Will Italy set off the next crisis in the eurozone?

Italian Prime Minister Matteo Renzi’s resounding referendum defeat on Sunday and his subsequent resignation have not caused much market turmoil in the short term. But over the long term, the political and financial consequences are difficult to anticipate. Italy need not pitch into chaos because of this result, says Neil Unmack of BreakingViews.com, “but the odds are now on a year of political uncertainty, few reforms and weak growth”.

For a start, there’s the precarious state of Italian banks, which have some of the weakest capital levels in the global financial system and are tottering under a pile of bad loans totalling more than 350bn. Renzi’s defeat has left them in a very uncertain position. “Without a stable political foundation, investors will lose faith in buying Italian banks’ shares and bonds – rattling the domestic economy and the eurozone,” says Patrick Jenkins in the Financial Times.

Any chance that perennially troubled Monte dei Paschi di Siena, the country’s third-largest lender, might be able to raise desperately needed capital from private investors has now practically evaporated, and the bank has been told to prepare for a state bailout. What’s more, investors’ nervousness about the state of Italian lenders may affect the entire banking system in Italy, and spread to the likes of Portugal and Germany, where banks such as Deutsche Bank are in similarly feeble positions.

Meanwhile, Renzi’s defeat means that Italy will have to carry on operating without the reform-minded strong government that is needed to dig the country out of its current environment of slow growth. The power vacuum that is set to follow Renzi’s downfall may be dangerous, says John Lloyd in The Guardian. The Five Star Movement, a radical political party headed by comedian Beppe Grillo, which has pledged to hold another referendum on Italy’s euro membership, has already won local elections in Rome, Turin and other towns this year. Nationally, Five Star is neck-and-neck with Renzi’s Democratic Party, and opinion polls suggest it would win a run-off for a majority in the legislature.

That would have a knock-on effect for the stability of the eurozone as a whole. The Five Star Movement has pledged to hold a referendum on Italy’s membership. If that were to happen and Italy were to vote to leave the single currency, the survival of the entire project would be in doubt. Hence Renzi’s defeat could be a much bigger threat than Brexit, says Gideon Rachman in the Financial Times. “The European project is under unprecedented strain.”