ITALY is on the brink of financial and political meltdown as the leader of the Eurozone’s third-largest economy tinkers on the edge of career suicide, plunging the already beleaguered European Union into fresh chaos.
Matteo Renzi has promised to resign if he loses a referendum on constitutional reform in October, which threatens to shake the financial foundations of the nation and push contagion to other nations in the crumbling bloc.
The Pro-EU Premier’s nickname is II Rottamatore - The Demolition Man - but many fear this moniker may come back to haunt him and he could become the main target for his own demolition.
Renzi’s departure would be taken badly by markets that have backed his reform agenda.
Guntram Wolff, director of Bruegel, an influential Brussels-based think tank, said: "Political instability would indeed cause financial instability.”
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If his proposals are defeated, opposition parties who are determined to push forward a breakaway from Brussels, and with Brexit increasing anti-EU sentiment across the continent, they will prepare for a fight to topple the union.
The autumn vote is about major constitutional change to Rome's notoriously slow and costly system of government.
Italy is one of EU’s founding members, with the union’s flag standing proud atop state buildings nationwide.
However, the ongoing migrant crisis and the bloc’s failure to stop thousands arriving on the nation’s shores, as well as constant negotiations over its finances, has left many Italians scorned.
Britain’s momentous decision to sever ties with Brussels was celebrated by anti-establishment and Eurosceptic party the Five Star Movement.
Five Star Movement, founded by comedian Beppe Grillo, has now become the most popular party in Italy after it won a quarter of the national vote in 2013 and last month clinched the mayoral seats in Rome and Turin.
Recent polls show it has 30.6 pr cent of the vote - up from the ruling Democratic Party’s 29.8 per cent.
Italy’s bank shares plunged on Tuesday, showing signs they are suffocating under a pile of non-performing loans and a growing sense of political instability. The crisis could push Italy back into recession and, in a doomsday scenario, generate a Greek-type meltdown that Europe would find almost impossible to contain.
Francesco Galietti, head of the Policy Sonar risk consultancy and a former finance ministry official, said: “Italy faces a severe crisis that is exponential. This is not gradual and not linear.
"The immediate trigger is the banking crisis."
In further signs of Italy’s increasing strife in the wake of the Brexit vote, it’s bank sector index FTIT8300 has fallen 30 percent, bringing its losses so far this year to 57 percent since the UK voted to leave the EU on June 2 The euro zone banking stocks index .SX7E plunged by 22 percent and 37 percent respectively.
One senior banker warned: “It’s one thing to have a British problem."
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He told American Politics website, Politico:“It’s another thing to have a British and an Italian problem.”
On Tuesday, the Italian index lost a further 1.44 percent to trade, which is around a three-year low. Italy is politically and financially fragile, often described as "too big to save" in a crisis, so even though there is very little direct economic linkage between its banks and the Brexit vote, any global shock creates major tremors there.
A former IMF official described Italy as the “fault line of Europe”.
He added: "Both the public debt and the banking sector are on a powder keg, being maintained by a process of non-recognition of accumulated losses in the system that they keep rolling over.
“The real problem is that somebody has to take the losses eventually."
Immediate concerns centre on Italy's third-largest lender, Banca Monte dei Paschi di Siena, which has the highest ratio of bad debts to outstanding loans among listed Italian banks.
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It has been ordered to slash these debts by 40 percent over three years by the European Central Bank (ECB). Market watchdog Consob predicted short selling of Monte dei Paschi shares would be banned in Wednesday's trading session.
Such bans aim to prevent speculators from forcing stocks down by selling borrowed shares heavily and then buying them back at a lower price, pocketing the difference.
Rome is currently in talks with Brussels to devise a plan to recapitalise its lenders, including BMPS, hoping to use public money to stave off potentially huge losses for bank bond and shareholders - many of them ordinary retail investors. Such a deal might require the bending of anti-bailout rules that the European Union adopted in 2014 to force investors and some depositors to share the burden of bank failures.
Although Germany urges for the rules to be respected, Italy says flexibility is needed to prevent possible bank contagion stemming from Brexit.
Andrew Edwards, CEO of British based financial company ETX Capital, said: "A solution should be found quickly or the world's oldest bank could fail and bring down the rest of Europe's embattled banking sector with it “The EU needs to show flexibility or Italy could go under.”
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http://www.express.co.uk/news/world/691326/Italy-prime-minister-Matteo-Renzi-political-financial-break-down-Eurozone-European-Union
