By Lambert Strether of Corrente.

“How did you go bankrupt?” “Two ways. Gradually, then suddenly.” –Ernest Hemingway

In this post I’ll do a quick wrap-up of the Italian referendum results as I see them. Despite heavy-breathing from journalists on both sides of the Atlantic, I don’t view the the Italian electorate’s rejection of Renzi’s constitutional reforms as part of a putative “populist wave,” nor do I see the result as leading to an Italexit (or Quitaly, or whatever). However, the result does couple political risk and financial risk uncomfortably tightly, in that Italy needs a government that can take decisions in regard to what’s generally referred to as its “troubled banking sector.” Italy’s been good at kicking the can down the road. So far.

First, I’ll briefly summarize what the Italian referendum was about, and the results. Then, I’ll look at the narrative (“ZOMG!! Populism”) and the local particularities that make that narrative unlikely. I’ll also present some pundits whose hair isn’t on fire. Next, I’ll look at whether the results make Italy’s exit from the EU more likely (no). Finally, I’ll look at the gradually worsening Italian banking crisis, and ask whether whether anything “sudden” might happen; interestingly, there are rather a lot of leaks right now, and they’re not consistent, so I take it that European elites are negotiating with each other and potential marks investors through the press. More, I can’t say.

Caveat: I’m trying my hardest not to project my American political narratives onto Italy (that is, I think, what the “populism” narrative does (and I’m not even sure it’s correct for this country)). If we have any readers who are knowledgeable about Italy, please speak up!

The Vote and the Outcome

The Economist describes Prime Minister Matteo Renzi’s referendum:

He thinks Italy’s biggest underlying problem is institutional paralysis, and has called a referendum for December 4th on constitutional changes that would take back powers from the regions and make the Senate subordinate to parliament’s lower house, the Chamber of Deputies. This, together with a new electoral law that seeks to guarantee the biggest party a majority, will give him the power to pass the reforms Italy desperately needs, or so he claims. Yet this newspaper believes that No is how Italians should vote. Mr Renzi’s constitutional amendment fails to deal with the main problem, which is Italy’s unwillingness to reform. And any secondary benefits are outweighed by drawbacks—above all the risk that, in seeking to halt the instability that has given Italy 65 governments since 1945, it creates an elected strongman. This in the country that produced Benito Mussolini and Silvio Berlusconi…

(I’ll come back to the underlined sentence later.) Italian voters rejected Renzi’s proposal resoundingly:

The margin of the rejection– close to 20 percentage points – was much wider than expected. On a high turnout of 65.47%, 59.11% of voters chose no; 40.89% went for yes. Overseas voters bucked the trend, voting overwhelmingly (64.7%) for yes.

(Yet again the polls were wrong. That doesn’t, as such, equate to a populist revolt, though it’s worth asking why (most of) the polls keep being wrong.) Renzi is expected to resign (having promised to do so); that’s baked in to asset prices.

One overseas voter provides one scenario for the Italian government in the short term following Renzi’s defeat. From the Yale Daily News:

The most likely scenario is a technocratic government charged with changing the electoral law. This would lead to elections in six to 12 months. The less likely positive scenario is that the current legislature runs its full course. However, this entails finding a government with the strength and legitimacy to follow through with much needed structural reforms, hence the “less likely” status. The less likely negative scenario is snap elections. Much of the opposition that ran the “No” campaign is asking for new elections, planning to capitalize on the recent win. This would require an unobvious application of the current electoral law. As polls stand, the center-left party would face a second turn with the anti-establishment Five Star Movement. And if the Five Star Movement wins, Italy would become the first large European nation led by a populist, euroskeptic government, which may call for a vote on the euro. Or in other words, Italy could break the eurozone [although not the EU]. Now, for the big question: Who decides? Technically, the President Sergio Mattarella, who will first ask the center-left to try and form a new government. So really, the matter rests in the hands of Renzi’s party. And their congress is convening on Wednesday.

Wednesday is tomorrow! Reuters seems to have plumped for the snap elections scenario:

Italy could have an election as early as February, a minister in Matteo Renzi’s outgoing government said on Tuesday after speaking with the prime minister. The comments will heighten support for a quick vote as the only way to avoid protracted political limbo in the euro zone’s third largest economy following Sunday’s “No” vote on Renzi’s constitutional reforms. The two largest opposition parties, the eurosceptic, anti-establishment 5-Star Movement and the right-wing Northern League, are both pushing hard for elections. Renzi announced he would step down after his resounding referendum defeat. President Sergio Mattarella told him to stay on until parliament approves the 2017 budget. Moving quickly, Renzi on Tuesday called a definitive confidence vote on the budget, to be held in the Senate on Wednesday, after which he is expected to return to Mattarella with his resignation.

So Wednesday is tomorrow both for the Democrat Party congress and the budget!

The Narrative

Marine Le Pen, in a splendid example of the Rice-Davies Rule, provides the clearest statement of “populist” triumphalism. She tweeted:

Les Italiens ont désavoué l'UE et Renzi. Il faut écouter cette soif de liberté des nations et de protection !MLP #referendumcostituzionale — Marine Le Pen (@MLP_officiel) December 4, 2016

Translated:

[LE PEN:] The Italians have disavowed the EU and Renzi. We must listen to this thirst for freedom of nations

At this point, we remember the underlined passage from the decidedly non-populist Economist, which also recommended a No vote. So perhaps the narrative is not quite as simple as LePen would have it.

Let’s look a bit more closely at the vote. From Bloomberg, we have a map of the constituencies:

Do the regions (in yellow) that voted yes have a common factor? Indeed they do. The Conversation:

Only three regions voted Yes: Tuscany, Emilia Romagna and South Tyrol – two of which are traditional strongholds of Renzi’s party.

So it looks like although Italy as a whole decided a “strong man” wasn’t such a good idea, the regions where that strong man had a political machine disagreed. This again cuts against the simplistic narratives.

But what really cuts against the populist narrative is the nature of the opposition, which Jacobin describes:

In order to explain the outcome of this referendum, which saw a massive turnout of 67 percent and No winning with almost 60 percent of the votes, one has to look at the convergence of multiple factors. Forces across the political spectrum opposed the reform for different reasons. On the Left, the measure was challenged by the CGIL, the country’s biggest union; by the left of the Democratic Party, including its former secretary; by the National Association of Italian Partisans (ANPI); by the whole radical left, including left unions, social coalitions, students’ organizations, and the various networks of occupied spaces; and by a number of prominent left-leaning constitutional law experts such as Gustavo Zagrebelsky. The arguments ranged from the defense of democratic representation and popular sovereignty against the principle of governability to the opposition to Renzi’s aggressively neoliberal political project, of which the constitutional reform is only a portion. On the Right, the reform was opportunistically opposed by the xenophobic Northern League, by the right-wing nationalist party Fratelli d’Italia, by neo-fascist forces such as Casa Pound and Forza Nuova, and — reluctantly — by Berlusconi. The reason for the mainstream right’s opposition is rather clear: as Renzi highly personalized the vote on the constitutional reform and linked the destiny of his government to the outcome of the referendum, the currently disorganized and fragmented right saw it as an opportunity to get rid of the government and start a process that may allow them to regroup and be competitive again. Finally, the Five Star Movement, a catch-all populist movement with highly contradictory positions, resisted the constitutional reform all the way through the parliamentary debate, protesting at every turn against the violation of the most basic parliamentary rules by the government. The reasons for their position combined both a defense of parliamentary democracy’s rules and the ambition to overtake the PD as Italy’s principal party.

Der Spiegel provides a vivid example:

One of those who campaigned against the referendum was Rossana Rossanda, 92, an icon of the Italian left. During the 1950s and 1960s, she was part of the leadership of the Communist Party. She was expelled from the party in the 1970s for failure to support key party positions and, together with others who had run afoul of the party, formed Italy’s most important left-wing newspaper, Il Manifesto. Like many on the Italian left, the leftist icon Rossana voted against the referendum and against Renzi. Rossana said the “pack” she had joined forces with was abhorrent to her. It included groups like the right-wing nationalist, xenophobic Lega Nord; the anger-fueled euro-skeptic, anti-everything party led by former comedian Beppe Grillo; and the remnants of those who in the past supported former Italian Prime Minister Silvio Berlusconi. Ultimately, though, Renzi is “just as bad” as them, she says. Indeed, many members of Matteo Renzi’s own Democratic Party voted against him for the same reason, including heavy-hitters like former Prime Minister Massimo D’Alema or Pier Luigi Bersani, who served as the party’s chairman for years.

This isn’t a populist uprising at all. It’s a loosely sintered together temporary coalition with a single short term goal — getting rid of Renzi — with no coherence other than that, and all the issues and the players are highly specific to the Italian context.

Finally, here are some commentators who have maintained a degree of equanimity. (Since I don’t know the Italian punditry at all, I could be quoting the Italian equivalents of David Brooks, or Thomas Friedman, or Eugene Robinson. Or Patrick Buchanan. Sorry!) From the Italian Insider:

Political commentator Massimo Franco summed up the turbulent event that was the constitutional referendum, saying, “What this shows is that democracy is still alive and that the Italian people are still deeply tied to the Constitution. The attempt to strengthen a non-elected government through a consultation on a referendum turned out to be a gamble.”

From the Financial Times:

A note of caution is struck by Roberto D’Alimonte, a commentator in Il Sole 24 Ore. He writes that, for Italian voters, “the desire to protest has outweighed the desire to change”. But the outcome needs to be seen in context. “This referendum cannot be compared to Brexit,” he says, referring to the decision by UK voters in a June referendum to leave the EU. “Leaving the EU is a different thing, politically, to not changing the constitution.”

From the New Statesman:

Alberto Alemanno is Jean Monnet Professor of EU Law and an Italian. He said the reforms would have been vital to modernise Italy but rejected any idea it would lead to an Italian Brexit. “While anti-establishment and eurosceptic actors are likely to emerge emboldened from the vote, interpreting the outcome of the Italian referendum as the next stage of Europe’s populist, anti-establishment movement – as many mainstream journalists have done – is not only factually wrong, but also far-fetched.”

So calm down. Or rather, you can panic when you get to the banks, but first we have to talk about the EU.

The European Union

It’s just not clear that anti-EU — and anti-Eurozone — forces can win control of the government. Politico:

“It is nonsense to call for Italy-exit from the eurozone or the EU,” wrote Lorenzo Codogno, a former chief economist at the treasury department of the Italian ministry of economy, to his consultancy’s clients on Monday. “Today’s outcome strengthens the anti-establishment and anti-euro parties such as the Northern League and the 5Star Movement, but again it would not be justified to jump to the conclusion that they will win the next general elections and that they will command an exit.”

(I suppose the Northern League and Five Star could join forces, but it’s one thing to cooperate to force out a common enemy; it’s another to make policy together.) However, even if anti-EU — and anti-Eurozone — forces take office, they face significant obstables. The New Statesman:

The Italian constitution bans the overruling of international treaties by popular vote, so Five Star would need to amend the constitution. That would require a two thirds majority in both houses of parliament and then another referendum on euro membership. Even that could be blocked by one of the country’s supreme courts.

Finally, absent exit from the EU or the Eurozone, the Italian government can be expected to approach Europe in the same way that Renzi did, since structurally nothing will have changed. The Guardian:

[A]ny new Italian government is likely to behave in the same way as Renzi’s government did towards its European allies, seeking to bend fiscal rules in its favour and to press for a more expansive fiscal policy. It will also continue to demand solidarity from the EU with its efforts to deal with migrants and to rebuild the areas affected by recent earthquakes. Italy is unlikely to be the domino that leads to more instability in Europe.

So, steady as she goes… Except for all those bad banks!

The Banks

Breugel has a fine summing up of the horror that is Italian banking:

Italian banks are still bearing the burden of a significant load of non-performing loans (NPLs). We have discussed the issue of NPLs in the Italian banking sector several times before (see e.g. here and here), and there is not much new on this front. As of September 2016, the Bank of Italy was reporting that the total of bad debts in the system was €198.9bn, down from €200bn in August. Table 1 shows updated 2016Q3 gross NPL ratios for some of the biggest Italian banks, showing that the situation is diversified. While some initiatives (such as the guarantee scheme GACS) have been taken recently, these will likely take time to bear fruit.

€198.9bn in bad debt seems like real money, even today. The poster child for bad Italian banking is Monte dei Paschi (MPS), said to be oldest bank in the world, and certainly one of the most decrepit; they need €5-billion by the end of the month, it’s not exactly clear how they’ll raise it, and the referendum results have thrown a political spanner into the financial works. Politico summarizes the state of play:

[T]he fall of about 4 percent in shares of Monte dei Paschi di Siena, Italy’s most troubled bank in the middle of a tense €5-billion fundraising, reflected more confusion about future steps in MPS’s recapitalization process than fears over a new European financial crisis. Here the market’s muted reaction is largely due to lack of information. The key issue is whether MPS can get its fundraising off the ground. JPMorgan and Mediobanca, the Italian lender’s main advisers, met with potential investors on Monday, but no major decision was taken, according to sources. The big question is whether JP Morgan and Mediobanca can persuade a large pension fund or sovereign wealth fund to act as an “anchor investor” for the recapitalization, buying a large chunk of new shares to be issued and acting as a catalyst for others to join in. The Financial Times reported that the two advisers were trying to persuade Qatar’s Investment Authority to put €1 billion into MPS. However, people involved in the talks told POLITICO that investors, advisers and MPS management were waiting to see the shape of the new government before deciding whether to pull the fundraising. That decision could come later in the week or even at the weekend. The problem for JPMorgan and Mediobanca is that if they don’t find an anchor investor, they would have to agree to provide the €5 billion themselves in the hope of getting the money back from other investors later — a risk neither bank would be willing to take. If the current plan fails, MPS and the Italian government have two main options, neither of them very good. The first would be to undertake a state-sponsored “precautionary recapitalization” of the troubled bank. Under EU rules, this would involve imposing some losses on MPS’s bondholders. The problem with this plan is that a large percentage of the bank’s bonds are held by small investors. Inflicting losses on “mom-and-pop” savers would be political dynamite for any government — even if a new administration were to promise to compensate them for some of their losses. A state rescue of MPS would also cloud the prospects for other banks seeking investors’ funds. For one, UniCredit, Italy’s biggest and one of Europe’s largest lenders, wants to raise some €13 billion. The second option is simply to let MPS fail, providing an early, unwelcome test of Europe’s “resolution authority” for dealing with collapsing banks and increasing the risk of a huge loss of confidence in the continent’s banking sector.

(I think “precautionary recapitalization” is so Eurocrat. It’s the best phrase ever!) The BBC describes another option:

If [the investors] do decide the plan is now too risky then the government may have no choice but to nationalise the bank. That would trigger a so-called “bail in” which means people who lent the bank money would have to write it off. Unfortunately, 65% of those creditors are ordinary retail investors so the damage would be widespread and politically toxic. There is another option. The Italian government could decide to simply break the rules and nationalise the bank without hitting small investors. That might be politically expedient but would be bitterly opposed in Germany and would set back immeasurably the project of banking union (separating the financial risk of banks from their governments – a move that came in response to the eurozone crisis of 2012). The money comes directly out of some small investors’ pockets or it comes out of every citizen’s taxes. The latter would be seen across Europe as a massive defeat in the battle to make sure taxpayers are not the first port of call when a bank fails.

(Italy doesn’t control its own printing press, so that’s not an option). And if the referendum vote wasn’t a populist uprising, bailing in the small investors would be an excellent way to create one.

The Wall Street Journal describes the state of play quite differently, earlier today:

ROME—The management of troubled lender Banca Monte dei Paschi di Siena SpA is set to meet officials at the eurozone banking regulator in Frankfurt on Tuesday, as Italy’s government crisis threatens to derail the bank’s recapitalization plans. A person familiar with the matter said Chief Executive Marco Morelli and Chief Financial Officer Francesco Mele will meet officials at the Single Supervisory Mechanism, the eurozone’s banks supervisor, to discuss the implementation of the Tuscan bank’s €5 billion ($5.38 billion) capital increase. The person said the investment banks working on MPS’ plan and the Tuscan bank will decide on the recapitalization by Friday. The bank aimed at raising €5 billion by year-end, as agreed with the eurozone supervisor, by asking bondholders to convert risky debt into equity and selling fresh shares to cornerstone investors and on the market. So far, bondholders owning slightly more than €1 billion worth of junior bonds have agreed to convert the bonds into equity. The bank is still in talks with large investors, including some Qatar-based funds, to sell them a large chunk of the new shares, people familiar with the talks said. But these investors are waiting to see how the government crisis evolves before making any investment decision in Monte dei Paschi, the people added.

And Reuters describes the state of play in yet another way, but agreeing with the Politico on “precautionay recapitalization,” a bit later today:

Italy is preparing a state bailout for Monte dei Paschi di Siena (BMPS.MI) as the bank’s hopes of being saved by private funding fade following Prime Minister Matteo Renzi’s decision to quit, sources close to the matter said on Tuesday. One of the sources said a government decree authorizing the deal could be rushed through as early as this weekend.Italy is likely to pump government money into Monte dei Paschi under a so-called precautionary recapitalization, three sources familiar with the situation said, to prevent the bank failing and triggering a wider banking crisis. Such a crisis could destabilize the whole bank sector , burdened by 360 billion euros of bad loans, and inflict heavy losses on tens of thousands of ordinary Italians who hold junior bonds in the Tuscan bank. However, sources close to the matter said on Monday that investment banks lined up to underwrite that plan, led by JPMorgan and Mediobanca, had in effect put the deal on hold because of the political uncertainty. Under a pre-underwriting deal, they can drop the transaction because of adverse market conditions. One source said they would make a decision by Friday but that the chances of the deal going ahead were now slim. Monte dei Paschi had pinned its hopes on Qatar’s cash-rich sovereign wealth fund injecting up to 1 billion euros in the lender. But bankers close to the underwriting consortium said the fund and other potential investors wanted to wait to see what kind of government would succeed Renzi. Rome wants to avoid losses being imposed on retail investors who hold 2.1 billion euros of the bank’s junior debt.

And the Financial Times describes the state of play in still another way:

Without the cornerstone investment from Qatar, the other parts of the complex plan to fill the bank’s €5bn capital shortfall are likely to collapse.

“Complex” is a word I never like to hear. Complexity is the enemy of quality. More:

To avoid the politically unpalatable option of imposing losses on the €2bn of retail bondholders in Monte dei Paschi, a plan is being drawn up to guarantee full repayment of the first €100,000 to every junior bondholder, according to senior bankers. Senior bonds and deposits would be left unscathed. The bank is also likely to press ahead with plans to hive off €28bn in soured loans to a securitisation vehicle supported by a government guarantee. “Whatever solution is found for Monte dei Paschi, I believe there is a significant risk of contagion to other Italian banks in particular,” said Megan Greene, chief economist at Manulife Asset Management.

Meanwhile, the ratings agency Fitch doesn’t like the political risks:

The “No” vote at the constitutional referendum has further heightened political uncertainty and possibly reduced the capacity to implement economic reforms. The risks from political instability were one factor that contributed to our revision of the Outlook on Italy’s ‘BBB+’ sovereign rating to Negative in October.

The banking situation clearly demands the full Yves treatment, which I’m not capable of giving it. From what I can glean, Renzi is being kept around so he can sign whatever papers the technocrats come up with, hopefully by the end of the week. And surely five billion euros is a rather trivial sum? If the investors — private or public — can be offered suitable inducements, surely a collapse and contagion can be avoided? Even at the cost of a populist uprising by bailed in small investors, should it come to that? And how can Qatar back out of a deal that was so palpably bad to begin with?

Conclusion

The whole situation reminds me of the famous saying by Karl Kraus: “In Berlin, things are serious but not hopeless. In Vienna, they are hopeless but not serious.” Still true in Berlin today, and substitute Rome for Vienna. Things are different for the voters, of course. They always are…

Appendix: The Curious Case of Five Star

Many sources agree that had the referendum passed, Beppe Grillo’s Five Star Movement would have benefitted. Jacobin:

If Yes had won, we would have risked ending up with a Five Star Movement or right-wing government with much greater executive powers than the ones currently allowed by the constitution. Not to speak of the majority system bonus’s effects. And even in the case Renzi had managed to secure a majority for the center-left at the next elections, we would have ended up with more neoliberalism and with an even stronger government with no space for effective opposition.

The Economist:

The risk of Mr Renzi’s scheme is that the main beneficiary will be Beppe Grillo, a former comedian and leader of the Five Star Movement (M5S), a discombobulated coalition that calls for a referendum on leaving the euro. It is running just a few points behind Mr Renzi’s Democrats in the polls and recently won control of Rome and Turin. The spectre of Mr Grillo as prime minister, elected by a minority and cemented into office by Mr Renzi’s reforms, is one many Italians—and much of Europe—will find troubling.

The New Statesman:

Ironically Renzi’s reforms to the constitution and senate would have made it easier for the eurosceptic Five Star Movement to gain power in upcoming elections in 2018.

And now the puzzling part. Still the New Statesman:

For reasons best known to themselves, they campaigned against the changes to their own disadvantage.

Can somebody who actually understands Italian politics — assuming, for the sake of the argument, that this is possible — explain why the Five Star Movement campaigned as it did?