Italians go to the polls on December 4 to decide whether to amend the constitution and grant greater powers to the lower parliamentary house – a move that, if approved, could allow greater political reform. On the same day, Austria has a repeat of its presidential election, with an increased chance the far-right Freedom Party (FPÖ) candidate Norbert Hofer could take charge.
Both could lead to significant upheaval. Italian prime minister Matteo Renzi has gambled his job on a ‘yes’ outcome in the referendum, meaning a potential general election and greater anti-EU representation in parliament if ‘no’ prevails. Polls suggest support for a ‘yes’ vote is as low as 34 per cent.
Austria’s vote would give further impetus to the nationalist movements taking charge in Europe and further afield.
Fund managers have said the likely ‘no’ vote in Italy would be viewed as another act of political protest, weakening the Italian market, particularly in fixed income. They predicted it would put further pressure on the already fragile banking sector and induce a sell off in bond proxies.
Maria Paola Toschi, global market strategist at JPMorgan Asset Management, said the most important reaction to the referendum result will be in the bond market, specifically the direction of yields on Italian government debt.
“In the event of a ‘no’ result, we could see a short-term spike upwards in yields. This could have implications for sectors of the equity market such as utilities, energy and telecommunications, which are historically sensitive to rate moves,” she added.
But the gravest effect would be on the beleaguered banking sector, according to Fidelity investment director Andrea Iannelli – despite financials often performing better when bonds sell off. He said two of the country’s largest banks are set to undertake issuance programmes that would be hampered by a ‘no’ outcome.
Mr Iannelli said that heightened political tensions from Mr Renzi’s resignation would increase pressure on UniCredit, Italy’s second largest bank by assets, and Monte dei Paschi, the third largest.
Mr Iannelli warned this could lead to nationalisation of the Monte dei Paschi bank in a worst-case scenario. “Ripple effects would be felt across the sector and might make it more difficult for UniCredit to complete a capital raising in 2017. For bond holders, the focus remains on a faster clean-up of banks’ balance sheets without triggering bail-ins,” he added.
Institutions are also worried. The European Central Bank (ECB) issued a warning last week that rising political uncertainty in Europe has intensified the risk of an abrupt market correction, posing a threat to banks, stability and economic growth.
In its twice yearly Financial Stability Review, the ECB stated “elevated geopolitical tensions and heightened political uncertainty have the potential to reignite global risk-aversion and to trigger a major confidence shock”.
Others remained more sanguine. Stuart Fraser, head of European equities at Kames Capital, said issues in Italy’s banking sector would dog the country regardless of outcome.
“I don’t think [Italy’s banking issues] will be solved, or not, by the referendum. They’re probably the only banks to have fallen over the past three months.”
On Austria, he added: “The possibility of Mr Hofer winning hasn’t impeded the performance of Austrian assets so far.”
Hermes chief economist Neil Williams conceded an Italian ‘no’ vote could lead to “messy” general elections and an EU-membership referendum, but emphasised Europe faced even “colder winds” in 2017 in the form of German, French and Dutch elections.
Changing role of Italy’s senate
Italy’s referendum is based on a change in the role of the senate, the upper parliamentary chamber. At the moment, the senate of 315 elected members plays an equal part in creating legislation with the lower chamber. Under Mr Renzi’s plan, the senate would be reduced to 100 unelected members of regional assemblies and mayors.
On most matters, this would mean a consultative and non-executive role, with the aim of reducing legislative gridlock.
Opponents say it gives too much power to the premier and lower house and removes an important check on the government.
