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.
Renzi has confirmed he will resign as prime minister and leave politics now that his reforms have been rejected. This will undoubtedly cause a further period of instability.
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.
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, 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 now likely to review.
Many national and international investors froze Italian investment plans ahead of the referendum. Now there’s been a ‘No’ vote, the situation could deteriorate rapidly, with a heavy toll on employment and growth.