Brexit means Brexit, but what does Quitaly mean?

Deutschebank has been the centre of attention in recent days with concerns mounting about its solvency. Worrying as this is, it is not the only European bank that is in trouble.

Italy’s banking system is swamped with debt and shares in the largest bank, UniCredit, have fallen by around 67 per cent in the past 12 months. The second biggest, Intesa Sanpaolo, is down by 45 per cent and Monte dei Paschi di Siena, has seen nearly 90 per cent come off its stock market value. Monte dei Paschi, the world’s oldest bank, has survived since 1472, but it is hanging on by the skin of its teeth. It fared the worst out of 51 banks put through recent health checks by EU regulators.

Italian banks overall have on their books more than £310billion of ‘non-performing loans’. That is almost 20% of total lending. Unfortunately for the Italian populace, bad debt on that scale is not just a problem for a few overpaid bankers, but for everyone. More than £170billion of bank bonds are held by individual savers. The lives of thousands of ordinary Italian investors, many of them elderly, could be ruined if their savings are wiped out.

One pensioner who lost more than £95,000 on Banca Etruria bonds last year committed suicide, sparking a national outcry.

Mending the broken Italian banks is made more difficult because under EU rules, they cannot be bailed out by the state unless bondholders – investors who have lent money to the banks – take a loss first and 60% of the bond holders are members of the Italian public, ordinary savers.

While all of this is going on, the Italian prime minister Matteo Renzi has called a referendum that, if he loses could see him having to call yet another election. The referendum is not about whether or not to quit the EU, rather it is about the implementation of reforms that would reduce the power of the Senate, the Italian upper house. However, if the vote goes against Mr Renzi, it could even lead to ‘Quitaly’ – to quote a term recently coined by the Daily Mail. Although an Italian exit from the European Union is unlikely in the short term, if it did happen it would be an outcome so cataclysmic for the EU, that Brexit would be quickly forgotten.

Renzi’s referendum is taking place amid not only the crippling banking crisis, but also an economy hamstrung by lack of growth. Increasingly – with unemployment for young people under 25 running at more than 36 per cent – it is also an economy dogged by lack of hope.

The referendum is in reality turning into a vote of confidence in Renzi, who has said he will step down if he loses, thereby necessitating yet another election.

Another election could boost Luigi di Maio, leader of the Five Star movement, who is calling for a referendum on euro membership. Five Star is a protest group founded by comedian Beppe Grillo that has been gaining popularity with the electorate. One of its leading lights, Virginia Raggi, was recently installed as Mayor of Rome.

An Italian exit would be an enormous blow to European politicians, including German chancellor Angela Merkel. If it were to break away, it could set off a domino effect leading to the unravelling of the union.

The pressure is on to find a way to bolster Monti dei Paschi and the other Italian banks, hiving off their bad loans and injecting billions of pounds of capital, without penalising small bondholders. The only way to do this may be to break the EU bailout rules, but given the alternatives it is perhaps the least bad outcome.