011. And the third is the separatist Lega Nord. In democratic countries, it is common that opposition parties eventually come to power. Expect that to happen in Italy too.

The referendum matters as it could accelerate the path towards euro exit. If Mr Renzi loses, he has said he would resign, leading to political chaos. Investors might conclude the game is up. On December 5, Europe could wake up to an immediate threat of disintegration.

In France, the probability of a presidential election victory by Marine Le Pen is no longer a remote risk. Of all the candidates that have declared, she is the best prepared. There are some who could beat her, like Emmanuel Macron, the former reformist economics minister, who declared his candidacy on Wednesday. But he may not make it to the final round of the elections as he lacks a party apparatus. If Ms Le Pen became president, she has promised to hold a referendum on France’s future in the EU. If that referendum were to lead to Frexit, the EU would be finished the next morning. So would the euro.

A French or Italian exit from the euro would bring about the biggest default in history. Foreign holders of Italian or French euro-denominated debt would be paid in the equivalents of lira or French francs. Both would devalue. Since banks do not have to hold capital against their holdings of government bonds, the losses would force many continental banks into immediate bankruptcy. Germany would then realise a massive current account surplus also has its downsides. There is a lot of German wealth waiting to be defaulted on.

Can this be prevented? In theory it can, but it would require a series of decisions taken in time and in the right sequence. For starters, Ms Merkel would have to accept what she refused in 2012 — a road map towards a full fiscal and political union. The EU would also need to strengthen the European Stability Mechanism, the rescue umbrella, which is not designed to handle countries the size of Italy or France.

Is this even remotely likely? Think about it this way: if you ask the German chancellor whether she wants commonly-backed eurozone bonds, she will tell you no. But if she has to choose between eurobonds and an Italian exit from the euro, her response may well be different. The answer will also depend on whether you ask before or after the German elections next autumn.

My central expectation, however, remains not a collapse of the EU and the euro, but a departure of one or more countries, possibly Italy, but not France. In the light of recent events, my baseline scenario is now firmly on the optimistic scale of reasonable expectations.


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With EUR USD, notice on the monthly chart that we have been supported several times supported by a rising trend line since its introduction. However guess what, we are once again now 15 years later we are taking a visit, except this time we may not come back if we penetrate this level. Could this indicate that Renzi will lose, or could we see a bounce. Looking across some of the dollar pairs, their is some skepticism. Please share any thoughts or articles you may find.


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No problem Casey, 

I know using charts to predict elections or future events is far fetched lol, but i will tell you one thing, dont know if anybody else has noticed this but, notice the patterns on the ftse100 and dowjones before and after Brexit and then the US election, could be deja-vu. The heat on this debate is picking up across several areas of the media, the potential political consequences could be avalanched between this and the German and french elections. If France where to elect the Le-pen, then the euro is finished and it will be complete total chaos across the markets. From a political stand-point the Brexit team should just sit on their hands and wait until these events are over, they may have the upper hand if they play their cards right.

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A few interesting articles from FX street, IG and Zero hedge. Overall have some have pointed out, this could just end up being something similar to Greece where the Italians may just be angry with their own government, but not to the point they wish to exit the euro or the single market and has stated in money week, the really worry is the French election of which if by some bad luck Le-pen was to get in, then be pretty much guaranteed Europe would be finished. But you can see from the charts below why the Italians are pretty irritated. Yellow is the FTSEMIB compared to its other European counterparts, ironically GDP heading the same way. The question is however if a no vote does occur which the polls suggest even though these days take that with a pinch of salt, but if they did you would see a sharper increase in the Italian bond yield curve, which would hit the economy further, so the referendum could be just a starting gun.







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Interesting article from the FT today:

Italy’s banking system needs intensive care

EU regulations are supposed to prevent crises, not encourage them

When a crisis has passed, the survivors should be wiser for it. How much Europe learnt from the global financial crisis may be tested soon, in Italy, where the banks are in a perilous state.


Italy and the EU will have to work together to prevent a systemic shock. As a first step, the EU should not insist on a rigid interpretation of its bank bail-in rules — allowing Italy the space it needs to prevent bank collapses and limit the risk of financial and political contagion.

The likelihood that further government intervention will be required is high. Yes, UniCredit, the country’s largest bank, is seeking to raise €13bn capital, and Monte dei Paschi, its most troubled large bank, may close a €5bn combined debt-for-equity swap and capital increase this week. But these sums are small compared with the system’s needs and the worst problems are concentrated in the smaller banks.

The woes of the banks stem from the Italian economy, which never recovered from the most recent crisis. Gross domestic product per head is 9 per cent smaller in real terms than it was in 2007 and is stuck near the levels of two decades ago. Italy staggers under an ageing population and the second highest public debt load in Europe, at more than 130 per cent of GDP.

Italy’s financial system is based on mutual and co-operative banks which have traditionally put their role in supporting local economies above profitmaking. The country is wildly overbanked, with more branches per capital than any other OECD country. This structure, and the lack of growth, has suppressed profits at all banks and caused non-performing loans to metastasise. There are €360bn of impaired loans in the system, according to the Bank of Italy; €200bn of these are of the worst sort, the non-performing sofferenze. This is a huge number given that there is €225bn in equity on the books of the banking system. And this may understate the rot. Banks close to being bust have reason to mark the value of their assets generously.

There have been efforts at reform and repair. Some mutual banks have merged. Atlante, a €4.25bn government-funded investment fund, has absorbed bad debts. But much more consolidation is needed, and it should be followed by brutal branch-closing and cost-cutting. Atlante has expended nearly all of its buying power already.

If the government were to inject capital into the banking system, EU rules would require — at the very least — that subordinated creditors be converted to shareholders. This would be politically explosive.

Italian banks have long sold their own shares and debt to their retail customers as an attractive alternative to savings products, a disgraceful practice that should never have been allowed. It means that ordinary Italians, many in retirement, have already suffered as bank shares have fallen. They will suffer much more in a bail-in.

The referendum on Matteo Renzi’s constitutional reform will take place on December 4. If the result is no, the country will enter a period of uncertainty. Combining political risk with bank collapses could have serious repercussions for all of Europe.

The bail-in of subordinated debt holders could be made palatable if a robust indemnification regime were put in place to protect retail holders up to a certain level. The EU should make sure Italy is free to fund such a scheme.

The situation in Italy will remain fluid and dangerous. This may not be the last time the EU will have to show flexibility. In return, Italy needs to make a firm commitment to a rigorous process of triage through which banks are forced to merge, close or shrink.

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Four things to watch out for in Italy’s looming referendum!!!!! (FT 25/11/16)

The clock is ticking.


Italians will be heading to the polls on December 4 in a referendum to reform the country’s constitution.

On paper, this is an arcane poll to shake up Italy’s parliamentary democracy and shore up government stability, but the referendum has become a proxy for the leadership of centre-left prime minister Matteo Renzi and is being seen as a one of the first major tests of Europe’s establishment in the wake of Donald Trump’s election.

The question on the ballot will ask Italians whether they are in favour of cutting the number of senators and reducing the costs of its political institutions.

Mr Renzi, who came to power in an internal party coup two years ago, has promised to step down and not lead a technocratic government should the ‘Yes’ campaign fail.

The reform proposals would, among other things, see the number of Italian MPs fall and more centralising powers handed to the executive over the country’s bicameral parliament.

As it stands, the polls give the ‘No’ vote a narrow lead of 5-7 percentage points. The Yes camp has fallen back significantly on the back of turbulence returning to Italian banks and electoral momentum for populist parties such as the left-wing Five Star Movement.

Here are the four most important things to watch out for:

1. Super central bank December

The referendum will come a week ahead of two major central bank meetings of the European Central Bank (Dec 8) and the Federal Reserve (Dec 14).

The December decisions are expected to highlight divergent policy paths for the world’s two major central banks. The ECB, which has held its rates and asset purchases at their current rates since March, is expected to announce a six-month extension and tweak to the rules of its QE programme to carry on its asset purchases beyond March 2017.

In its latest Financial Stability Review, the ECB warned that Trump-induced volatility could trigger a rout in European markets and lead to surging eurozone government borrowing costs.

Meanwhile, markets are placing a 100 per cent probability the Fed will opt to carry out its first rate hike of the 2016 at its last meeting of the year.

2. Watch banks, not bonds

Any immediate financial stress from a No vote is likely to be seen in the Italian bank stocks rather than government bonds, according to analysts at Goldman Sachs.

With the ECB’s measures set to keep a lid on bond yields until at least March 2017, political upheaval in Italy is set to concentrate investor focus back on the country’s troubled financial system.

Should Mr Renzi fall on his sword, the task of cleaning up the country’s lenders, who are lumbering under the highest bad loan mountain in the eurozone, is set to stall.

In an already turbulent year, Italy’s main banking index has already shed nearly 50 per cent of its value. In the immediate term, a No vote it could throw into jeopardy a planned €5bn recapitalisation plan for Italy’s most troubled bank Monte dei Paschi, potentially forcing Rome to take a stake in the lender and for creditors to undergo a debt-for-equity swap that would see them endure losses.

“Should the No vote prevail, we see a weakened centre-left government muddling through until early 2018, possibly without Mr. Renzi at the helm” says Francesco Garzarelli at Goldman.

“In these circumstances, we believe the likelihood of successful market-driven recapitalisations of the weaker Italian retail banks – which are already likely to be pushed into 2017 – would diminish substantially”.

European government bonds have endured a tough time in the wake of Mr Trump’s election, sparking fears over rising global inflation and concerns his victory could embolden eurosceptic populists in Europe.

Italy’s 10-year government bond yields have climbed above 2 per cent for the first time since 2015 this month but a major bond tantrum may not be on the cards, according to Goldman, who think Italy will remain a riskier bet than Spain for bond investors following a No vote.

Both Goldman and UBS expect Italian government debt yields to stay above their Spanish equivalents after Madrid broke a near 12-month political deadlock and appointed a new minority government last month.

“The political backdrop in Spain is currently more favourable than in Italy, and we maintain our preference of being long 10 year bonds of Spain versus Italy”, says Nishay Patel at UBS.

4. After the vote: shades of grey


Even in the event of a victory for Mr Renzi, the aftermath of the referendum may not prove to be a game-changer for the struggling Italian economy which has had its growth forecasts slashed and lumbers under a 130 per cent of GDP debt pile.

Economic growth is expected to hit just 0.8 per cent this year and 1 per cent in 2017, according to the government’s most recent economic forecasts.

Analysis from Bank of America Merrill Lynch shows the reformist Mr Renzi has lost much of his verve this year, with progress on implementing new reform measures slipping as troubles in the banking system have come to dominate the domestic political agenda.

BAML highlights a landmark competition law and a revamp of public administration as two key measures that have all but stalled in recent months.

Should Mr Renzi scrape through the referendum, expect him to keep muddling along until a general election in 2018, says Barclays:

We expect the government to remain in office but do not anticipate the implementation of additional meaningful structural reforms, as we would expect the government to avoid costly political decisions before the next round of general elections is held.

Unless the Yes camp wins with a strong majority and very high turnout, we expect the government to be mindful of risks stemming from precipitating a political crisis.

Should the No side prevail, an immediate snap general election or even an upsurge for the populist Five Star Movement – Mr Renzi’s most potent political challengers – is unlikely, notes Fabio Balboni, European economist at HSBC.

Mr Balboni thinks Italy’s president will be reluctant to call an election in the aftermath of the referendum and instead will hold off until late 2017, which will be “only a few months before when [an election] would become due anyway”.

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Currency vigilantes set their sights on the Italian referendum

Investors wanting to express their concern over the world's rising populist mood are preparing to attack currencies, rather than government bonds, on the latest political battleground: the Italian constitutional referendum.

Both the euro and Italian bonds have fallen in the lead-up to the December 4 vote as analysts predict the European Central Bank may step in to prop up the bond market should Prime Minister Matteo Renzi fail to secure his Senate reforms.


"People are concerned about this anti-establishment trend, following on from Trump and Brexit," said James Woods, global investment analyst at Rivkin Securities. "The upcoming Italian election is next on the list and it will probably influence currency markets; they are copping investor reaction more than anything at the moment."

Where "bond vigilantes" once prowled markets, punishing fiscally irresponsible governments for their indulgent spending, currency traders appear to have picked up the mantle as unconventional quantitative easing programs flattened the bond market and warped stock markets.


"Whether the ECB will then continue its buying program will affect the euro," said Mr Woods. "It might provide a backstop for Italian bonds, but if the Italians vote no, the euro will probably fall further."

The "currency vigilantes" roared to life following Britain's shock decision to leave the European Union in June. The pound was decimated after the decision and bore the brunt of investor anger, whereas bonds leapt higher on the expectations of more quantitative easing and further rate cuts.


The euro has dropped nearly 4 per cent against the US dollar since Donald Trump's election victory on November 8.

The Australian dollar was slightly higher on Tuesday afternoon at US73.94¢

Politics: the main driver

"For FX markets, politics is the new economics," said David Bloom, global head of FX research at HSBC. "Quantitative easing has stifled the bond market, distorted equity markets and narrowed yield differentials. This means FX is uniquely placed to reflect political developments."

With major central banks continuing to buy up bonds, regardless of the fundamental drivers, there is less scope for bond traders to express their displeasure at a wayward government. 

"There is no room for this traditional bond reaction," Mr Bloom said. "This puts the onus on FX to punish the weak and reward the strong." This has played out in the emerging market currencies, which have been savagely sold off following the Trump election with investors instead pouring into the US dollar. 

Equity markets also offer no place for investors to position themselves based on fundamentals. A flood of cheap money has prompted investors to scour the globe for yield, forcing companies to issue higher dividends or initiate share buybacks with spare cash, rather than invest. 

Despite sluggish economic growth around the world and weak corporate earnings growth sharemarkets have soared to record highs, making them no accurate place to reflect actual sentiment. 

"So FX, being less directly distorted by quantitative easing, becomes the go-to instrument to trade political developments," said Mr Bloom. 

Lastly, Mr Bloom argued that interest rates, which used to be the "cyclical lifeblood" of foreign exchange markets, are languishing at zero or below, meaning interest rate differentials have all but evaporated. 

"As we lose this anchor for rational currency moves, the reaction to political events becomes even more acute." 

So instead of focusing on the fundamentals of Europe's collective economies, currency investors are poised to react, perhaps violently, to the rising populist views reverberating in Italy and further abroad. 

The vote

Prime Minister Renzi has staked his political future on reforming existing Senate rules.

One of the difficulties of governing Italy is the equal powers ascribed to both legislative chambers: the Senate and Chamber of Deputies. Mr Renzi is looking to curb the powers of the Senate making it easier to instigate changes, and also redesign the responsibilities between central and regional governments, which overlap adding to the government's inertia. 

His reforms would allow the prime minister much more power and allow the government of the day a guaranteed parliamentary majority. 

Italy is in dire straights, with debts of 132.7 per cent of GDP and a banking sector laden with bad debts. The world's oldest operating bank Banco Monte dei Paschi di Siena, founded in 1472, is close to collapse as it houses $US55.2 billion ($75 billion) of bad loans on its books.

Investors are less concerned with the fact that Italy might sort itself out than with the political disarray that might eventuate should Mr Renzi lose the referendum and resign. 

The populist Five Star Movement (M5S) headed by ex-comedian Beppe Grillo has steadily gained supporters as a populist fever grips the developed world. At the last election in 2013, M5S took a quarter of the vote. Analysts worry the party has little capacity to run an effective economy and could reintroduce the idea of Italy leaving the eurozone. 

Deutsche Bank economists released a note last week suggesting there was a 60 per cent chance the vote would fail, while political risk-advisory firm Eurasia Group flipped its call this month saying there was a 55 per cent probability of a "no" vote, which doesn't bode well for Mr Renzi or the euro.

HSBC lowered its end-of-year euro forecast to $US1.05, from $1.10. Italy's benchmark 10-year bond yield, which rose above 2 per cent this month for the first time since mid-2015, is at 2.07 per cent.


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This is what Europe's biggest bank expects from Italy's crucial referendum.

Europe's biggest bank by assets, HSBC thinks that it is highly unlikely Prime Minister Matteo Renzi will resign his post, regardless of the outcome of next week's much-anticipated Italian referendum on constitutional reforms. 

T he vote — which will be held on December 4 — is now just over a week away, and represents the final big political risk event in a year that has seen both Brexit and the election of Donald Trump as US president.

Here is the key extract (emphasis ours):

"Our central case scenario is that, even after a 'no' vote, Mr Renzi stays as Prime Minister. First, he is likely to remain the leader of the biggest party in parliament. Mr Renzi himself said recently that whoever intends to take over as leader of the Democratic Party (PD) needs to call a congress, and win it, which won't happen overnight. And there does not seem to be anyone within the party ready to step in as PD leader. Second, the junior parties in the government coalition would have little interest in triggering early elections (nor would some of the opposition parties, particularly Silvio Berlusconi's Forza Italia)."

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Another great article from the FT just in well worth the read, posted it below.

Fears mount of multiple bank failures if Renzi loses referendum!

Up to eight lenders risk being wound up if No vote triggers prolonged market mayhem.



Up to eight of Italy’s troubled banks risk failing if prime minister Matteo Renzi loses a constitutional referendum next weekend and ensuing market turbulence deters investors from recapitalising them, officials and senior bankers say.


Mr Renzi, who says he will quit if he loses the referendum, had championed a market solution to solve the problems of Italy’s €4tn banking system and avoid a vote-losing “resolution” of Italian banks under new EU rules.

Resolution, a new regulatory mechanism, restructures and, if necessary, winds up a bank by imposing losses on both equity and debt investors, particularly controversial in Italy, where millions of individual investors have bought bank bonds.

The situation is being closely watched by financiers and policymakers across Europe and beyond, who worry that a mass failure of Italian banks could trigger panic across the eurozone banking system.

In the event of a “No” vote and Mr Renzi’s exit, bankers fear protracted uncertainty during the creation of a technocratic government. Lack of clarity over a new finance minister may lethally prolong market jitters about Italy’s banks. Italian lenders have more than halved in value this year on concerns about their non-performing loans.

Italy has eight banks known to be in various stages of distress: its third largest by assets, Monte dei Paschi di Siena, mid-sized banks Popolare di Vicenza, Veneto Banca and Carige, and four small banks rescued last year: Banca Etruria, CariChieti, Banca delle Marche, and CariFerrara.

Italy’s banks have €360bn of problem loans versus €225bn of equity on their books after successive regulators and governments failed to tackle a bloated financial system where profitability was weakened by a stagnant economy and exacerbated by fraudulent lending at several institutions.

But the market solutions, including a JPMorgan plan to recapitalise Monte Paschi and the efforts of a government-sponsored, private vehicle Atlante to backstop problems at smaller banks, are looking shaky in the face of expected market turbulence if a “No” vote wins, said officials and bankers.

Lorenzo Codogno, a former chief economist at the Italian Treasury and founder of LC Macro Advisors, argued that the “biggest concern” in the aftermath of the referendum is its impact on “the banking sector and implications for financial stability”.

“The capital increases of Italian banks due to be announced right after the referendum may become even trickier than currently perceived in the case of a “No” vote”,” Mr Codogno said.


Senior bankers and officials said that the worst-case scenario was where a failure of Monte Paschi’s complex €5bn recapitalisation and bad-debt restructuring demanded by regulators would translate into a wider failure of confidence in Italy and imperil a market solution for its ailing banks.

Under this scenario, officials and senior bankers believe that all eight banks could be put into resolution. They fear that contagion from the small banks could threaten a €13bn capital increase at Unicredit, Italy’s largest bank by assets and its only globally significant financial institution, planned for early 2017.

Senior bankers argue that, irrespective of the referendum result, there is little incentive for investors to put fresh capital into Monte Paschi, Carige or the Veneto banks when Italian listed mid-sized banks are on average only trading at about a quarter of tangible book value.

“The issue is whether Siena gets done or not,” said a senior official, reflecting how Monte Paschi has become a proxy for the Italian financial system. “Without Siena on the line, I am not worried. With Siena on the line, I am worried.”

This person added that, should Monte Paschi’s deal fail, “all theories are possible” including “a resolution of the eight banks”, especially if a “No” vote led to Mr Renzi quitting office and a period of protracted political uncertainty.

Spreads on Italian government bonds versus German Bunds rose above 190 points on Friday, a level not seen since October 2014, as markets priced in expectations of turbulence.

The prospectus for the recapitalisation of Monte Paschi, which includes a debt for equity swap that begins on Monday, warns that the vote weighs on its chances of success. The Bank of Italy has warned of market volatility around the vote. Critics of Mr Renzi have accused the central bank of fear-mongering ahead of the vote.

But the threat of resolution has loomed large in his premiership as it has coincided with the advent of the single banking supervisor which has taken a tougher stand on Italy’s non performing loans.

Bankers and officials can envisage a technocratic government agreeing with Brussels and Frankfurt a systemic “bail-in” of vulnerable Italian banks which emerged among Europe’s weakest in stress tests two years ago and again this summer. Under a bail-in, which forces losses on bond holders, Brussels could allow for some compensation for vulnerable retail investors, officials said.

Nicolas Veron, senior fellow at think tank Bruegel argued that “if anything the ECB has been very lenient in addressing the system-wide banking situation [in Italy] that has been very visible since the comprehensive assessment two years ago”.

“It is a very difficult moment but it is not sustainable. The problem of banking fragility is not going away. It is not something that resolves itself with time,” Mr Veron said.


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  Six charts that are key to understanding Italy’s referendum (FT)

Italy’s referendum on proposed constitutional changes on December 4 is unnerving markets and could prematurely end the premiership of Matteo Renzi, who has staked his term in office on the outcome.


Following the UK’s Brexit vote in June and the election of Donald Trump in the US, the Italian referendum has gained significance as the next potential opportunity for an anti-establishment vote. So what is it all about?

How the parliament could change

Currently two chambers, the Senate and the chamber of deputies, are both elected in the same way and in effect hold the same powers: both must approve a law in identical form. More often than not this leads to protracted negotiations, numerous amendments, and overly complicated legislation. 

If Yes wins the referendum, the Lower House will become the primary legislative body, while the Senate will become a “House of Regions and Municipalities” with no veto and limited and specific legislative powers. If Yes wins, the number of senators will be cut from 315 to 100. 

The Italian parliamentary system is currently one of the most burdensome in the world. Across both chambers, Italy has 952 members of parliament, the third-largest number in the world after China and the UK and one of the only four countries globally to have more than 900 MPs. 

Although members of the UK’s House of Lords can claim expenses of up to £300 for each sitting day, they do not receive a salary. Italian senators are currently salaried but if the reform passes that will no longer be the case. 

The cut in Senator numbers is even more critical in light of how much they get paid 

According to the UK’s Independent Parliamentary Standards Authority, the gross salary of an Italian parliamentarian is the second-highest of major advanced countries after the US. It is higher than any other major European country, and nearly double what UK MPs receive. And this is without accounting for expenses and allowances. 

Another core element of the reform: re-centralising power

If the reform goes through, regions would lose oversight of energy, strategic infrastructure and civil protection. The responsibility would instead go to the central government. 

“Italy has become a quite decentralised country,” the OECD noted in its 2013 country report. Indeed, regional government accounts for over three-fourths of national procurement. That is around double the share in the UK and above most European countries. 

According to the same report “for some policy areas the decentralisation to regions does not make much sense”. It highlights energy policy, where “current arrangements require every region to have its own strategic energy plan”.

Many economists support the redesign

“Once in place, the reform should permit more efficient policymaking, reduce ambiguity about who is responsible for what, avoid implementation delays due to subnational government not following through on national legislation,” writes the OECD. 

The reform “would allow the government to regain certain key responsibilities, which would make the public administration more effective, while allowing simultaneous devolution and control on other areas”, Lorenzo Codogno, a former chief economist at the country’s Treasury department, has said. 

Critics claim democracy will be impoverished 

The main argument of critics is that the Senate’s limited legislative powers would undermine the checks and balances of the Italian constitutional system, especially in light of the new electoral reform. The eligibility of some of the regional representatives and how they can function in their double roles of functionaries and Senators also raised concerns

They also point out there are many uncertainties over how the new system would actually work. 

Anti-reform or anti-Renzi?

It is difficult to say whether the Italian public shares these views or whether a No vote would mostly indicate lack of support for Mr Renzi. A recent survey, for example, showed that only about one-in-10 Italians know the details of the reform, meaning anti-Renzi protest votes are playing an important role. 

It is not difficult to understand why Italians are dissatisfied. This, after all, is a country where nearly one-third of the population is at risk of poverty or social exclusion and where youth unemployment is still at 37 per cent, and as high as 50 per cent in the south of the country. Polls appear to show those who live in the south and younger people are more likely to be against the reform.

Low levels of trust in Mr Renzi also do not help build a consensus. The prime minister is currently trusted by 32 per cent of the population, higher than any other party leader but 20 percentage points below the president, Sergio Mattarella. 

But votes are harder to predict

It is illegal to publish polls for two weeks before elections in Italy, but the last available figures appeared to show No in the lead. This will not please many top Italian chief executives who almost unanimously expressed support for the reform

Yet recent electoral results showed that we should treat voting intentions polls with a pinch of salt. The gap between support for Yes and No is fairly narrow and a large proportion of the population has not expressed a view on the vote.

Support is particularly difficult to gauge in Italy because a significant part of the electorate is not surveyed. More than 1m Italian expatriates took part in the 2013 general election, more than half living in European countries. 

One million expat votes are not a game changer in a country where around 35m people will vote domestically, but they could make a difference in a tight race. In previous elections, Italians abroad have given little support to the Five Star Movement and Silvio Berlusconi’s party Forza Italia. Both support the No campaign. 

The Italian government bond yield, a measure of market-perceived risk, has been rising, while the spread with the German and Spanish bonds has been hitting a new record high nearly every day.

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Italian Prime Minister Matteo Renzi's office denied news reports that the premier is considering stepping down even if he wins the Dec. 4 referendum.

Our eagle-eyed friends at Livesquawk spotting the Bloomberg story from earlier.


"Officials dismissed the reports as speculation in a text message today. Italian newspapers including Corriere della Sera reported earlier in the day that Renzi might resign even if voters on Sunday pass the constitutional reform he is requesting. The officials declined to be identified in line with internal policy"

Renzi told reporters on Monday, when asked about his plan for after Sunday's vote:

"The Italian institutional system has many safeguards so there is always a government -- political, technocratic, super-political, hyper-political, hyper-technical," .

He has previously said in interviews and in speeches in the Rome-based Parliament that he would step down if he loses the referendum.

The newspapers said that Renzi would seek re-appointment after his potential resignation in order to form a new government with a broader majority within the current parliament. Under the plan, they said, the cabinet would be reshuffled and lawmakers would pass a new voting law before general elections next year or in 2018.

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Exclusive: ECB ready to buy more Italian bonds if referendum rocks market - sources: (Reuters 29/11

The European Central Bank is ready to temporarily step up purchases of Italian government bonds if the result of a crucial referendum on Sunday sharply drives up borrowing costs for the euro zone's largest debtor, central bank sources told Reuters.

Italian government debt and bank shares have sold off ahead of the Dec. 4 referendum on constitutional reforms because of the risk of political turmoil. Opinion polls suggest the 'No' camp is heading for victory, which could force out Prime Minister Matteo Renzi in the latest upheaval against the ruling establishment sweeping the developed world.

The ECB could use its 80-billion-euro ($84.8 billion) monthly bond-buying program to counter any immediate, further spike in bond yields after the vote, smoothing market moves and supporting bonds, according to four euro zone central bank sources who asked not to be named.


The sources added the scheme was flexible enough to allow for a temporary increase in Italian purchases and that such a move would not necessarily need to be rubber-stamped by the ECB's Governing Council, which is due to meet on Dec. 8 to decide on whether to keep buying bonds after March.

But they stressed this would be limited to days or weeks, to counter any immediate market volatility, because the asset-purchase program was designed to shore up inflation and economic growth in the entire euro zone and was not intended to fight crises in individual countries.

This means that, if Italy or its banks needed longer-term financial support, Rome would need to formally ask for help.

"The Governing Council understands that there is some space to help Italy, which will be used, if needed. The asset purchase program has built-in flexibility," said one of the sources. "The key is that the ECB has to be convinced the volatility can be overcome by using this flexibility."

The ECB declined to comment.

With one of the world's largest public debt piles, Italy's borrowing costs are closely watched as a potential flashpoint for market instability in the wider euro zone.

They risked spiraling out of control during the sovereign debt crisis until ECB President Mario Draghi pledged in 2012 to do whatever it took to save the euro.



Renzi has said he will resign if Italians reject his constitutional reforms, which would drastically reduce the powers of the upper house of parliament and take back some decision-making powers from the regions.

Investors worry that his departure would lead to political instability and bolster the anti-establishment 5-Star Movement, which has called for a referendum on euro zone membership.

Speaking in public, ECB officials remain sanguine.

Draghi emphasized on Monday that Italy's debt was sustainable, albeit with no room for complacency given its huge sovereign debt pile.

Vice President Vitor Constancio opened the door to an ECB intervention last week but also stressed that still-low Italian bond yields did not point to investor fears that the country may crash out of the euro zone.

Indeed, the health of Italian banks, rather than the governments' own borrowing costs, may be Rome's biggest worry in the aftermath of a 'No' vote.

Italy's 10-year bond yields IT10YT=TWEB stand at 2 percent, the highest level in more than a year but nowhere near the 7 percent level that prompted emergency ECB purchases in 2010-11 and eventually led to the resignation of Prime Minister Silvio Berlusconi.

Italian banks' share prices indicate investors are concerned about their ability to raise the cash they need to work off their huge piles of unpaid loans, a legacy of the financial crisis that is hampering confidence in the sector and curbing economic growth.



Shares in Italian bank Monte dei Paschi di Siena (BMPS.MI) are near all-time lows over concerns it may fail to raise the 5 billion euros it needs as part of a rescue plan agreed with the ECB, which is also the euro zone's banking supervisor.

The stock of larger peer UniCredit (CRDI.MI), which is also planning a cash call, is also close to a record low.

Euro zone central bank sources say there is little the ECB can do about the banks' need for capital unless Italy itself asks for a rescue program for its banking sector.

This would also unlock further, country-specific ECB purchases of Italian debt, known as Outright Monetary Transactions (OMT). These, unlike the current asset-purchase program, are not tied to the "capital key", or how much capital each country has paid into the central bank.

"There is a risk that a bout of volatility would have a broader impact on the bank sector," one of the sources said. "At that point, it's not for the ECB to act. That's typically where OMT needs to come in with all the requirements, including a (rescue) program."

Asking for such a program has been an unpalatable option for Rome as it would require private investors in banks to lose their money in a so-called bail-in before European public funding can be used.

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Four ways Renzi’s referendum could change Italy (FT)

Scenarios include fresh elections, caretaker government and comeback victory


The technocratic fix

If the referendum goes against Mr Renzi, he is likely to honour his pledge to stand down as prime minister in the event of defeat.

Sergio Mattarella, Italy’s president, would then start talks with the country’s political parties and select a new prime minister to head a technocratic caretaker government.

Its mandate would be to limit any market fallout from the No vote, which could hit the country’s banks, and pass Italy’s 2017 budget.


ut the new government would probably also be charged with changing the country’s electoral law, a controversial measure that gives extra parliamentary seats to the party that wins most votes, ahead of new elections due by early 2018.

Otherwise, the populist Five Star Movement could make big gains if it comes top in the next general election.

Names floated for prime minister in a caretaker government — all Democratic party members — are Pier Carlo Padoan, currently finance minister; Dario Franceschini, culture minister; and Pietro Grasso, president of the Senate.


Snap elections

If Mr Renzi suffers a crushing defeat, Italy could be on course for quick elections, which could take place as early as the beginning of next year.

A return to the polls has been a rallying cry for the populist parties that lead the opposition to the constitutional reforms, notably the Five Star Movement and the anti-euro, anti-immigrant Northern League. If they win the day, such calls may be extremely hard to brush aside.

But many MPs in the Democrat party’s ranks would also prefer to have new elections rather than support an unpopular interim government.

Mr Renzi is Italy’s third unelected premier in a row — his predecessors were Mario Monti and Enrico Letta — and installing a fourth consecutive such leader could further inflame populist opposition to the political order.

Although Mr Mattarella is said to be wary of snap elections, he may have to come round to the idea.

Such elections would be by definition unpredictable: they could allow Mr Renzi to stage a quick comeback but could also usher a government led by Five Star into power or lead to the return of the centre-right. 


Renzi 2.0

Mr Renzi could always rethink his vow, reiterated in the final days of the campaign, to leave office if he is defeated.

Despite his protestations that he does not want to be part of any old-school Italian fudge, if the result is close, he may still be asked by Mr Mattarella to form a new government.

Barack Obama, US president, urged such an outcome at a White House meeting in October, when he said that he would like to see Mr Renzi “hang around” regardless of the result.

The prime minister may be tempted: he often speaks longingly of organising the G7 summit in Sicily next May and the 60th anniversary celebrations of the EU’s founding Treaty of Rome in March.

But hanging around has drawbacks. The opposition would accuse Mr Renzi of ignoring the will of the people, so harming his comeback chances. The mandate would be similar to a caretaker government’s, a thankless task for an ambitious reformist like Mr Renzi. But will he stick to his word if duty calls? 

Renzi triumphs

The final polls may have been wrong. Mr Renzi’s campaign may be right in betting that it can win over undecided voters in the campaign’s last days. Either way, there is still a decent chance of an upset victory for the prime minister.

But that would not imply an end to political risk. Mr Renzi’s main focus would be to bolster his majority in the 2018 elections rather than pushing ahead with big new economic reforms.

The prime minister may also have to deal with any banking sector issues that could flare up regardless of a Yes victory. Most likely, he will still try to negotiate a deal to change the electoral law, in partnership with Silvio Berlusconi’s Forza Italia, to limit Five Star’s power if it wins the next big vote.

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ECB would react to “shocks” caused by the Italian referendum (source econotimes)

ECB meeting on 8th December will be largely influenced by developments in Italy's politics as we head into Italian referendum scheduled to take place on 4th December. At its semi-annual financial stability report last week, the ECB expressed concern regarding the possible unrest a 'No' vote could cause in the financial markets.  ECB's Vice-President Vítor Constâncio underlined that the central bank would react to “shocks” caused by the Italian referendum.

Prime Minister Matteo Renzi has renewed pledge to resign if he loses the upcoming constitutional referendum. Opinion polls indicate a 4-5pp lead for the 'No' side, but polling uncertainty and a large share of undecided voters mean that the actual results can go either way. 


A 'No' vote may not be a big surprise but is still likely to have a major impact on Italian politics, the banking sector and financial markets. The Italian government has been struggling to address weakness in the banking sector even before the referendum. A 'No' vote would weaken the government and make efforts even harder, while capital for the banks via the private sector would be even harder to find. 

A 'Yes' vote on the other hand, will be a better start, but it will be hard to see any quick improvements in the Italian outlook. Markets are likely to retain a cautious view on Italian assets, at least until the political situation and foremost the outlook for the banking system clears. 

The implied EUR-USD volatility recently rose to the levels seen during the rather volatile US election night. Italian politics may become decisive for the ECB meeting on 8th December. ECB stands ready to temporarily step up purchases of Italian government bonds if referendum rocks market. The European Central Bank meets on Dec. 8 and is widely expected to extend its bond-buying program. 

"We expect the ECB to announce an extension of its bonds purchasing programme beyond March 2017 at its last meeting of the year. This step is likely to become even more urgent if it has to stop a further rise of yields on Italian government bonds," said Commerzbank in a report.


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