Euro wobbles after Italian referendum

BBC | Published: 11:22, Dec 05,2016

Dollar, Euro

A collage of Dollar and Euro. — Reuters photo

The euro fell sharply against the dollar after Italian prime minister Matteo Renzi suffered a heavy defeat in Sunday's referendum.

The fall continued after Renzi announced his intention to resign. At one stage the euro hit $1.0507, its lowest level since March 2015.

But it rebounded from that low and a short while ago was at $1.056, still down 1 per cent from Friday's close.

Analysts say that there is caution among investors but not panic.

‘While the markets are likely to remain nervous as we start a new week, they haven't fallen of a cliff, so far,’ said Kathleen Brooks, research director at City Index Direct.

‘Either markets are becoming immune to political risk, or they are taking the view that the Italian issue will be a slow-burner, even if the president can't form a government, he still has 70 days to try, and that seems quite far away at this stage,’ she said.

However, the Italian economy is in a fragile state and a period of political uncertainty could do it further damage.

Analysts are particularly concerned about Italy's banking industry, which is seen as vulnerable to a loss of confidence.

Many banks are struggling with a burden of bad debt and are in need of refinancing.

That finance would be harder to come by amid a political crisis.

‘Italy's banks don't have time to waste to try and boost their capital buffers. A win for the Yes camp in this referendum could have seen investors help to recapitalise the banks. However, it is unknown whether investors will do so now that the No camp has prevailed.

‘Without a sitting government, will there be official help for Italy's beleaguered banking sector?’ said Brooks.

The size of Italy's government debt is also a concern. Government borrowing, depending on which figures you look at, is one of the largest in the eurozone.

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