Italy

almanis forecast markets:
Will the proposed reforms of the Italian Senate be passed in a constitutional referendum before the end of 2016?
Will an Italian bank be forced to “bail-in” bond holders before the end of 2016?

The global financial crisis and, even more pertinently, the Eurozone’s debt crisis have intertwined the fates of financial markets and governments as never before. Much has been done in recent years to weaken these ties between governments (and the tax-payers who ultimately support them) and failures within their respective banking systems. To put it bluntly, these efforts do not seem to be working in Italy.

There are two points arising from June’s shock Brexit result that have not had enough media attention, at least not in the mainstream UK press that I read. The first is that the major financial consequence of the Brexit result was a crash in Italian banking stocks. This dwarfs the depreciation in sterling and the troubles of a few UK property funds in terms of global significance. The second is that Matteo Renzi, the Italian Prime Minister tasked with responding to his country’s renewed banking crisis, has his job on the line, à la Cameron, at a constitutional referendum due in October.

The resolution of these two issues is absolutely central to the medium-term outlook for the Eurozone. Understanding how they play out may require some digging for information and learning some dreadfully boring details about how banks fund themselves, but I would suggest that if you can’t understand and forecast these issues, good luck forecasting anything else. I count five other almanis questions that are directly affected by this situation. Indirect effects will be felt more widely.

For those looking to familiarise themselves with the woes of the Italian banking sector, I recommend this primer from the BBC. For those with time and access, a longer analysis from the Financial Times is worth the investment.

Turning to the referendum, we know by now that these are hard things to call. Precedent counts for little or nothing in these one-off events and so the traditional forecasting models are very fallible. Any analysis will have to start, I think, with a look at the likely role of Beppe Grillo’s swelling M5S movement.

They oppose Renzi’s proposed reforms and, having recently overtook his party in the polls, have everything to gain from forcing his resignation and an early general election. Their newly elected mayor of Rome has announced her intention to restructure the city’s outstanding debt. Beppe Grillo, the party’s leader, is looking to do likewise with Italy’s €2.2tn stock of national debt. It is hard to overestimate the shock to financial markets were such an outcome to even become likely.

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