Seoul markets brace for impact from Italian referendum
Analysts and experts said Sunday that the constitutional referendum in Italy can cause a stir in the domestic financial market, if Italians say no to the reforms proposed by Prime Minister Matteo Renzi and he resigns as he promised.
Italians began voting on Renzi’s constitutional reforms Sunday and the result is expected to be available Monday afternoon (KST). The plan contains sweeping changes to Italy’s Constitution, including reducing the number of senators from 315 to 100.
Of all the impacts from the vote, Renzi’s promise to resign if the voters reject the referendum will likely be the greatest.
In more than 40 polls over the referendum, “Yes” voters outnumbered “No” voters only three times.
If Renzi resigns, Italy has to form a new government and one of the leading opposition parties, the Five Star Movement, will likely take control of the country.
The populist party has been throwing out questions about Italy staying in the European Union. Though several more steps, such as constitutional amendments, will be needed before “Italexit,” analysts say it will bring a populist surge across Europe and increase political uncer- tainties which will affect Korean markets.
“The vote actually is a confidence vote for Renzi,” said Kim Yong-goo, an analyst at Hana Financial Investment. “A no result will bring huge political turmoil to Italy and will increase political uncertainties all over Europe.”
“This will likely cause a materially weaker euro and a strengthened U.S. dollar. This clearly is a not good for the Korean stock market,” he said.
The fallout of the referendum also includes the possibility that several Italian banks will collapse. Renzi has been trying to convince the EU to allow the Italian government to inject cash directly into Italian banks, which are already sitting on huge amounts of bad loans.
To prepare for Renzi’s loss, banks are striving to improve their financial status on their own, such as issuing new shares, but expectations are growing that markets may refrain from making investments.
The Italian referendum is the first of a series of major political events scheduled in Europe. France will have a presidential election in April and Germany will have a federal election in August.
With a surge of populists being expected, whose major pledges are an exit from the EU, experts say the elections will become major risk fac- tors for not only Korea but also all of Asia.
“The events, including the Italian referendum and those scheduled next year, are enough to spook investors,” said IBK Investment & Securities Economist Jeong Yong-taek.
“After the global financial crisis, Europe has been the epicenter of global financial shocks.”
“An interim cabinet will have weaker stability and responsiveness to economic issues. Also, we have to note that Renzi has been maintaining good relations with the EU,” he said, adding that it is time for Korean investors to elevate their awareness of European issues.