Italy: Post referendum, what the future holds? - Natixis

Research Team at Natixis, suggests that the outcome of Italian referendum was uncertain until the very end, as it quickly turned into a vote of confidence in Prime Minister Matteo Renzi.

Key Quotes

“As the opinion polls gave a clear lead to the “No” campaign, this piled even more pressure on Italian assets, especially on sovereign bonds (10-year yield has shot up by 80bp since the start of October) and bank stocks. The market reaction is showing a good resilience of the Italian BTP with a widening of only 7 bp for the 10y.”

“No”/What’s next? scenario

After the “No” vote, what happens to Italian assets will depend mainly on three factors:

• Whether Matteo Renzi is called back by President Mattarella;
• Newsflow out of banking sector (recapitalisation of MPS/Unicredit’s restructuring plan);
• Validation or rejection of Italicum by Constitutional Court in January 2017.”

“In this context there are three possible outcomes: 

• Matteo Renzi stays (20% probability): this scenario is unlikely given the crushing victory of the “No” vote, but given current strains on Italian assets, one cannot totally rule out the possibility Matteo Renzi will stay on. Matteo Renzi resigned but will then be called back by President Sergio Mattarella on the view that only he can govern, steer the banking sector out of harm, and possibly head off M5S. Matteo Renzi would then form a new government (Scenario 4). Note that if Matteo Renzi stays on, he would likely be able to drag it out until the February 2018 elections.
• Formation of a government of technocrats (70% probability): this scenario supposes that Matteo is out. President Mattarella would then designate a person agreeable to the PD and capable of securing the confidence of centrist parties. Enrico Letta could be the one most susceptible of winning a confidence vote as well as rallying the extreme left and right wings of the PD. Other names have been mentioned, notably Pier Carlo Padoan (current Economy and Finance Minister) and Pietro Grasso (chief of the Senate and member of the PD). A government of this type would be tasked with expediting current business and, especially, with drawing up a new electoral law if Italicum is validated by the Constitutional Court, this in preparation for the elections in February 2018. If the new government does not win the confidence vote, snap elections would be held in H2 2017 (Scenario 5a). This scenario is really only conceivable if Italicum is thrown out by the Constitutional Court in January 2017. Note that, for Italian MPs to be paid a full pension, they must serve a full term, which is a factor favourable to holding elections in February 2018.
• Snap elections in February 2017 (10% probability): this would clearly be the most unfavourable outcome (Scenario 1). It is also the least likely as it would require an immediate dissolution of Parliament by President Mattarella. As it would not be known what electoral law would apply if an election is held in February, it is unlikely that President Mattarella will run the risk before knowing the decision of the Constitutional Court in January.”