Italian Referendum & the European Banking Crisis Deutsche Bank and Banco Monte dei Paschi are facing tough times and the failed Italian referendum infuses more uncertainty.
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Italian Referendum and the European Banking Crisis Adverse events in global markets are something you need to observe in online stock trading, since they can soon affect the market you’re trading in. You need to be prepared. One such crisis situation is taking its toll on European banks. The European banking crisis seems to be getting more intense, particularly with Italians rejecting a referendum seeking constitutional reforms pushed forward by Prime Minister Matteo Renzi. This has forced Renzi to resign and could adversely affect Deutsche Bank AG ($DB) and Banca Monte dei Paschi di Siena SpA ($BMPS). In the case of the latter, it’s worth remembering that even before the referendum, analysts had expressed fear that if people refused the referendum it could deflate the delicate rescue plan set up by the bank. Effects of the Failed Italian Referendum As of now, the Euro has dropped following news of the failed referendum. The political uncertainty that the result of the referendum has brought about would result in investors not being too keen on following through with the €5 billion recapitalization effort. Italy is discussing bailout terms with the European Commission, though it could be extremely difficult since governments aren’t capable enough for rescuing struggling banks, and voters too aren’t willing to support such a move. That’s why the fears intensify. If the situation arises when Banca Monte dei Paschi has run out of recovery options, it could trigger a series of adverse events akin to the Lehman Brothers effect which could hurtle the global economy into uncertainty and chaos again. Financial Crisis in European Economy The economy of Europe is distressed in a few areas while mostly listless, and the financial crisis began when the mortgage bubble burst in the United States. Greece has been reeling under the sovereign debt crisis which threatens to pull the nation out of the eurozone. Average unemployment in the EU is close to 10%, while in Greece it is more than 20%. While the banks in the country are generally profitable in spite of the effects of the financial crisis, with the IMF-reported average return on equity of 6.6% in 2015 when compared to the 15.2% in 2006 and 2007, there has been a decrease in fee-generation activities and borrowing. Non-performing loans are continuing to burden the sector, particularly in the “PIIGS” countries to which Italy and Greece belong, along with Spain, Portugal, Ireland and Italy.
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Negative Interest Rates Burdening Banks But what has really hit the banks is the negative interest rate concept. This was a flawed idea by the policymakers looking to reverse the economic weakness that spread through the continent and affected the banks primarily. The negative interest monetary policy was first seen in Sweden in 2009 and has spread to the 19 nations making up the Eurozone. As a result banks had their margins squeezed, with most of them not being prepared to pass on the negative interest to savers, fearing losing deposits. Stocks of Monte dei Paschi and Deutsche Bank reflect the fact that negative interest rates have burdened them. In the nine years leading to June 30 2016, their shares lost 99.6% and 88.6% of their value respectively. In this period the ECB deposit rate sunk from 2.75% to -0.4%. This situation is certainly something that needs to be monitored closely by stock traders and investors for successful online stock trading.
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