The Italian referendum has been the third electoral outcome of the year, after Brexit and Trump, to impact global markets. The euro has fallen to a 20-month low, not because the voters rejected the constitutional reform but because they overwhelmingly turned against the stable pro-EU government under PM Renzi. This is a clear vote of no confidence towards the government and its policies, which also now hinders any possibility of a banking reform which the country desperately needs.
The Italian banking stocks have opened 4-5% lower and the single currency experienced its largest single-session drop since Britain’s Brexit vote six months ago, retesting a 2015 low of $1.045 before pulling back a little to just over $1.05. The political crisis and the further fall in the share prices will make the difficult task of re-capitalising the banks almost impossible. Under the current scenario, a banking crisis looks almost inevitable and this will be a serious test to the ECB and the euro.
Another threatening factor is this defeat being projected as anti-establishment and centrism, and possibly enabling the rise of far right eurosceptic political outfits in Italy. Such a scenario will potentially fuel anti-euro sentiments in the country and across the region which may even grow further to collapse the European market of free movement of goods, services and people. Europe’s political elites were able to draw some consolation from the Austrian electorate’s rejection of the far right in the country’s parallel presidential contest, however at the moment, investors are likely to focus on the impact on the bailout of Beleagured bank Monte Dei Paschi and the perilous state of Italy’s banking sector balance sheets.
Mihir Kapadia is CEO and founder of Sun Global Investments