The Mess That Is Still Europe

by: John M. Mason


The futures of Europe and the European Union are highly uncertain due to the Italian constitutional referendum coming up this weekend and national elections coming up in 2017.

The situation is Italy is the most concerning right now because the success or failure of the vote in that country may have a substantial impact on the banking distress.

Eight Italian banks are in dire straits and a "no" vote in the referendum could cause confidence to collapse and result in the banks not getting the capital they need.

One week ago I wrote about the "The Mess That Is Europe."

Well, with another week under our belts, we see further the depths of the challenges facing Europe.

Rachel Sanderson writes in the Financial Times that "Fears mount of multiple bank failures if Renzi loses referendum." The referendum is a constitutional referendum initiated in Italy by Prime Minister Matteo Renzi and will take place on Sunday, December 4. James Politi writes in the Financial Times that "Renzi will face political risks even if he triumphs." Mr. Politi examines four possible outcomes of the constitutional referendum and what they might mean for the future of Italy…and the future of the European Union. Then there is the French election coming up. It pits someone from France's center-right party, former prime minister François Fillon, against the Far-right's National Front candidate Marine Le Pen. No word yet about what the most unpopular French president, François Hollande, plans to do. This election is scheduled for April 2017. Some writers are seeing this election result as a possible cause for the collapse of the EU. Even in Germany, Chancellor Merkel is currently facing headwinds in a run for her fourth term as Germany's leader. But, first things first. No one seems to doubt the fact that Italy's banking system needs substantial help. The timing couldn't be worse. Italy's third largest bank, Banca Monte dei Paschi di Siena SpA is in the process of a debt-Equity swap to help it reposition itself to raise more capital from the open market. This swap is valued at €4.3 billion or, roughly, $4.6 billion. The fear is that the bank will not be able to complete its re-capitalization after the debt swap takes place because a defeat of the referendum could mean that all efforts at Italian reform have to be "put on the shelf" until new leadership is in place. Why, analysts ask, should investors put fresh capital into the banks if there is no leadership in the country to promote the reforms that are needed? And, if the Monte dei Paschi deal falls through, there is fear that the seven other Italian banks in dire financial straits could not raise the capital they needed, all eight troubled banks could be "put into resolution." Furthermore, this situation could spread to impact the efforts of UniCredit, Italy's largest bank, to raise €13 billion in new capital in early 2017. The overall concern is whether or not the banking system of the whole European Union can stand such a collapse. There is no sign, however, that even if Mr. Renzi turns out to be triumphant in the referendum vote, that Mr. Renzi will be escape the problems associated with the banking system or the political risks surrounding the needed economic and financial reforms. Mr. Politi, in the article cited above, states that Mr. Renzi's focus will still be divided if he wins because he will now have to restructure the government as the constitutional referendum demands and this will require he give a lot of attention to building up his legislative majority in order to gets the reforms enacted. Mr. Renzi will still have to give lots of attention to the banking situation and banking reform to save Italy's banking system. European stock markets are reflecting this dilemma. As bank stocks have rallied in the current "Trump-bump" in stock markets,
Italian banks have not participated in the rally. That is, it seems as if much of the political reality of the situation in Italy has been priced in to Italian bank stocks. This just speaks, however, to the fragility of the European economic system and to the European Union. It seems as if the European Union has been dealing with problems of economic recovery and economic reforms for the past ten years or more. The leaders of the EU have gotten this far by their practice of "kicking the can down the road," of doing as little as they can to actually solve problems, but allowing things to go on so that the major issues can be resolved in another day. The question always has been, "how long can the leaders of the EU continue to postpone dealing with the real issues?" Well, we may be approaching the time when the major issues have to be addressed. Then the question becomes "have the leaders of the EU postponed things too long and no real solution is possible." Last year there was the Greek situation, and although resolved for the time being, Greece issues still smolder threatening to burst out in flames again at any time. Now, Italian problems are at the forefront. Next year we have the elections in France…and, in Germany. Meanwhile, Spain and Portugal still are dealing with major problems, it is just that other countries have been dominating the headlines. I hope that the European Union does not fall apart. But, it seems that the leadership vacuum in Europe is reaching a crisis point and the outcomes that are being presented to us are not that encouraging. And, I haven't even mentioned Brexit in this post.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.