CLSA’s Chris Wood, author of the popular Greed and Fear newsletter, chimes in on the consequences for Brexit with a note titled “Disintegration Dynamic” in which he focuses not so much on Britain as Italy and specifically the proposed Italian bailout which was first reported here and which circumvents European bailout rules, however which Renzi hopes will pass as a result of scapegoating Brexit (even if Angela Merkel was quick to shut down).
This is what he says, excerpted:
GREED & fear continues to believe that the real flash point in the EU is likely to be Italy. GREED & fear was reminded of this reading this week that Italian Prime Minister Matteo Renzi is now seeking Europe’s agreement for a €40bn state-funded recapitalisation of the country’s banking system. This would seem in conflict with the EU’s new rules that taxpayer money cannot be used for bank bailouts before bank shareholders and, critically, bank bondholders are first bailed in. The tricky point here is that 29% of Italian bank bonds were still owned by retail depositors as at the end of 2015 (see Figure 1).
This Italian issue was discussed in more detail here a few months ago (see GREED & fear – The Eurozone and newborn economics, 3 March 2016). Renzi is doubtless hoping that the market turmoil created by Brexit, or at least the sense of political crisis, creates the pressure for Berlin and Brussels to agree to a breaking of the new rules. But if Berlin does agree to such a concession it will strengthen the electoral appeal of eurosceptics within Germany, just as further debt relief for Greece would – and the eurosceptics, primarily in the form of the AfD in Germany, have enjoyed a surge of support ever since last summer’s refugee crisis. Indeed Renzi’s plan has reportedly already been rebuffed by Frau Merkel and ECB board member Benoit Coeure.
The conclusion from all of the above is that it will take a political genius to hold the EU together in the next few years. And geniuses are in short supply. In this sense Brexit will only have accelerated something that was going to happen anyway.
Meanwhile, from a market standpoint, to repeat the point made here already, Brexit will serve as an excuse by G7 policymakers to accelerate the next wave of easing which in GREED & fear’s view is likely to be some form of monetisation of fiscal stimulus. Logically, this should only happen after the November US presidential election. But if markets are bad enough it can happen before.
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