Matteo Renzi delays exit as EU calms nerves

Italy's Matteo Renzi will remain as prime minister until the country's 2017 budget has been approved, as the political and economic ramifications of Sunday's referendum defeat reverberated across the continent yesterday.

Following a meeting with President Sergio Mattarella in Rome, Mr Renzi agreed to delay his resignation to ensure parliamentary approval of the country's budget, a process that could be completed as early as Friday.

The 41 year-old prime minister announced his intention to resign in an emotional press conference on Sunday night following the decisive rejection by voters of his much-feted proposal to reform the Italian constitutional system.

Amid fears that Italy's third-largest bank, Monte dei Pasci di Siena is heading for a state bailout in coming days, euro zone finance ministers meeting in Brussels sought to calm nerves about weaknesses in the Italian banking sector.

"I don't think there is reason to speak about a euro zone crisis," German finance minister Wolfgang Schauble said, a view echoed by euro group chief Jeroen Dijsselbloem who said that political instability was "the new reality we have to work with."

Minister for Finance Michael Noonan said developments in Italy posed no contagion risks to the Irish banking system, arguing that the Irish banks were in a "very strong" position. He said there was "no financial crisis coming from the referendum in Italy".

Confidence

Asked whether he had confidence in the Irish banks given

AIB

and

Bank of Ireland

were among the worst performers in European bank stress tests in July along with troubled Italian lender Monte dei Paschi, Mr Noonan said those stress tests had been based on data that was 18 months old. “If you look at present day data the Irish banks are very strong,” he said.

But with Italy’s banks grappling with €360 billion of non-performing loans, there are concerns that already-shaky investor confidence could dissipate further as Italy faces another period of political instability.

Nonetheless, market reaction was muted, with the euro recovering from a 20-month low during the day, though Italian banking stocks closed sharply lower.

Concerns centred around Monte dei Paschi – the world’s oldest bank – which is currently in the midst of a capital-raising exercise which includes investors swapping bonds for equity holdings in the bank, part of a complex plan to raise €5 billion by the end of the year. But amid signs of fading investor buy-in, some form of government capitalization was being seen as an inevitable outcome.

Complication

The issue is further complicated by new EU “bail-in” rules introduced in the wake of the financial crisis which prohibit tax-payer bailouts of banks unless creditors, including unsecured depositors, are bailed-in.

President Mattarella is expected to form either a so-called “technical” government which would lead the executive through to the end of the legislature in early 2018 or he could nominate a senior figure in the Renzi administration to lead a caretaker government through to the general election in 2018.

Were the President to opt for the technical government, then the most favoured candidate would appear to be the current speaker of the senate, Pietro Grasso. Were he to opt for someone from Mr Renzi's cabinet, then the most likely choices would be Finance Minister Piercarlo Padoan, Infrastructure Minister Graziano Del Rio or Arts Minister Dario Franceschini.