Can we ignore the run up to Italy's referendum?

When pundits and pollsters tracked the probabilities of a "Brexit" type outcome at the beginning of the year many had thought the possibilities weren't completely out of reach but the likely occurrence would see the British public support the idea of remaining within the Eurozone agreement after experiencing the beneficial configuration(and least to say the detrimental effects) of open borders amongst Europeans.

But as chance would have it the most improbable scenario markets could've foreseen descended into reality, heaving a worrisome blow to the market's perception over the acceptance of defective policies meted by politicians throughout Europe by its own citizens whom were underestimated in the strength of their convictions to effect change.  

Fast forward to the beginning of November and the same knee jerk reaction was felt when the announcement of Donald Trump as the US presidential elect caused market participant to re-consider the variability of polls and their purpose in measuring certainty.

Investor Who Backed Brexit Sees Euro Breaking Up Within 5 Years https://t.co/1hXzZ03KET via @stespezzati pic.twitter.com/1bF7OztQyD

— David Goodman (@_DavidGoodman) November 28, 2016

Being on the cusp of yet another referendum to be held in Italy over constitutional reform set to take place on the 4th December 2016, the market has surprisingly not learnt from its previous mistakes of the past and seemingly looks self-assured that Sunday's election won't significantly alter the viewpoint.

Unfortunately this unrealised risk poses the potential to reinforce the idea that cross border syndication of promoting the shift in policy away from socialism ideals into a nationalist-driven protection of sovereignty may be gaining momentum when considering the results of two major and decisive electoral outcomes.

Perhaps the disproportionate balance of views between investors and citizens can be understood by observing the dynamics in dealing with catastrophic economic circumstances where politicians have settled for maintaining the status quo and injected confidence in financial markets in allowing participants appetite for free money be feed with extended and expansive monetary programs whilst ignoring the issues on the ground.

Here are four things to watch for as Italy prepares to vote in a referendum called by prime minister Matteo Renzi https://t.co/qsJeeqvItk pic.twitter.com/Y7F5SR8r74

— Financial Times (@FT) November 25, 2016

However the miscalculated sentiment borne from these events compared to that of the situation unfolding in Italy doesn't match. Since scrapping the Lira in favour of the Euro back in 1999, Italian's have seen their economy plagued by chronic low growth, mass unemployment and uncompetitive manufacturing prices relative to its other European counterparts, namely Germany. With the advent of these events and the can kicking occupation of Brussels has led Rome into the most indebted economic states on record with little much resolution from the European Union in fixing it.

When weighing up the mood of Italians against that of the British or American public before their respective voting days, it's clear that there's abundant signs of dissatisfaction on the part of the former as opposed to the latter which simply cannot be ignored.

The next EU crisis; Italy's banking system

Just as the heightened fear and uncertainty reached frightening levels after the British referendum to exit the EU, it appears the event has indirectly influenced a trigger of a fresh crisis concerning Italian banks. Although Italy's banking system has been under strain for some time, the markets shifted focus away from a potentially devastating financial implosion has made the likelihood of such occurrence edge closer to happening.

And if you thought the European circus of politics couldn't entertain you anymore than it has, a regulation passed by the European Commission preventing member governments from bailing out ailing banking institutions is going to have dire consequences on the strength of the union if it cannot be overlooked.

Effectively the EU wants creditors to suffer from losses made by the banking institution, a term referred to as bailing in, instead of allowing governments to mop up the mess. If the EU were to succeed in upholding such policy it could mean funders aiding the banks with credit to generate loans would now be less convinced to provide financing facilities as well as cause a collapse of the entire Italian banking system if continued signs of financial stability erosion isn't plugged.

It should be said that a figure of 17% has been bantered around as a measure of the amount of loans that are considered "soured" or "bad", meaning an unlikeliness of being recovered which equates to roughly €360 billion in loans that cannot be paid!!!

Moving on to the economic dynamics that would lessen the severity of a mass default, lack of any confidence can be found when considering that the Italian economy has grown underneath the 1% band for far too long to shine any hope on the matter. Some analysts have cited the inadequate depreciation in the Euro versus other major currencies has made Italian goods & services more expensive when compared to its counterparts giving impetus to calls from nationalist parties for an exit out of the EU agreement.

Bad-debt warning triggers fresh fears for Italian banks https://t.co/rxW2sPduwD

— CNBC International (@CNBCi) July 5, 2016

That reality became much more real after the British referendum which not only put the final nail in the coffin of Euro optimists but also feted the grievances among citizens of Europe. Inasmuch as politicians in the region might find diplomatic and flexible solutions to devilishly avoid evidence proving closer integration a mass failure, the full effects being felt by the ordinary folk on the street has become so insurmountable that its caused a revolution of opinion.

What was once seen as beneficial is now seen as thieving sovereignty if agreeing to generalised policy that might stand in one country but has no place in another.

Italian prime minister Matteo Renzi will have to decide whether he should followed the prescribed rules set out by the EU commision or ignore them and face the consequences of the trade bloc but inevitably save his nation's banking system from collapse.

The EU's lack of flexibility over this simply enforces the notion of drawing out extreme cases where convention is disregarded and rules firmly stated instead of dealing with the issue at hand. This only serves to weaken the EU and strengthen the case of Euro-Skeptics who are convinced that this will all come crashing down.

Italy can't succeed economically if their banking system is placed in such a poor state that it drawdowns confidence in them.