Eq: Dev ex-US
Italy is not getting the press coverage it deserves right now, and we think investors really need to be aware of what is going on there. In either late November or early December, Italy will hold a landmark referendum on its constitution, deciding whether or not to give the prime minister more power. The vote is being put forward by current PM Renzi, and he has said he will resign if he loses. The vote, therefore, has turned into more of a vote on his popularity than on the underlying question, and that has made things very dangerous. The far-right Five Star Movement (the anti-Euro party) has proved potent in the polls, winning the mayoral seat in Rome, and Renzi and his party are currently losing narrowly in the polls on the referendum.
FINSUM: The reason this is so important is that if Renzi loses, there is a good chance the far right party could easily swing to power and then call a referendum on Euro membership, which could be a real market catastrophe. This is a BIG tail risk, and we think US investors need to be made more aware of it.
Source: Financial Times
Be fearful of the forthcoming Italian referendum. In November (date to be decided), Italians will hold a vote on some wide-ranging constitutional reforms. PM Matteo Renzi has pledged his career on the vote, saying he will resign if the referendum is defeated. The polls are indicating a majority of citizens might reject the reforms, and if he loses, the far-right wing Five Star Movement could sweep to power and call a referendum on Euro membership. This article says that Italian bonds are starting to show anxiety over the vote as investors are now beginninging to demand a yield premium over Germany.
FINSUM: We would like to formally warn investors that this could be a very large issue. If Renzi loses this vote, and the anti-Euro party looks set to come to power, it could spark fears of the disintegration of the Euro, which would deeply trouble financial markets.
There has been a lot of hype over the last week about the Bank of England’s new quantitative easing programme. However, the programme appears to be stumbling just as it begins because of a key issue—investors are unwilling to let the BOE buy their long-dated bonds. For this first time in the history of doing its QE (which it started in 2009), the BOE failed to reach its stated goal amount at an operation on Tuesday. The problem highlights why the programme as a whole might struggle, as investors are reticent to let go of their long-term bonds because they are the only place one can earn yield.
FINSUM: So negative rates and the search for yield has become so strong that investors won’t even part with their bonds when there is a willing buyer in the market. Will this be a big thorn in the side of the QE programme?
The Bank of England surprised markets today with a shock move to stimulate the UK economy following the country’s vote to leave the EU. The BOE cut rates by 25 basis points and re-launched QE to £70 bn per month of purchases. The bank also decided to add corporate bond buying to its purchase programme at volumes of £10 bn per month. The bank also presented the biggest decline to the growth outlook in more than 20 years. The big announcement came following some very poor economic data.
FINSUM: This was significantly bigger than most were expecting, so the BOE certainly has the “shock and awe” factor on its side.
Source: Financial Times
Several days ago we made call, saying that it seemed likely the EU would have to go against its own rules and use public funds to bailout Italy’s Monte dei Paschi and other troubled Italian lenders. That call appears to be starting to come true, as ECB chief Mario Draghi has now officially called for a public bailout given “exceptional circumstances”. Draghi said doing so would help avoid firesales. So far, Italy has been unsuccessful in trying to secure funding to save its banks, and it has thus far been unwilling to impose losses on private investors, as doing so would inflict harm on a great many Italian households.
FINSUM: We think the EU is going to be forced to come around on this. The reason why is that if they let Italian bondholders take the big losses, then the far-right party is going to steam roll through a referendum on Italian Euro membership on the back of popular anger, which would torpedo the currency and launch a new financial crisis.
Source: Financial Times
There is big trouble brewing in Italy. With so many important headlines swarming media outlets recently, it would have been easy to miss the potential banking-induced socio-political crisis brewing in Italy. Italy’s banks, as everyone knows, are in big trouble, and Monte dei Paschi is chief among them. The bank badly needs to raise capital to stay afloat, but experts say it will be virtually impossible to do so in private markets, which means a bailout may be necessary. However, new EU banking regulations dictate that a bank cannot be bailed out with public funds unless private investors have been wiped out first. Unsurprisingly, Italy is loath to let that happen considering ~$2.5 of the bank’s junior bonds are held by Italian households. Italy is working furiously to find a loophole in the regulations.
FINSUM: Just imagine how badly this could go. Italians are already livid about the state of their economy and largely blame the Euro. Now think what it could do if the EU tries to force a wipeout on Italian creditors. This could be the moment when tensions come to a boil.
Source: Wall Street Journal