Italian referendum to have modest impact

Victory or defeat for Italian Prime Minister Matteo Renzi’s constitutional reform referendum will hit financial markets only modestly, a Reuters poll found, with analysts split on how serious a “No” vote would be for the future of the euro.

Renzi has said he would resign if he loses the Sunday, December 4 ballot – an outcome all opinion polls say is the most likely – on his plan to drastically reduce the role of the upper house Senate.

The Reuters survey of 32 analysts showed investors expected to demand an extra 25 basis points in yield to hold Italian debt over its German equivalent if the reform were rejected, with the euro dipping 1.25 per cent.

Similar moves in the other direction are expected if voters approve the reform at the ballot box, which Renzi is presenting as a chance to speed up lawmaking and stabilise government.

While the poll consensus shows only muted reaction to either outcome, the European Central Bank said the risks were rising to eurozone financial stability and it would react to any “economic shock” from the vote. The most pessimistic view in the poll was for a 70 basis point premium on the Italian/German yield spread and for the euro to fall as much as 10 per cent.

Half the analysts polled see a “serious” blow to the euro project if Italians reject the plan, which those opposed to it say will over-centralise power and make Italy less democratic. The other half said the blow would not be serious.

Italy’s chronically stagnant economy is struggling to post convincing growth and its debt pile, one of the world’s biggest, keeps it under close investor scrutiny.

Many in the financial markets worry that, if Renzi resigns, the anti-euro 5-Star Movement could come closer to power.

“The ‘No’ scenario opens up a very volatile phase,” said Intesa Sanpaolo fixed income strategist Sergio Capaldi.

“In case of Renzi’s resignation there is no clear path for the formation of a new government. A short-term government could just approve an electoral law for the Senate and announce early elections.”


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