30 Nov 2016

Italian referendum: implications of a ‘no’ vote

Philip Shaw

Chief Economist

Italy is set to hold its Constitutional referendum this Sunday (4-Dec). It is actually far more wide ranging than many people believe.

Constitutional referendum: What is it?

  • Whilst the reduction in the number of Senators from 315 to 100 is a major part and the most widely publicised part of Renzi’s plans, the reform actually seeks to change a third of the 139 articles of the Italian Constitution. Including the movement away from a bicameral system, in that the Senate would only be required to vote on special procedures- laws affecting the constitution and the EU. A recentralization of power away from regions is also included.

  • In terms of the polls a two week blackout period has come into effect, but of the last few polls recorded the ‘No’ vote was leading by 8% on average.

What happens if Renzi loses the referendum?

Should the Italian people vote ‘No’ in the referendum the big question will be whether Matteo Renzi remains Prime Minister. He had previously stated that he would step down if there was a ‘No’ vote, but his stance on this has varied over recent months, most recently again suggesting he will step down. In terms of possible paths there are a number of options:

  •  Renzi remains in power despite the loss?

  • Technocratic government - President Sergio Matterella could ask Renzi to stay in his post either at the head of the current government or a technocratic one, although on the latter he has stated that he would not. Another option would be for the President to invite another candidate to head a technocratic government to push forward electoral reform (Italicum- see below) ahead of a possible early election. This would be a similar situation to 2011, where Mario Monti was invited to form a new technocratic government following Silvio Berlusconi’s resignation. Should a technocratic government be appointed, one name that has been mentioned for PM is Finance Minister Padoan.

  • PD (Democratic Party) Vice-President Lorenzo Guerini has stated that if there is a ‘no’ vote the party would seek early elections in the summer of 2017 (the current parliament’s term ends in 2018). The latest polls have shown the PD running with a 4-5% average lead (33%) ahead of the 5* party (27%). One thing touted in some media reports is that Silvio Berlusconi could make a return, with Forza Italia willing to support the government in order to keep 5* out of government (apparently Berlusconi’s big concern).

  • Electoral law - Italicum: In addition to the referendum itself there is another major political question mark over changes to Italy’s electoral law. In 2015 Renzi was able to push through an electoral law, known as Italicum. This law effectively regulates the election of the Lower House (Chamber of Deputies), by attributing 617 of the 630 seats. Through a two round system the wining party will win a ‘majority bonus’ taking 340 seats (54%). This law has however come in for criticism, that this combined with the Constitutional reform plan places too much power in the hands of the PM and has stirred some concern among the PD that this could fuel support for 5*. Renzi has stated that he would consider reforms to the electoral law in particular that a coalition could receive the majority bonus. As stated above, reforming this law could be a task undertaken by a technocratic government ahead of early elections.

  • 5* - One concern among some is that a ‘no’ vote, resulting in possible early elections could give further rise to the 5* party. As above 5* lags the PD by around 5% in the polls, but as recent results have shown polls may not be entirely accurate. The most concerning 5* prospect is its desire for a referendum on the euro. Whilst this prospect may generate media headlines, it is worth considering a number of points.

  • Firstly, any attempt to hold a referendum on euro membership is likely to be fraught with constitutional hurdles. Under Article 75 of Italy’s constitution, referendums on international treaties are effectively banned. As such even a referendum on the euro may require a constitutional amendment, which would need to be approved with a 2/3 majority in both houses and possibly with a requirement for a referendum itself. Plus the risk that it may be blocked by the Constitutional Court.

  • Secondly, even if it was possible to hold a referendum on euro membership, the most recent poll has shown Italians overwhelmingly in favour of remaining part of the Eurozone. A poll conducted this month by La Stampa had 67.4% in favour of remaining a euro member.

  • Banks: Market concern has once again focused on the Italian banks and their prospects following a possible ‘no’ vote; the FTSE MIB bank index is down 48.3% since the start of the year. Concern seems to centre on banks’ ability to address non-performing loans and capital, particularly in light of heightened market volatility which could hinder institutions’ ability to shore up their balance sheets privately. This is a factor given the restriction placed on state aid for banks given BRRD (Bank Recovery and Resolution Directive) rules introduced this year.

  • Monte Dei Paschi Di Siena - remains a primary concern. On the 25 November the Board approved a €5bn capital raise, which coincides with a debt-equity swap and a plan to remove €27.1bn of NPLs from its balance sheet. The various parts of the capital raise are scheduled to be completed by 31 Dec 2016. The big issue is that the capital raise itself is reportedly lacking serious interest, while it is also dependent on the various other parts being completed (the debt swap needs sufficient support of bond holders to agree, whilst the pricing of NPLs is seen by many as above market value and may hamper their securitisation). A failure of the MPS capital raise would be an ominous sign for Italian banks and their ability to raise capital privately if required and hence likely fuel further negative sentiment.

  • Unicredit - Reports seem to be swirling about a possible €13bn capital raise from Unicredit, possibly to be launched in Feb-2017. As of the end of 2015 Unicredit’s CET1 stood at 10.6% and was expected to stand at 11.6% in 2018 under the baseline scenario in the EBA’s 2016 stress test, around the average for the large European banks, but the worst of the 4 big Italian banks. However, given falls in the share price and NPL concerns the bank is supposedly under pressure to shore up its position. A new business plan is due 13-Dec.

  • In terms of the large Italian banks they generally remain relatively well capitalised, with the only one to fail the EBA’s 2016 test being Monte Dei Paschi Di Siena. The situation with the many smaller banks may however be a less positive read and remedying individual issues may prove to be more difficult following the referendum. For example the situation with the 4 banks bailed out in November 2015 has still not been finalised.