Italy Rejects Constitutional Reform

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As polls (and Standish) predicted last week, the Italian electorate comprehensively rejected Prime Minister Renzi’s proposed constitutional reform, with the NO campaign getting 60% of the vote share. Record high turnout of close to 66% underlined the strength of feeling towards the current administration. Prime Minister Renzi quickly and graciously admitted defeat and characterized the high turnout as a strong demonstration of democracy.

Election Aftermath

Renzi is expected to tender his resignation to the President later today. This is likely to be accepted, with the Partito Democratico (Democratic Party) party set to meet tomorrow to announce their caretaker prime minister candidate (with Finance Minister Padeon the most cited name, but other ministers are just as likely). It’s important to note the use of the word ‘caretaker’ rather than ‘technocrat’, as a technocrat like previous PM Mario Monti is unlikely to be accepted by the Partito Democratico or even the electorate.

Risk of Snap Elections is Low

Recent statements suggest that Berlusconi’s Forza Italia party would support a caretaker prime minister from Partito Democratico, either formally or informally. The 5 Star Movement and Lega Nord are calling for early elections – and while the scale of Renzi’s defeat is larger than expected – such calls are unlikely to be heeded given the upheaval in the electoral system. Given the last constitutional reform Parliamentary Bill took PM Renzi 16 months to push through Parliament, any reforms undertaken by a caretaker government could be delayed almost until to the scheduled date for Parliamentary elections in May 2018. Even if the caretaker government was able to push through reforms more quickly, early elections are unlikely to take place before mid 2017.

Electoral Reform

The Constitutional Court is expected to rule on the electoral law for the lower house sometime before Christmas. Since they have already rejected the electoral law for the upper house, they are expected to do the same for the lower house. This will be important in determining the mandate of the caretaker government, which will focus on electoral reform rather than the banking system.

Market Reaction

On the London open, the Euro has retraced much of its weakness seen in light Asia trading hours with peripheral Eurozone government bonds opening up in an orderly fashion (with Italy and Portugal around 5 bps wider than Germany – in line with our expectations of a narrow NO vote).

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