Yes or No, Ital­ian ref­er­en­dum to have mod­est mar­ket re­ac­tion

Kuwait Times - - BUSINESS -

ROME/BEN­GALURU:

Vic­tory or de­feat for Ital­ian Prime Min­is­ter Mat­teo Renzi’s con­sti­tu­tional re­form ref­er­en­dum will hit fi­nan­cial mar­kets only mod­estly, a Reuters poll found, with an­a­lysts split on how se­ri­ous a “No” vote would be for the fu­ture of the euro project. Renzi has said he will re­sign if he loses the Dec 4 bal­lot an out­come all opin­ion polls say is the most likely - on his plan to dras­ti­cally re­duce the role of the up­per house Se­nate. The Reuters sur­vey of 32 an­a­lysts con­ducted on Nov 24-25 showed in­vestors ex­pected to de­mand an ex­tra 25 ba­sis points in yield to hold Ital­ian debt over its Ger­man equiv­a­lent if the re­form is re­jected, with the euro dip­ping 1.25 per­cent.

Sim­i­lar moves in the other di­rec­tion are ex­pected if vot­ers ap­prove the re­form at the bal­lot box, which Renzi is pre­sent­ing as a chance to speed up law­mak­ing and sta­bi­lize gov­ern­ment. While the poll con­sen­sus shows only muted re­ac­tion to ei­ther out­come, the Euro­pean Cen­tral Bank said the risks are ris­ing to euro zone fi­nan­cial sta­bil­ity and it would re­act to any “eco­nomic shock” from the vote.

The most pes­simistic view in the poll was for a 70 ba­sis point pre­mium on the Ital­ian/Ger­man yield spread and for the euro to fall as much as 10 per­cent. Half the an­a­lysts polled see a “se­ri­ous” blow to the euro project if Ital­ians re­ject the plan, which those op­posed to it say will over-cen­tralise power and make Italy less demo­cratic. The other half said the blow would not be se­ri­ous. “I think the mar­ket un­der­es­ti­mates the long-term con­se­quences of a ‘No’ out­come,” said Dek­a­Bank econ­o­mist Kris­tian Toed­mann. “Italy’s re­form agenda is a project for many years. If it fails, trend growth will not accelerate and gov­ern­ment debt will be­come less sus­tain­able. This can­not be com­pen­sated by (ECB) quan­ti­ta­tive eas­ing for­ever,” he said. Italy’s chron­i­cally stag­nant econ­omy is strug­gling to post con­vinc­ing growth and its debt pile, one of the world’s big­gest, keeps it un­der close in­vestor scru­tiny.

CRACK IN THE EURO PROJECT?

Many in the fi­nan­cial mar­kets worry that, if Renzi re­signs, the anti-euro 5-Star Move­ment could come closer to power. Renzi has said he will not par­tic­i­pate in any at­tempt to form a tech­no­crat gov­ern­ment of the kind that took over af­ter Sil­vio Ber­lus­coni’s last ad­min­is­tra­tion col­lapsed in 2011. “The ‘No’ sce­nario opens up a very volatile phase,” said In­tesa San­paolo fixed in­come strate­gist Ser­gio Ca­paldi. “In case of Renzi’s res­ig­na­tion there is no clear path for the for­ma­tion of a new gov­ern­ment. A short-term gov­ern­ment could just ap­prove an elec­toral law for the Se­nate and an­nounce early elec­tions.” Fur­ther in­vestor con­cerns fo­cus on Italy’s banks, which, sad­dled with 200 bil­lion eu­ros in bad loans, are hold­ing back lend­ing to small com­pa­nies that tra­di­tion­ally re­lied on them.

Banca Monte dei Paschi di Siena, the world’s old­est bank, is among the big­gest wor­ries as it plans a 5 bil­lion euro ($5.29 bil­lion) re­cap­i­tal­iza­tion plan. Monte dei Paschi plans to launch a stock sale on Dec. 7 or 8 into what could be tur­bu­lent mar­kets if the ref­er­en­dum goes against Renzi and his gov­ern­ment re­signs. “If the prospect loomed of a failed cap­i­tal hike for MPS, the next hy­poth­e­sis is a bail-in, which would have se­ri­ous con­se­quences,” said IG strate­gist Vin­cenzo Longo, re­call­ing the case of four banks the state res­cued from bank­ruptcy last year. — Reuters

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