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Europe’s Turmoil Deepens, Euro at 20-Month Low

The ‘No’ vote creates uncertainty in Italy, as the EU bloc struggles to revive growth and define its future
Italy’s Prime Minister Matteo Renzi announces his resignation during a press conference at the Palazzo Chigi following the results of the vote for a referendum on constitutional reforms, on December 5, in Rome. Italy’s Prime Minister Matteo Renzi announces his resignation during a press conference at the Palazzo Chigi following the results of the vote for a referendum on constitutional reforms, on December 5, in Rome.

The resounding 'No' vote in Italy's constitutional referendum is set to lead to short-term political uncertainty which could complicate efforts to strengthen the country's embattled banking sector. The euro dropped 1.1% to $1.054 in Tokyo after falling as much as 1.5% to $1.050, the lowest since March 16, 2015.

Italian voters rejected by a 60-40 margin in Sunday's constitutional referendum a plan to overhaul the country's legislature, prompting an announcement by Prime Minister Matteo Renzi that he was resigning, news outlets reported.

Though largely expected, the 'No' vote creates uncertainty in Italy, the European Union's fourth-largest economy, as the bloc struggles to revive growth and define its future. Renzi's resignation could clear the way for the formation of a caretaker government and, possibly, new parliamentary elections next year.

"The banking sector is the most vulnerable in the near term to increased political uncertainty," wrote economists at Citi in a note early Monday.

"Rejection of senate reforms constitutes a further risk for the banks' plans to raise equity capital from private investors," said economists at Commerzbank.

Investors will closely watch the moves of Monte dei Paschi, Italy's third largest lender and one of its most troubled.

The bank, the only one to effectively fail European stress tests last summer, needs to raise €5 billion ($5.30 billion) in new capital by the end of the year, without which it may need a form of state bailout. Any rescue of the bank by the government would be complicated by new EU rules.

Any trouble at Monte could also make it difficult for UniCredit SpA, Italy's largest bank by assets, to raise as much as €13 billion to strengthen its own balance sheet and shed €20 billion in bad loans.

"The country's banking supervisors have been too lax for too long, and the inefficient bankruptcy laws make bank restructuring complex and lengthy," said the Commerzbank economists.

Euro, Shares Skid

The euro fell to a 20-month low on Monday and investors fled riskier assets after Renzi said he would resign. 

European stock markets are also set for a weak start, with Italy underperforming as investors brace for turbulence and political crisis in the eurozone's heavily indebted third-largest economy.

Financial spreadbetter IG Markets expects the EuroSTOXX 50 to open down 0.6%, and Germany's DAX and Britain's FTSE to start the day 0.4% lower.

Renzi's failure deals a body blow to a European Union already reeling under anti-establishment anger that led to the shock exit of the UK from the club in June.

The single currency slumped to $1.050, before recovering a bit to $1.056. 

Analysts argued that, based on what happened in 2012 at the height of the Greek crisis, the risk of a eurozone crisis could see the euro trade as low as $0.8000.

The euro slid as much as 2.05% to 118.71 yen, but pared some of the losses to trade down 1.1% at 119.85 yen.

The dollar was supported by expectations of a US rate increase this month and more to come next year. The dollar index, which tracks the greenback against a basket of six global peers, jumped 0.6% to 101.37.

Against the yen, the US currency, which rose earlier to as high as 113.85, pulled back 0.1% to 113.41 yen. The New Zealand dollar, which earlier weakened almost 1% to $0.707 after Prime Minister John Key unexpectedly announced his resignation on Monday, recovered a little to trade at $0.7106. New Zealand stocks ended the day 0.7% lower.

MSCI's broadest index of Asia-Pacific shares outside Japan eased 0.6%, while E-mini futures for the S&P 500 ESc1 narrowed losses to 0.3%. Japan's Nikkei closed down 0.8%. China's CSI 300 index tumbled 1.7%. Hong Kong's Hang Seng index retreated 0.7%.

Back in Europe, dealers said Italian bonds were set to come under pressure as top-rated US treasuries and German bunds gained. US 10-year treasury yields fell to 2.343% from 2.39% at Friday's close.

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