Italian Referendum: Back to Politics as Usual in Italy

Italian Referendum: Back to Politics as Usual in Italy

With around 60% of voters opting for a “no” and nearly 70% turnout, Italians on Sunday firmly rejected a constitutional reform that would have removed power from the Senate and left the lower house as the key legislative chamber. The proposed reform was one of the flagship measures of Prime Minister Matteo Renzi, who resigned from his post shortly after the result.

Market implications

The referendum result at the margin is negative for Italian and European risk assets, as Italy has lost an opportunity to make its political system leaner and more conducive to reforms. In addition, Renzi’s resignation will likely prompt greater political uncertainty that could complicate Italy’s ongoing bank recapitalization efforts.

But we should not overplay the significance of the vote. First, a “no” result was largely expected by investors, as confirmed by the muted market reaction following the vote. Second, following Renzi’s departure we expect to see a transition government tasked with changing the existing electoral law (currently inconsistent between the two legislative chambers). The new system is likely to be proportional and could facilitate the formation of grand coalition governments which leave anti-establishment parties in opposition. Third, the European Central Bank (ECB) remains in play in European sovereign markets; its monetary policy tools provide some reassurance for investors through periods of higher uncertainty.

Key risks to the baseline: Italy’s banks

The main risk to our otherwise balanced outlook is that sentiment deteriorates significantly on Italian banks, infecting other risk assets. The key near-term hurdle is the recapitalization of Monte dei Paschi; its failure would be a setback in the ongoing restructuring of the Italian banking system.

Next steps

As the next step following the referendum and Renzi’s resignation, Italy’s President Sergio Mattarella this week will be conducting consultations to seek to form a government, headed by a political or technocratic figure. A new government is likely to be in place in coming weeks.

From an investment perspective, our stance remains fairly neutral on Italian sovereign bonds at current levels.

Nicola Mai is a portfolio manager and leads sovereign credit research in Europe. He is a regular contributor to the PIMCO Blog


PIMCO’s industry-renowned experts analyze the world’s risks and opportunities, from global economic trends to individual securities.


By Month



All investments contain risk and may lose value. Investors should consult their investment professional prior to making an investment decision. This material is intended for informational purposes only. Forecasts, estimates and certain information contained herein are based upon proprietary research and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission. PIMCO is a trademark of Allianz Asset Management of America L.P. in the United States and throughout the world. THE NEW NEUTRAL is a trademark of Pacific Investment Management Company LCC in the United States and throughout the world. ©2016, PIMCO