Italian referendum adds to the banks’ distress

Economy - Himanshu Gill - Dec 02,2016

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italian referendum adds to the banks distress

Italian banks are at a stop and their sorrow may last long if Italy votes no in the upcoming referendum on 4th December, which may eventually cause a political and financial crisis in the country.

The referendum for a constitutional reform will ask the voters if they want to amend the Italian constitution to renovate the appointment and rights of the Parliament, as well as the partition of powers of state, smaller regions and administrative entities. It was proposed by Prime Minister Matteo Renzi and his center left Democratic Party.

Renzi has announced that he will resign if the proposals are rejected which could be followed by re-elections and may directly benefit the Five Star Movement, an anti-euro group led by former comedian Beppe Grillo.

This political disruption in the country could cause a severe disturbance in the economy and a more immediate problem in the banking industry, which is currently the main trouble spot for the Eurozone. It would be a major backdrop to the country’s dwindling economy.

The banks are struggling with the burden of bad debts and it is unlikely that they would be able to pay the full amount in the near future. Italian banks’ bad debts or non-performing loans are worth 360 billion euros at the moment, roughly about a fifth of the size of the country’s economy. The banks are potentially the main factor that Italy’s economy is pouring concerns in the EU’s currency sector.

Italy is the third largest economy in the Eurozone but if certain figures are to be concerned, the country also has the largest debt burden. The country’s economic performance have been poor as it still stands at a similar position as it was in the start of the century. The Gross Domestic Product (GDP) of the country remains 8% smaller than it was at the beginning of the global financial crisis.