After the no, Italy, Euro area face increased uncertainty

“I lost, and the post that gets eliminated is mine,” Italy’s Prime Minister Matteo Renzi said after his heavy defeat on his reforms referendum, triggering his resignation announcement and heightened likelihood of political instability in the Euro area’s third largest economy and currently in the midst of a risky banking crisis. Italy’s oldest bank Monte Dei Paschi di Siena (BMPS) needs to raise EUR 5 billion by December 31, 2016 or undergo banqueroute, putting the whole Italian banking sector – and the euro areaat risk of collapse.

Two main obstacles could however stand in the way of a sustainable solution: first, European authorities theoretically oppose that the Italian government recapitalizes BMPS given that using taxpayer’s money would be considered illegal state aid; second, the no’s win in the referendum may have put further distance between BMPS and investors, this way forcing more than ever the Italian government to act in contravention with the European Union (EU)’s rules.

Since it’s like a snake biting its own tail, hope may come from the European Central Bank (ECB) of which Italian President Mario Draghi could decide to prolong the Quantitative Easing (QE) for ten more months, fueling the investors’ appetite for risk and the chances of a solution for the Italian banking sector as a result. For this to happen, Italy has now to find a new leadership quickly or face a new round of general elections soon with a possible win by Beppe Grillo’s eurosceptic 5-Star “populist” movement.

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