20160708-招商证券_香港_-Is_Italy_the_next_domino_to_fall_in_Europe__11页_547kb_547kb

Summary of Macro Report: Is Italy the next domino to fall in Europe?

Core Content

This report analyzes the growing economic and political risks in Italy, particularly in the context of the broader European financial and political landscape following the Brexit vote. It highlights the deteriorating state of the Italian banking sector, the potential for a public bailout, and the significance of the upcoming October constitutional reform referendum as key concerns for the region.

Main Risks in Italy

Banking Sector Vulnerability

• Non-Performing Loans (NPLs): Italian banks have EUR 360 bn in bad loans, representing approximately 18% of total loans, according to the World Bank.
• Stock Price Decline: The top 5 Italian banks have seen their stock prices fall between 40-80% in 2016, with a 65% decline since mid-2015.
• ECB Pressure: The ECB has warned Monte Paschi, the third-largest lender in Italy, to shed EUR 10 bn in bad loans. Stress test results are expected by the end of July, and the ECB's negative interest rate policy has further weakened bank profitability.
• Fiscal Constraints: Italy's debt-to-GDP ratio stands at 133%, which is among the highest in the EU, making a public bailout politically and economically challenging.

Political Risks

• October Referendum: A constitutional reform referendum is scheduled for October 2016, which would replace the bicameral system with a unicameral one, significantly reducing the power of the Senate.
• Renzi's Resignation: Prime Minister Matteo Renzi has stated he will resign if the referendum fails, which could lead to political instability and potentially allow the populist Five Star Movement to gain power.
• Populist Threat: The failure of the referendum could increase the likelihood of a "Italexit" vote in 2017, though actual exit from the EU or Eurozone is not imminent.

Key Questions and Analysis

1) Current Situation in Italian Banks

• Italian banks have been weak in the Eurozone since the global financial crisis.
• The ECB's warning and negative interest rates have intensified market concerns.
• Share prices and earnings per share for the top five banks have declined significantly since mid-2015.

2) Reasons for Pressure on Italian Banks

• Weak Economic Activity: Low loan demand and high NPLs due to economic stagnation.
• Monetary Policy Impact: Negative interest rates have reduced bank margins by taxing deposits.
• Regulatory Constraints: Basel III requirements have put pressure on Italian banks, which are traditionally undercapitalized.

3) Need for a Bailout and Possible Scenarios

• A public bailout of EUR 40 bn has been proposed, but it would violate EU anti-bailout laws.
• Potential options include direct recapitalization, expanding the Atlante fund, or using EU resources like the ESM.
• Bail-in rules could be applied, resulting in haircuts for bondholders or depositors, which may trigger a bank run.

4) Risk of Debt Crisis Flare-Up

• A bank bailout could increase Italy's debt burden, potentially reigniting concerns about its sovereign debt.
• The proposed EUR 35 bn bailout could nearly double the 2016 budget deficit and raise financing costs.
• EU bailouts typically come with strict conditions, further complicating the situation.

5) Importance of the October Referendum

• The referendum is a key political test for Renzi's government.
• A failure could lead to his resignation and political instability, opening the door for populist policies.
• It may also trigger a broader debate on EU membership or Eurozone exit, though this is unlikely in the short term.

6) Potential for "Italexit"

• Italy is seen as a potential candidate for EU or Eurozone exit, but actual exit is not expected soon.
• A series of events, including referendum failure, Renzi's resignation, and a Eurosceptic government, would need to occur for such a scenario.
• Unlike the UK, Italy has strong ties to the EU and Eurozone, making an exit less likely.

Key Forecasts

Country	2015 Actual	2016 Forecast
U.S.
GDP	2.4%	2.1%
CPI	0.1%	1.7%
Unemployment	5.3%	4.7%
Current Account / GDP	-2.7%	-3.4%
Fiscal Balance / GDP	-2.6%	-2.7%
Policy Rate	0.50%	0.75%
Dollar Index	98.7	101.0
Eurozone
GDP	1.6%	1.4%
CPI	0.0%	0.5%
Unemployment	10.9%	10.4%
Current Account / GDP	3.2%	2.7%
Fiscal Balance / GDP	-2.1%	-1.8%
EUR/USD	1.09	1.05
Japan
GDP	0.5%	0.4%
CPI	0.8%	0.3%
Unemployment	3.4%	3.4%
Current Account / GDP	3.3%	2.4%
Fiscal Balance / GDP	-6.7%	-7.2%
USD/JPY	120.2	110.0

Conclusion

Italy's banking and political challenges are significant and could have broader implications for the European financial system. The combination of a weak banking sector, high debt levels, and political uncertainty poses a risk of renewed debt crisis concerns and potential shifts in the political landscape. The October referendum will be a critical test for the Italian government and could lead to further instability if it fails. While an "Italexit" is not imminent, the report suggests that Italy is a key risk point for the EU and Eurozone in the coming months.