During the summer I wrote about the marvels of the Italian tightrope trick (The NPL Circus: the Italian Tightrope) and remarked on the massive feat of the Italian legislature in making the seemingly impossible, possible with the establishment of a state guaranteed securitisation structure that is capable of divesting a significant volume of non-performing loans (NPLs) without “bailing in” creditors.

With the news that Prime Minister Matteo Renzi had failed to secure a victory for his “yes” campaign, there will now be a fresh challenge for the Italian NPL market.  It is as if a seagull has just dive bombed the Italian tightrope walker, the consequence being a stomach churning wobble or maybe a slip.  Although the arrival of this unwelcome guest is rightfully going to be treated by the tightrope walker with disdain, nevertheless the audience should not be surprised ‎as it may be that this is very much part of the trick.

The reality is that the beleaguered Italian banks continue to have astronomical volumes of NPLs that must be off-loaded in order to strengthen the banks and make them more resilient.  Nobody said that it would be easy and nor should it be given the complexity of the Italian banking system and the fact that Italian domestic retail investors are so heavily entwined with the banks.  By devising the guarantee securitisation structure, the Italian legislature has not only demonstrated that the deleveraging of the banks is a political “must” but that it is willing to implement the necessary legislation required to ensure that the Italian banks fulfil these political aims.

It is fair to say that the results of the Italian referendum and the subsequent resignation of Mr Renzi will no doubt be treated with trepidation given the obvious political uncertainty this creates.  However, one thing that does remain certain (and despite the fact that it is a magical time of the year) is that these huge volumes of NPLs are not going to miraculously disappear nor can they just be swept under the carpet.  In fact, when it comes to considering the deleveraging of the Italian banks, one cannot help but be reminded of the expression “too big to fail” that was so frequently used at the beginning of the global financial crisis when considering the status of banks.  The same can also be said of the Italian deleveraging process: it really is too big to fail (without exception) as the off-loading of NPL’s is integral for rehabilitating the banks and therefore the Italian economy as a whole.  It is for this reason indeed, that yesterday’s vote should merely be regarded as a wobble and very much part and parcel of the excitement and drama of the trick.