As world markets absorbed the result, investors soured on Italian banking stocks. Shares in Monte dei Paschi di Siena, which was involved in Italy's grandest banking fiasco, surrendered 4 per cent on Monday on expectations that a private sector rescue devised by Renzi had been killed.

Investors initially pushed down the euro before it recovered. They cut the price of Italian government bonds, lifting the yield a sign that investors will demand greater reward for the heightened risks of lending to Italy. Investors also unloaded Spanish and Portuguese government bonds, while buying German government debt.

The widening spread between lower-yielding German bonds and those issued by debt-saturated European countries amounts to a flashing indicator that investors see risks for the southern periphery. These market moves were muted because the results had been anticipated.

Indeed, for Europe and the rest of the world, this dynamic was uncomfortably familiar. For nearly a decade, the 19 nations sharing the euro have lurched from one crisis to the next, with no effective fix. A currency designed to unite the adversaries of World War II has instead generated fresh divisions between creditor and borrower; northern Europe and the Mediterranean.

If investors worry that Italy may leave the euro, they will demand greater rewards for continued lending. Those with the greatest debt burdens Greece, Spain and Portugal could see their borrowing costs rise beyond their ability to pay.

The most immediate consequences fall on the Italian banking system, now choked with some €360 billion ($518 billion) in suspect debts.

Renzi tried and failed to inject public funds into Monte dei Paschi, the perpetual locus of fears about an Italian-bred financial conflagration. The European Union, led by Germany, effectively forbade that step, citing new rules barring taxpayer bailouts to limit the temptation of bankers to engage in reckless lending.

Renzi instead forged a plan that has Monte dei Paschi scrambling to secure €5 billion from private investors.


"For Monte dei Paschi, it's going to be extremely hard to close the capital raise by end of the year," said Nicola Borri, a finance professor at Luiss Guido Carli University in Rome. "The political future is so uncertain."

Monte dei Paschi problems

Most experts assume a caretaker Italian government will wind up seeking permission from European authorities for some form of a taxpayer-financed rescue of Monte dei Paschi, while agreeing to wipe out the investments of a thin slice of bondholders.

The consensus is that Italy can patch immediate holes in the banking system. But the referendum has destroyed what momentum existed to address the condition that is both cause and effect of the banking problem a dire lack of economic growth.

Italy's banks are stuffed with uncollectable debts in part because the country's economy is smaller than it was a decade ago. Bad loans on bank balance sheets reflect that millions of people have lost jobs, eliminating spending power, while companies have seen sales evaporate.

Renzi pursued reforms aimed at spurring companies to invest. He made it easier for companies to terminate low-performing workers to eliminate a chief impediment to hiring them in the first place the fear that giving someone a job was akin to adopting them as a dependent forever.

He sought to speed civil processes in the notoriously inefficient court system to make it easier for banks to recoup bad debts by collecting collateral.

The constitutional changes he sought were aimed at clearing another blockage to reform. They would have trimmed the powers of the upper chamber of the legislature, a place where proposals die.


Voters clearly did not trust Renzi to wield greater power. Now, they will be represented by someone with less power where it matters a great deal: Brussels and Berlin.

Debt-saturated nations in Europe have long argued that their burdens would be lighter if they could spend more money to spur faster economic growth.

But the European Union anchored by Germany has cited rules limiting the spending of member governments with big debts. Instead, Brussels and Berlin argue, such countries must deliver so-called structural reforms, stripping away labor protections and trimming pension benefits.

Greece out of euro?

In a testament to the severity of this creed, German Finance Minister Wolfgang Schauble effectively threatened to banish Greece from the euro if Athens did not deliver on reforms it promised as a condition of successive European bailouts.

"Athens must finally implement the needed reforms," Schauble told the Bild am Sonntag newspaper in an interview published Sunday, a day before eurozone finance ministers convened to court the participation of the International Monetary Fund in the Greek bailout. "If Greece wants to stay in the euro, there is no way around it."

Renzi was a rare leader who carried credibility in such quarters. He gained modest relief from European spending strictures in part by pointing at his reforms.

"Renzi is the only leader in recent history who has advanced a structural reform agenda," said Mujtaba Rahman, managing director for Europe at the Eurasia Group, a risk consultancy.

Now, Renzi is gone, along with his reform trajectory. What is most palpably still here is an Italian economy that is growing anemically, soon to be presided over by a caretaker government with a limited mandate.

The New York Times