Situation report: Italy’s predicament

Italian Prime Minister Matteo Renzi

The troubles of an Italian bank, Monte dei Paschi di Siena (MPS), are just one in a long line of difficulties that Italy is currently facing. A summer of natural catastrophes and a war of words with the European Commission are introducing more uncertainty into the country’s future. A recent survey showed that investors now believe Italy is more likely to drop out of the euro currency zone than Greece.

Banks in crisis

On 2 November 2016, shares in MPS, the oldest bank in the world, fell more than 6 per cent. It was the latest in a series of disasters for the Italian lender, which is heading towards its third bailout in as many years, losing 75 per cent of its share value between 2015 and 2016.

The sudden drop was precipitated by the prominent Italian banker Corrado Passera withdrawing his rescue plan for the bank, accusing the executive board of obstructing his team as he prepared his case. The bank instead chose a scheme that involves selling off its entire portfolio of bad loans worth EUR27 billion, cutting personnel costs by 9 per cent, and finding institutional investors to back the EUR5 billion plan.

MPS has experienced significant upheaval at the executive level, with unexpected resignations prompting a further drop in the share price of the bank. Now, chairman Alessandro Falciai must concentrate on two major obstacles before the rescue plan can be set in motion. The first is the approval of shareholders, who will vote on the plan on 24 November. The second is the willingness of international investors to step in, once again, at a time of major uncertainty in Italian banking.

MPS is not the only Italian bank undergoing a major overhaul: the entire sector is considering ways to improve competitiveness. The Italian banking landscape is threatened by a huge portfolio of non-performing loans worth EUR360 billion, and by endemic over-capacity. There are 59.6 commercial bank branches per 100,000 adults in the country, more than double the Eurozone average of 27.9. However, reducing the personnel costs would entail thousands of redundancies, which nobody – least of all the Italian government – is willing to undertake at such a politically sensitive time. Shareholders in Italian banks are generally private citizens and small businesses who could quickly turn against the government if it does not find a solution to the crisis.

Renzi’s referendum

A further factor weighing on potential investors in MPS is the upcoming referendum on 4 December. Italy’s political structure is distinct from all other European countries in that its two houses of parliament have equal powers, which, according to supporters of the proposed constitutional amendments, increases the time it takes to pass any legislation. The amendments, proposed by Prime Minister Matteo Renzi, would see the powers of the upper house of the legislature reduced: the number of senators would be reduced from 315 directly elected representatives to 100 members of local assemblies and mayors. There would also be changes to the way that power is divided between the national and regional governments, to provide clarity and avoid duplication. An electoral law, tied to the constitutional amendments, would allocate a majority bonus to a party that won more than 40 per cent of the national vote, giving it 55 per cent of seats.

Voter intentions in Italy’s 2016 referendum – Source: Instituto Ixe, Presidenza del Consiglio

Originally, Renzi was so confident of success that he pledged to resign if the amendments were not approved. By August 2016, however, he admitted that he had ‘made a mistake in making this too personal’; almost every opinion poll in October 2016 showed that the referendum was likely to be rejected. Much of the opposition to the amendment stems from concerns about the potential concentration of power in the hands of the executive. The Italian post-war political system was built to ensure that leaders could never again maintain a stranglehold on power like Benito Mussolini, the fascist prime minister who ruled from 1922 to 1943. Further, opponents of the changes point out that the Italian parliament passes more laws annually than the U.K., France or Germany, so reducing the power of the senate would further accelerate Italy’s lawmaking process, complicating the legislative environment and scaring off potential investors.

Italian referendum poll

The campaign has bitterly divided Renzi’s own party, the P.D., whose former leader Pier Luigi Bersani announced that he would vote against the amendments. Massimo D’Alema, another P.D. traditionalist and former prime minister, is also campaigning against the proposals. It has become a polarising debate in parliament and on the streets. In early November, an anti-government rally in Florence, Renzi’s hometown, descended into violence when protesters threw pyrotechnic devices and firecrackers at police as they tried to break into a building where Renzi was holding a meeting.

The prime minister has changed tack, and is trying to separate the referendum from his government, investing in a large advertising campaign and staging mass rallies across the country.

Renzi portrayed himself as an agent of change, but dissatisfaction is growing. The anti-establishment party M5S is increasingly popular and won a series of municipal elections in Italy this year. The party advocates dropping out of the single currency, and opposes the proposed amendments. Beppe Grillo, a comedian and founder of M5S, wrote on his much-read blog that Trump’s victory was a ‘V-Day’; ‘an apocalypse for the mainstream newspapers, journalists and intellectuals’. The M5S have successfully portrayed Renzi, a career politician, as a paid-up member of the liberal, centrist but corrupt establishment; since only 3 per cent of Italians trust political parties, this is not a strenuous task. It could be too late for Renzi to try and convince the electorate of his radical credentials.

Outlook

If the referendum fails, Renzi will likely resign, unless it is a close result. If he does stand down, there would not necessarily be snap elections. None of the parties are prepared for electoral campaigning, and although the M5S would likely perform well, it would be very unlikely to win enough support to form a new government, leading to parliamentary deadlock and probably another round of elections, with added voter fatigue.

A new coalition government could be formed, including parties from the centre-right, or the P.D. could try and stay in power with a new leader, as was the case in the U.K. after the referendum on E.U. membership. Alternatively, a caretaker government would take over, as Mario Monti’s technocratic administration did in 2011. In any case, the Italian civil service, judiciary and general population are well-versed in the art of survival without a government, experiencing a political collapse on average once a year.

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