Italy: Referendum to drive the economic growth? - Westpac

Research Team at Westpac, notices that Italy has barely grown since 2000 and its GDP remains below pre-crisis levels and youth unemployment is extremely high (over 37%) and the banking system has not undertaken any genuine reforms and is persistently at risk of further regional bank failures.

Key Quotes

“Italy’s debt to GDP ratio, at 132%, is the second highest within the Eurozone (only Greece is higher at 177% with the Eurozone average being 90%). The lack of growth and inability to achieve banking reform leave Italy with the highest Non-Performing Loan (NPL) profile within the Eurozone at around 19%.”

“Renzi’s Government claims that the political system is exacerbating the banking sectors problems. Monte dei Paschi, the world’s oldest continually operating (just) bank, is currently struggling to achieve a refinancing package and avoid collapse.”

“On the positive side for Italy, its corporate sector is not heavily indebted and the household balance sheet profile is strong. However, private and especially household ownership of bank debt is high which adds to the political difficulty of resolving the bad debt and the sector’s need for consolidation (Italy has some 300 banking institutions).”

“Italy, along with Spain, also has a large and growing deficit within the Eurozone’s cross border, electronic (central) banking settlement system (Target 2). In Italy’s case, this could be considered as a consequence of its banking issues. Depositors seem to have a preference to hold their EUR in non-Italian banks to safeguard against possible failure. Germany is the dominant creditor, but smaller countries such as Netherlands and Luxembourg have notable credit positions which, in a NIRP environment, mean that there is an effective painful transfer from those creditor countries.”

“All of these issues add to the concerns in markets about what might occur if Italy votes No to the constitutional reforms and the uncertainty that would arise over Italy’s government.”

“It is unlikely that a No vote will force Italy immediately towards early elections (the current profile is that elections need to be called by mid-2018) as it has a long history of forming new Governments under such scenarios. However, yields are likely to rise between 25-75bps against Bunds and the impact on EUR is likely to force it to test its 18 month lows (in the 1.0450 area) if not eventually parity against USD.”

“Conversely, a Yes vote could come as a surprise positive for Italian assets, prospects for its banking sector and therefore for EUR. However, given the economic and political realities, the outcome is not likely to be an immediate unleashing of pent up reforms and a release from economic stagnation. Gains may themselves be short-lived should there be moves to restrict the actual details of the proposed reforms.”