Will Italian Banks Cause Another EU Exit?

Investors' concerns are valid, as leaving would isolate Italy's economy further from the broader EU, setting back Italian GDP growth prospects

Stephen Ellis 14 July, 2016 | 4:44PM
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With Britain's vote to leave the European Union a surprise to many investors, United Kingdom banks fell, but Italian bank stock prices also collapsed. The banks declined, in our view, as a result of investor concerns over whether Italy would be the next to hold a referendum to leave the EU, which would significantly destabilise the Italian banking system.

Investors' concerns are valid, as leaving would isolate Italy's economy further from the broader EU, setting back Italian GDP growth prospects for one of the euro-system's weakest members. Our view on an Italian exit is similar to our view on the U.K.'s departure; it does not make economic sense.

Still, roughly 40% of the Italian populace views the European Union unfavourably according to Pew Research Centre, and the Five Star Movement, which has won between 20% and 25% of Italian votes in recent years and consists of avowed Eurosceptic, or "Leavers", won 19 out of 20 mayoral races in June, which is a setback to Prime Minister Matteo Renzi. Italy is holding a vote in October on several constitutional reforms, and if the vote does not pass, he has said he will step down.

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Stephen Ellis  Stephen Ellis is a senior stock analyst on the Energy Team.

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