Renzi gets a bigger headbutt From his own team than Materazzi from Zidane

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Italian PM Renzi has suffered a bigger headbutt by his own team than Materazzi suffered from Zidane. 60% voted NO to the trimming of the Senate to 1/3rd the current number.

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One would think in a country plagued by decades of political deadlock, 24 Prime Ministers in 40 years, corruption scandals, bunga bunga parties and an economy that has been sick for decades would encourage any common sensical voter to pave a Roman road to quicker reform to fix the parlous state of things. Well it would seem that Italians don’t want to pave a road for incompetent incumbents to gain more power.

The 5-Star Movement (anti-EU, anti-euro) and Lega Nord (anti-immigration) must be relishing the outcome of this election. The former at least is viewed as a proper populist party. To join the M5S you can’t have any political career history. M5S swept to victory in the Rome and Turin gubernatorial elections.

This referendum, down to Renzi’s fault for threatening to resign if the NO was carried, turned into a vote against the establishment rather than deciding the fate of senators. Self inflicted wounds.

Interesting how the southern parts of Italy where economic conditions are harshest, unemployment worse and non-performing loans are approaching 50% would prefer to blow up the system than try to make life easier for the incumbent politicians which might have benefitted them. Perhaps they think that blowing the system up will be a complete new start rather than applying a tourniquet to  a gangrenous wound.

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This has been the problem for Italy. Since joining the euro its long running overspend and devalue the currency no longer works. It is living beyond its means with an economy that doesn’t work effectively in a euro world.

The bigger concerns now boil down to the ramifications. Already Lega Nord is calling for fresh elections to get the anti-establishment parties to leadership positions. At present polling levels, Renzi’s Democrats are at 30%, with M5S at 28% and Lega Nord at 13%.

The biggest ramifications boil down to what Italy does with its membership to the EU should the populists get in. As I wrote the other day, the 240billion euro of Italian bonds held by a lot of Continental European banks would run a high risk of bankruptcy were that debt converted to lira. They’ll be hosed for billions today as yields are likely to rise. It is a much larger event than Austria appointing a president who is little more than ceremonial.

A snap election is probably unlikely (although who knows in Italy) at this juncture but the replacement for Renzi (should he resign as promised – seems he has) will only prolong the eventual move for Italy to seek aggressive change which will spook markets.

Last year four Italian banks were rescued and it seems that since Lehman collapsed in 2008 non performing loans (NPLs) have soared from 6% to almost 20%. Monte Dei Paschi De Siena, a bank steeped in 540 years of history has 31% NPLs and its shares are 99.9% below the peak in 2007. Even Portugal and Spain have lower levels of NPLs. The IMF suggested that in southern parts of Italy NPLs for corporates are closer to 50%!

Italy is the 3rd largest economy in Europe and 30% of corporate debt is held by SMEs who can’t even make enough money to repay the interest. The banks have been slow to write off loans on the basis it will eat up the banks’ dwindling capital. It feels so zombie lending a la Japan in the early 1990s but on an even worse scale.

Not to worry, the Italian Treasury tells us the ECB will buy this toxic stuff! But wait, the ECB is not allowed to buy ‘at risk’ stuff. So it will bundle all this near as makes no difference defaulted garbage (think CDO) in a bag and stamp it with a bogus credit rating such that the ECB can buy it. In full knowledge that most of the debt will never be repaid, the ECB still violates its own rules which state clearly that any debt they buy ‘cannot be in dispute’.”

Interesting days ahead but this is not just a head butt to Renzi by Italy but to the EU and establishment as well.

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