Italy’s referendum: A take on the result – Deutsche Bank

Marco Stringa, Senior Economist at Deutsche Bank, notes that the Italy’s PM Renzi lost by a significant margin and he will resign on 5 December

Key Quotes

“We think that the result of the referendum strengthens the populist/eurosceptic parties.”

“An immediate early election is unlikely

The low-likelihood-high impact scenario would be an “immediate” early election. The large margin of victory for the “No” may have increased this probability, but only to 30%. Hence, we continue to see an “immediate” early election as unlikely but with a potential systemic impact.”

“When will a new government be formed?

We expect the President of the Republic Mattarella to act quickly. Assuming Renzi resigns, a new government supported by broadly the same majority behind Renzi’s cabinet could be in place by next week. A delay would likely be unwelcomed by markets. The priorities will likely be approving the 2017 budget and, above all, a new electoral law for both Houses of the Parliament.”

“ECB

We think that the ECB response is likely to be based on messaging and in-built QE flexibilities as long as market stress remains idiosyncratic.”

“Italian banks 

In our opinion, the referendum outcome is negative for Italian banks. We expect them to further underperform the European banks index in the short term. In medium term a systemic solution of the Italian NPL issue is needed.”

“Medium-term consequences

The referendum was a catalyst rather than the cause of Italy’s complex situation. The complexity is due to disappointing growth, concerns about the banking system and the rise of populist and euro-sceptic parties. At least initially, we do not expect to revise down our GDP projections as the “No” outcome was our central case scenario. The likelihood of a systemic solution for the NPL issue will influence the medium-term evolution of the Italian banking sector and banks’ ability to support investment growth. We expect no pro-active systemic solution for the banking sector before the next election. We expect a new electoral law for both Houses of the Parliament. In our opinion, it is important that a compromise on a new electoral law does not lead to a system that encourages the formation of governments supported by overly heterogeneous coalitions.”