Italian referendum 2016

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 followed through on his promise to resign should his reforms get rejected, and any hopes that he would stay on in the short term to ‘steady the ship’ proved unfounded. Now, a new governmental crisis and further period of instability is 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, 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 still unclear, even after the result has come in. 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 40, France 40 and FTSE 100 were all up in early trading on Monday. 

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.