The resignation of Italian Prime Minister Matteo Renzi following Sunday's no vote in a referendum on constitutional change has dealt another political blow to the European Union.
Fears are growing that the political uncertainty could worsen the chronic problems of Italian banks and spread to other parts of Europe; but, many analysts say the referendum result was about domestic issues — and markets have given a muted response to the upheaval.
Several Italian banks were struggling with bad loans well before Sunday's referendum. Analysts put the total figure at $390 billion.
"Nothing has really changed"
Banca Monte dei Paschi di Siena — which claims to be the world's oldest bank — planned to raise $5.4 billion in capital. Now those investments are in jeopardy and the bank could be nationalized.
Luigi Scazzieri of the Center for European Reform says there is hope that investors will not be put off.
“In the immediate term they might find it slightly more difficult to raise capital, which they need to cover their bad loans,” Scazzieri said. “However, nothing has really changed in the banking situation since the situation previous to the referendum.”
Borrowing costs rise
Italy's borrowing costs have risen since Sunday's vote; but, Europe is better able to prevent a repeat of the 2008 euro debt crisis, according to Yves Bertoncini of the Paris-based analyst group the Jacques Delors Institute.
"The EU is more equipped to face a possible problem in Italy than it was five years ago,” Bertoncini said. “We have an ECB [European Central Bank] playing its role, we have a European Stability Mechanism able to rescue Italy if needed.”
Prime Minister Renzi will remain in power until parliament passes the 2017 budget. The president has said he will avoid calling immediate elections but the political uncertainty could turn market sentiment against Italy, says Giovanni Orsina of Luiss-Guido Carli University in Rome.
Orsina says the troubles over the constitution and the electoral laws now add to the uncertainty over the government. So, he adds, one can say that Italy's overall is entering a period of uncertainty.
Call for Immediate elections
The opposition Five Star Movement — which tops opinion polls — is demanding immediate elections and a vote on leaving the euro; but, Scazzieri says fears that Italy will exit the single currency are overplayed as new electoral laws will most likely deliver a coalition government.
"The new law crucially is going to be based on a proportional system most likely,” Scazzieri said. “ And such a system is going to make it extremely hard for single parties such as the Five Star Movement to gain power at the next elections; but, of course they are calling for a referendum on the euro. The small matter is that this is actually unconstitutional."
The hope in Italy and Europe, analysts say, is that a smooth political transition will help avoid a stormy end to a year of upheaval.