Analysis. According to the Financial Times, Italy is the most vulnerable eurozone country, and Prime Minister Matteo Renzi is seeking an injection of public funds to prop up the country’s banks.

Banking stress test is Italy’s version of the Brexit vote

Banks will be the topic of one of the hotter debates in Italy over the next few months: This is confirmed by the storm blowing, again, on the Monte dei Paschi and, together with the large amount of evidence presented Monday by the Financial Times, placing “Renzi’s challenge to Brussels” in front-page headlines. Monday, stocks in the Bank of Siena dropped to a historic low, below 35 cents, dragging down all the banks and, more particularly, BPER and Intesa Sanpaolo. The underlying cause: the news that, a few weeks ago, on the dawn of the British Brexit referendum, the ECB sent the institution a very stern letter.

The ECB, in essence, wants to accelerate the plan for the progressive unloading of credit held within MPS: In the next three years, it would go down from €24 billion to €14 billion, unloading, in a few words, €10 billion in toxic products. It’s a request that’s not easy to comply with, if you consider that the a similar extreme measure from the Bank of Siena aimed to discharge only €3.5 billion by 2018. A traumatic action might lead to an imbalance of €3 billion, three times the actual capitalization in the Stock Exchange (about €1.2 billion) and recapitalizing, after the injections already received during the last years, and having seen the fact that the Atlante fund itself is searching for cash, is certainly not a simple operation.

Premier Renzi himself, two days ago, excluded new public MPS interventions, saying he prefers “a market operation,” but he knows he’s moving in a minefield, because Montepaschi might open a new case similar to the one of the four banks, even bigger than that, which might be a lethal one for his consensus (the more so if united to the difficult passage of the October referendum). In fact, we must take into account that MPS too has its own shareholders, and there are a lot of them too: We calculate that the shares owned by about 60,000 of its small shareholders are equal to, about, €5 billion.

We can only imagine what might happen should these rescuers be called in to replenish the eventual debts based on the bail-in rules: a strong economic risk for them, but also a new wave of protests that the government might not survive. This is why Renzi, as the Financial Times highlighted, might have identified in the banking knot as an absolute urgency, attempting to solve it by “challenging Europe.”

We can’t exactly know what he’s going to be able to do, although it’s clear that, after the no from Angela Merkel a few days ago to the possibility of pumping public money into the system, the talks with Brussels have gone ahead anyway. “Italy,” the Financial Times writes, “is prepared to defy the EU and unilaterally pump billions of euros into its troubled banking system if it comes under severe systemic distress, a last-resort move that would smash through the bloc’s nascent regime for handling ailing banks.”

Certainly it wouldn’t be a Brexit, but, at least according to the Financial Times, “Italy is the eurozone’s biggest vulnerability following the shock outcome of the U.K. vote to leave the E.U.” And “stress test results are due on July 31 and senior bankers consider Italy’s weaker banks — including its third largest Monte dei Paschi — may be found to be undercapitalized.”

Monday, at the Democratic Party leadership meeting, Renzi spoke again on the banking issue: “Saving the account holders doesn’t mean protecting the interests of the lobbies, of the stronger powers,” he said. He then added he has done “all that was useful,” that he “took politics away from the banks.”

“I’ve closed the 2012 elections in Siena by saying that I would not have dealt with the nominations,” Renzi said. But much of his destiny will play out in the banks.

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