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Italy's Political Upheaval Stokes Banking Crisis

by Henry Ridgwell

   LONDON --

   The resignation of Italian Prime Minister Matteo Renzi following
   Sunday's no vote in a referendum on constitutional change has dealt
   another political blow to the European Union.

   Fears are growing that the political uncertainty could worsen the
   chronic problems of Italian banks and spread to other parts of Europe;
   but, many analysts say the referendum result was about domestic issues
   -- and markets have given a muted response to the upheaval.

   Several Italian banks were struggling with bad loans well before
   Sunday's referendum. Analysts put the total figure at $390 billion.

   "Nothing has really changed"

   Banca Monte dei Paschi di Siena -- which claims to be the world's
   oldest bank -- planned to raise $5.4 billion in capital. Now those
   investments are in jeopardy and the bank could be nationalized.
   Luigi Scazzieri of the Center for European Reform says there is hope
   that investors will not be put off.

   "In the immediate term they might find it slightly more difficult to
   raise capital, which they need to cover their bad loans," Scazzieri
   said. "However, nothing has really changed in the banking situation
   since the situation previous to the referendum."

   Northern League's leader Matteo Salvini, center, stands with party
   lawmakers holding a placard reading in Italian "Vote Now" outside the
   Lower Chamber in Rome, Dec. 6, 2016.

   Borrowing costs rise

   Italy's borrowing costs have risen since Sunday's vote; but, Europe is
   better able to prevent a repeat of the 2008 euro debt crisis, according
   to Yves Bertoncini of the Paris-based analyst group the Jacques Delors
   Institute.

   "The EU is more equipped to face a possible problem in Italy than it
   was five years ago," Bertoncini said. "We have an ECB [European Central
   Bank] playing its role, we have a European Stability Mechanism able to
   rescue Italy if needed."

   Prime Minister Renzi will remain in power until parliament passes the
   2017 budget. The president has said he will avoid calling immediate
   elections but the political uncertainty could turn market sentiment
   against Italy, says Giovanni Orsina of Luiss-Guido Carli University in
   Rome.

   Orsina says the troubles over the constitution and the electoral laws
   now add to the uncertainty over the government. So, he adds, one can
   say that Italy's overall is entering a period of uncertainty.

   Call for Immediate elections

   The opposition Five Star Movement -- which tops opinion polls -- is
   demanding immediate elections and a vote on leaving the euro; but,
   Scazzieri says fears that Italy will exit the single currency are
   overplayed as new electoral laws will most likely deliver a coalition
   government.

   "The new law crucially is going to be based on a proportional system
   most likely," Scazzieri said. " And such a system is going to make it
   extremely hard for single parties such as the Five Star Movement to
   gain power at the next elections; but, of course they are calling for a
   referendum on the euro. The small matter is that this is actually
   unconstitutional."

   The hope in Italy and Europe, analysts say, is that a smooth political
   transition will help avoid a stormy end to a year of upheaval.