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Qatari's Pull Out of Saving Italian Bank Due to Political Risks; Outlook for Euro Worsens

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After fighting for its life, the oldest bank in Italy got the thumbs down from investors on Wednesday, when the felled lender’s cries for help fell on deaf ears.

A deal to save Banco Monte dei Paschi di Siena collapsed after the ‘anchor investor’ the Qatari Sovereign Wealth Fund pulled out in the final stages.

The Qatari’s had been expected to invest 1bn in the failing bank, however, they withdrew after deciding the investment carried too much risk.

The failure of the deal was seen as having as much to do with the increased political risk in Italy since the referendum as about the quality of Monte dei Paschi’s balance sheet, or the outlook for Italian banking as a whole, according to the Guardian’s Nils Pratly.

“It ought to be possible for a bank founded in 1472 to shuffle off its bad loans, even at depressed prices, overcome its foolish acquisitions from the boom years and regain a profitable niche, “ commented Pratly.

“The critical sum at stake in the recapitalisation plan – €5bn – was not off the scale and JP Morgan, the Wall Street powerhouse advising MPS, was on hand to round up a few so-called anchor investors,” he added.

What the failure appears to have brought into relief is how much of a concern Italy’s uncertain political future is for outside investors.

In an attempt to explain the failed rather modest bailout deal, Pratly goes on to say:

“The immediate reason (for the failed bailout) is that the anchor investors, supposedly from Qatar and China, have got cold feet.

“But the other trigger was the landslide defeat for prime minister Matteo Renzi in the referendum on constitutional reform. That reopened the debate about Italy’s long-term future in the Eurozone. Until the elections are held and the political picture clears, investors seem to have decided that Italy is not a place to take a high-risk bet.”

Political Risks Still a Feature, Says BNY Mellon Strategist

Not long after the Italian referendum there was a joke going around that the market took a month to recover from Brexit, a week to recover from Trump and only a day to recover from Italy.

The explanation seemed to be that markets were overreacting to political uncertainty.

The question now, however, is whether markets have swung too far the other way and become too complacent instead.

BNY’s FX Strategist Simon Derrick appears to think so, after suggesting Italian Political risk is still likely to be a major concern for investors in 2017.

The failure of Monte Dei Paschi to secure even a modest sum appears to provide a real world example of his claim.

Derrick notes how markets have quickly forgotten about the risks from the Italian Referendum.

“While most eyes are now on the Dutch general election (which must take place no later than March 15), the French presidential election in May and the next election of Bundestag members in H2, these may well be joined by a general election in Italy at some point in the first half of the year.”

Polls suggest an Italian election would see a victory for ‘Movimiento Five Star’ which is vehemently anti-EU.

Whilst President Matarella is trying to reform the new voting system which supports single party majority rule rather than coalition rule as previously, it is uncertain whether reforms will be implemented in time or possible.

If not, then we could be faced by a Five Star majority government seeking to withdraw Italy from the EU.

Whilst there would be checks and balances, including the mixed Upper House who could delay any attempts to take Italy out of the EU the huge cloud of uncertainty hanging over the process appears to be unnerving investors.

“Were there to be an election held in the near future then the polls continue to indicate that the Five Star Movement would win control of the Chamber of Deputies, the lower house of Italian parliament.

“However, in the absence of any reform of the electoral law with respect to the upper house (the upper house is currently elected with a proportional system) the lower house would need to abandon their opposition to forming coalitions.”

Derrick’s conclusion that investors will be put off Italy due to the political risk will come as no surprise to those who have been spectating Monte die

Paschi fighting for its life, however, replicated in countless other deals it raises major concerns about the future of Italy’s economy.

“Given the Five Star Movement’s unambiguously anti-EUR stance35 and the global political upsets of the past 12 months, investors might decide that discretion is the better part of valour,” concludes the BNY analyst.

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