Italy will hold a much-anticipated referendum on constitutional change on the 4 December. While the passing of the referendum would bring greater electoral stability in the future, there is an increasing risk that the referendum will result in a ‘No’ vote as the populace use it to declare their dissatisfaction with Prime Minister Renzi and his Partito Democratico (Democratic Party) led government.
Our base case scenario is for a narrow ‘No’ vote and rejection of the electoral and constitutional changes, and while Renzi has said he will resign, we will likely see the President seek to install a caretaker prime minister to lead a technocrat government until scheduled elections in May 2018. We believe this is currently priced into Italian spreads, although we would likely see a widening in spreads if a significant defeat for Renzi leads to increased speculation regarding early elections (particularly given the significant gains recently of the populist Five Star Movement).
Rowena Geraghty – Standish, a BNY Mellon company