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Italian Referendum - Quick Reaction from PIMCO's Nicola Mai

05 December 2016

Nicola Mai, Head of European Sovereign Credit Research at PIMCO provides a quick reaction on the Italian referendum below:  
•         With around 60% of voters opting for a “no”, and nearly 70% turnout, Italians firmly rejected an important Constitutional reform that would have removed power from the Senate and left the Lower House as the key legislative Chamber in Italy. The reform was one of the flagship measures of PM Renzi, who has already confirmed he will tender his resignation.
•         The result is negative at the margin for Italian and European risk assets, for a couple of reasons:
  First, the reform’s failure means that Italy has lost an opportunity to make its political system leaner and more conducive to reforms.

  Second, Renzi’s resignation is likely to lead to a period of higher political uncertainty which comes in the midst of ongoing recapitalization efforts in the Italian banking sector.
•         Negative market sentiment on the vote is likely to be mitigated by the fact that the market has been expecting a “no” (based on polls) and that the ECB remains in play in European sovereign markets. Tail risk is sentiment deteriorating significantly on Italian banks and infecting other Italian and European risk markets.
•         The referendum outcome makes the recapitalization of Monte dei Paschi harder to achieve, with potential negative knock-on effects on the rest of the system and in particular on Unicredit’s equity raising plans.
•         In terms of next steps, President Mattarella will seek to facilitate the formation of a transition government, headed by a political or technocratic figure, tasked with leading through ongoing bank recapitalizations and reforming the current electoral law (which is currently inconsistent between the two Chambers). This will take some time, and elections are unlikely to be called until this is done (until mid-2017 at the earliest). The new electoral system is likely to be proportional in nature, and facilitate the formation of grand coalition governments in future.

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