Italian referendum: Three scenarios and multi-asset implications

A ‘no’ vote in the constitutional referendum on 4 December could result in Prime Minister Matteo Renzi’s departure

On 26 September, Italian Prime Minister Matteo Renzi announced that the referendum on the constitutional reform will take place on 4 December. If successful, the proposed reform would reduce the role of the upper house of parliament (Senato) in Italian politics. It would complement a new electoral law designed to ensure that if a party wins an election, it gets a majority of MPs in the lower house (Camera). We think the measures would make it easier to pass reforms and would lead to more stable governments.

Earlier this year, Mr Renzi said that he would resign in the event of a ‘no’ vote. Since then, faltering growth, the refugee influx and problems with the Italian banks have conspired against him, fuelling support for the populist and euro-sceptic parties Five Star Movement and Northern League. These parties want to use the referendum as an opportunity to force a general election, and the polls point to a very tight race.

Mr Renzi has played down resignation talk recently, in an attempt to shift focus back to the reform itself. This might reduce the risk of an immediate political crisis if there was a ‘no’ vote. But the damage might have already been done: the prime minister would be under significant pressure, from his own party and the opposition. Without these reforms, it would be as hard as ever to drive the changes needed to set Italy on a more prosperous path. The risk then is that Italy becomes even more disenchanted with life inside the euro.

In this report, we examine three scenarios: one where the vote is ‘yes’ and two where the vote is ‘no’. We also analyse implications for different asset classes.

Fixed Income – A ‘yes’ vote could take Italy’s 10Y yield flat with Spain initially, but Italy’s underperformance should continue in the medium term because of low growth and concerns over the banking sector. A ‘no’ vote could see the 10-year spread gap to over 40bps but the knee jerk reaction should be limited by ECB and dip-buying.

Equity – The result has the potential to create volatility, but not on the scale of the UK’s EU membership referendum. A ‘yes’ vote should trigger a partial retracement of Italy’s recent underperformance. A ‘no’ vote combined with PM Renzi standing down would be a significant risk-off event for Italy, with repercussions for wider Europe.

FX – The EUR should to be relatively indifferent to any outcome, although the risks may be biased slightly to the downside in the near term, given that little political risk premium is priced in. We do not think EUR weakness would be sustained however.

Fabio Balboni – European Economist – HSBC Bank Plc