After Brexit and Trump’s election in the US, the Italian referendum is the next 2016 political event that could trigger an important financial market reaction.
Despite the broad agreement on the need for Italian constitutional reform, aiming at diminishing Senate powers and facilitating law-making, the referendum has turned more political, and the ‘No’ side is leading in polls.
This reflects the mounting antiestablishment sentiment in Europe, and translates into the rise in the Five Star Movement (M5S), reads a report made by Céline Renucci, strategist of Investment Managers’ Research & Investment team.
AXA IM’s central scenario is a ‘No’ vote that would not lead to a political crisis, as the asset manager’s expects either Renzi to stay, or the existing coalition to quickly form a new government. This would “drastically” reduce the reform impetus, the report highlights.
“Such an outcome would likely trigger another widening of spreads (+20bp versus Bund) but to a limited extent as most of the impact is possibly already priced in. It should also weigh on financials, in a context where spreads have already widened and the Italian banking system remains highly fragile,” the report reads.
A more critical scenario would be if the referendum rejection turns into a political stalemate after the current coalition breaks up, leading to a sharp spread widening (+150bp versus Bund), and a further deterioration in the Italian banks’ situation.
The outcome of the referendum may have implications for Italy’s banking sector and the need in terms of capital raising: a narrow “no” — AXA IM central scenario — would not affect so much the current situation, but a narrow “yes” may help to some extent. However, given the magnitude of the capital to raise, it cannot be “a game changer”.
A large “no”, on the other hand, may “seriously complicate matters”, with financials loosing values, raising difficulties for private sector capital funding. A tail risk, if
this was materialising, would have implications for the European banking sector more largely given the degree of cross-border bank exposures — French banks are the most exposed to the Italian banking sector.