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Italian referendum 2016

The votes are in, and Italy has voted ‘No’ on Renzi’s reforms. So what happens now?

Find out all about the result – and what it might mean for Italian banks, EUR/USD and major indices – here.

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Read our analysis on the referendum

Renzi took little time in announcing his resignation after the results came in, causing major market volatility. Follow our analysis here:

Italian referendum: the market focus is starting to switch

Italian referendum: spotlight on the banking system

What happens next?

The potential fallout from Italy’s ‘No’ vote on reforms to the Senate is huge. Here’s what it might mean, politically and financially, in both Italy and beyond.

Political impact

Renzi has threatened to resign as prime minister and leave politics if his reforms are rejected. Should he resign, a new governmental crisis and further period of instability could be on the cards. 

It falls to president Sergio Mattarella to maintain stability. He could ask finance minister Carlo Padoan to form a government in the interim, or another key political figure. The populist Five Star Movement, meanwhile, are calling for snap elections – though this would require a change in Italian law.

With key elections coming up in France and Germany in 2017, Italy’s referendum also came at a pivotal point for the future of the EU. The instability the ‘No’ vote could cause in Italy may further strengthen the position of Eurosceptic parties across Europe – parties that have already been emboldened by the UK’s decision to exit the EU and Donald Trump’s win in the US presidential election.

Market impact

The impact of the referendum will be seen in the financial markets first and the real economy second.

A ‘No’ vote is likely to have more of an impact than a ‘Yes’ vote would have had, and the banking sector is likely to be most affected. Italian banks remain very fragile, and any impact is likely to reverberate across the European banking sector as a whole.

What that might mean for the huge amount of non-performing loans overhanging the banking system – and the capital increases being proposed by Banca Monte dei Paschi di Siena SpA and UniCredit SpA – is unclear. More may become clear when Unicredit announces its new business plan on December 14.

A ‘No’ vote was also expected to rattle other markets across Europe. Major crosses like EUR/USD, EUR/GBP and EUR/CHF did see a short term drop, but quickly recovered and the long term market impact is still unknown. The Germany 30, France 40 and FTSE 100 were all up in early trading on Monday.

If the subsequent fallout threatens the stability of the eurozone or its banking system, then it’s likely that we could see much more of an impact. The contagion could then spread into global markets, with US and Asian indices also moving. 

Italy’s credit rating

A period of economic and political turmoil could also compromise Italy’s credit rating, which would in turn push up the cost of borrowing for the Italian government and its municipals and businesses. DBRS, the Canadian rating agency, holds the highest rating on Italian debt but has a negative outlook and will review its rating after the referendum. The three major ratings agencies – Fitch, Moody’s and S&P (which has a BBB- rating for Italy, the lowest of the investment grade ratings) – are also now likely to review.

Many national and international investors froze Italian investment plans ahead of the referendum. Now there has been a ‘No’ vote, the situation could deteriorate rapidly, with a heavy toll on employment and growth.

What has Italy voted against?

Italian laws need to be approved by both houses of the Italian parliament: the Chamber of Deputies and the Senate of the Republic. This system pits the state against the regions, which frequently leads to the delay or scuppering of new laws, and undermines the stability of the Italian government. 

In an attempt to rectify this situation, Italy’s prime minister and reform minister proposed key changes to the constitution, to effectively reduce the power of the Senate. On 4 December, Italy voted ‘No’ to these reforms, in order to maintain the status quo.

The reforms in detail

The biggest changes proposed were to the composition and role of the Senate. Renzi’s reforms suggested it be reduced to 100 members, down from 315. He proposed that members be elected indirectly, with 74 to be councillors, 21 mayors, and five nominated by the presidency. 

The role of the Senate would have been redefined to represent local institutions. They would not be compensated for their Senate roles, only for their roles as mayors or councillors, with their senatorial reform ending when their term as mayor or councillor ended. The reform aimed to end the competition between state and regions.

Alongside Senate reform, Italy voted not to approve four other key changes to Italy’s constitution (as well as a wide range of technical amends):

  1. Both of Italy’s political houses to exercise legislative power in respect of constitutional laws, electoral laws, referendums, treaties of the European Union, linguistic minorities and those governing in the territories. But all other laws to be approved by the Chamber of Deputies alone, with the trust of the government.
  2. The National Economic and Labour Council (CNEL) – an advisory body on economic and social matters that also has the power to submit draft bills to parliament – to be abolished.
  3. The number of signatures needed to propose new legislation to increase from 50,000 to 150,000.
  4. Instead of both houses jointly electing five judges to the Constitutional Court, three to be elected by the Chamber of Deputies and two by the Senate.

Why was the referendum held?

A referendum had to be held because, while the reforms were approved by overall majorities in both the Senate and the Chamber of Deputies, they were accepted by less than two-thirds of each chamber – a so-called ‘qualified majority’. Under Italian law, that means the reforms had to go to a public vote.

What could the impact be?

The potential fallout from Italy’s ‘No’ vote on reforms to the Senate is huge. Here’s what it might mean, politically and financially, in both Italy and beyond.

Political impact

Renzi has threatened to resign as prime minister and leave politics if his reforms are rejected. Should he resign, a new governmental crisis and further period of instability could be on the cards. 

With key elections coming up in France and Germany in 2017, Italy’s referendum also came at a pivotal point for the future of the EU. The instability the ‘No’ vote could cause in Italy may further strengthen the position of Eurosceptic parties across Europe – parties that have already been emboldened by the UK’s decision to exit the EU and Donald Trump’s win in the US presidential election.

Market impact

The impact of the referendum will be seen in the financial markets first and the real economy second.

A ‘No’ vote is likely to have more of an impact than a ‘Yes’ vote would have had, and the banking sector is likely to be most affected. Italian banks remain very fragile, and any impact is likely to reverberate across the European banking sector as a whole. What that might mean for the huge amount of non-performing loans overhanging the banking system – and the capital increases being proposed by Banca Monte dei Paschi di Siena SpA and UniCredit SpA – is unclear. More may become clear when Unicredit announces its new business plan on December 14.

A ‘No’ vote is also expected to rattle other markets across Europe. The impact will be felt in euro markets, including major crosses like EUR/USD, EUR/GBP and EUR/CHF, as well as in equity markets, including the Germany 30, France 40 and FTSE 100. If the subsequent fallout threatens the stability of the eurozone or its banking system, then it’s likely that the contagion could spread into global markets with US and Asian indices also moving. 

Italy’s credit rating

A period of economic and political turmoil could also compromise Italy’s credit rating, which would in turn push up the cost of borrowing for the Italian government and its municipals and businesses. DBRS, the Canadian rating agency, holds the highest rating on Italian debt but has a negative outlook and will review its rating after the referendum. The three major ratings agencies – Fitch, Moody’s and S&P (which has a BBB- rating for Italy, the lowest of the investment grade ratings) – are also now likely to review.

Many national and international investors froze Italian investment plans ahead of the referendum. Now there has been a ‘No’ vote, the situation could deteriorate rapidly, with a heavy toll on employment and growth.

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