Italy’s referendum on constitutional reform next Sunday (December 4th) could be a make or break moment for the euro and the Eurozone.

The final polls before a two-week blackout show the No camp in the lead – the implications for the financial system and markets should not be underestimated.



Italy failed to clean out its banks post-Lehmans and there is trouble brewing with about €400bn in non-performing loans, which amounts to about a third of all the Eurozone’s bad debt and about a fifth of all consumer loans in Italy.

Worries about the banks have led the Italian stock market lower. UniCredit, Italy’s only globally systemically important bank, is down two-thirds in the last 12 months, while the benchmark Italy 40 index has dropped by a third since its August 2015 highs.

But the worst affected is Banca Monte dei Paschi Siena (BMPS), which has lost around 80% of its value this year.


The task for the bank is huge. It has to raise about €5bn and shed €28bn in bad loans by the end of the year. Achieving this is hard enough as it stands now; a No vote in the referendum would kill any chance to raise external capital. Shareholders have approved the plans but the referendum could derail the process. If Yes comes through, it’s thought that Qatar could stump up €2bn to build ties with the Italian government.

According to Deutsche Bank, if there is a No vote a slide in banking shares could send the FTSE MIB index down 6% in 2017.



The biggest trade for the Italian referendum is the euro. EURUSD has been crushed by expectations of monetary policy divergence. The dollar has hit 14-year highs as markets bet on the Fed hiking rates in December.


The issue for the euro is political risk – if there is a No vote we might have political chaos in Italy and surge in support for the anti-establishment parties, who could press for Italy to leave the Eurozone. 

While that may be at the extreme of the outcome spectrum, the risk and uncertainty would almost certainly heap pressure on the euro. The question for traders is whether a NO vote is already baked into the price.

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