On Monday, the euro fell against the dollar and the Asian stocks slipped. Why? It may all be because Italy ’s vote against some changes in their constitution. These important changes were seen as vital to for the country’s growth, especially in the economic area. Italy has some pretty serious government debts and a not very solid banking system. Add the vote into the equation and it may mean problems for the peninsula. Some are considering the result of this vote a sign that the people are still against changes proposed by economists. Supposedly, the Eurozone needs these changes in order to get rid of some serious problems it currently has.
The fact that people voted against these changes will probably become a big obstacle in the way of rebuilding the Italian banking system. Moreover, banks have trouble with loans and this is a serious impediment for the country’s already weakened economy. A solid proof that investors are now seeing Italy as a risky place to invest is the fact that the yield on government bonds rose. Also, the Portuguese and Spanish ones did the same.
Immediately after the results of the vote were in, the euro fell more than a cent against the dollar. Asian stock markets were also slightly down. This takes us to the problem of Italy ’s banking system. Before the vote, Ángel Talavera, senior Eurozone economist at Oxford Economics in London declared that
“This is a critical point for restructuring of the Italian banking system. Rebuilding the banks is critical for the economy.”
The problem can become even larger as many countries all over Europe are lending money to each other. Let’s remember the danger the Eurozone was in back in 2011 when a similar crisis hit. If not managed, this one might prove to be the same. The national debt of Italy equals 136 per cent of gross domestic product. This is bad news, as the only country with a more severe debt is Greece.
Matteo Renzi resigns
Italian Prime Minister Matteo Renzi declared that he would resign. When he will do that, Italy ’s most affected bank, Monte dei Paschi di Siena, will not be restructured soon, as the government intended to do.
The European Central Bank will be meeting on Thursday to discuss the problem and to find solutions. One of them would be to extend purchases of government bonds in the Eurozone. By doing this, it would hold down the borrowing rates. Still, analysts are skeptical as they do not think that this solution would solve anything in the long run. If the economy of Italy collapses, there is a very high risk of a chain reaction.
If businesses and consumers do not pay their debts, these problem loan will extend. And they weigh heavy on the economy of a country because banks would not be able to provide credits for businesses to grow. So, the problem will spread and it will most likely become extremely hard to track down. Let’s just hope that the meeting on Thursday will be the first step towards defeating these serious problems that Italy is confronting right now.
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