Referendum on December 4th Could Decide The Fate of The Euro

“In contrast to the U.K.’s EU referendum, or the USA elections, where the results were a surprise, the markets are likely to be much better prepared for a negative outcome this time around”, said Mislav Matejka, J.P. Morgan’s chief European equity strategist, in a note.

ROME Italy’s constitutional reform referendum on Sunday could lead to the resignation of Prime Minister Matteo Renzi, trigger renewed turmoil in the country’s battered banking sector, and push the euro zone back towards the edge of crisis.

“Four million people who have a right to vote and who live overseas all of a sudden have become very important, because they could possibly determine who wins this referendum”.

“We made a mistake in personalizing this reform”, said Matteo Richetti, a PD lawmaker close to Renzi.

He says the changes are long overdue.

The premier stopped short of saying explicitly he would quit if he loses, saying: “Politics isn’t the only thing that counts in life”.

Kathleen Brooks, research director at City Index Direct, said: “Italian banks are in bad shape, and had been subject to a bailout plan agreed by Renzi’s government”.

The prospect of an adverse outcome from Italy’s constitutional referendum on Sunday has rattled global trading at the start of this week.

A Demos poll has revealed Mr Renzi’s reforms will be rejected by an 11 percentage point margin in the south of the country – where most of the poorest regions are located – compared with a seven-point margin across the country. Investors are anxious that if PM Renzi resigns, his proposed bank bailout may be scrapped, leaving the Italian financial system facing heightened risks.

“If a “no” vote wins, everything remains as it is”, Mr.Renzi said in a radio interview this past week.

In its twice yearly Financial Stability Review, the European Central Bank stated “elevated geopolitical tensions and heightened political uncertainty have the potential to reignite global risk-aversion and to trigger a major confidence shock”.

Renzi says the reforms will make the government more stable and efficient.

But that could also bring forward parliamentary elections now slated for 2018.

In fact, the best defence against “Italexit” and the Five Star Movement may be the same legislative sclerosis Renzi wants to eradicate.

These lenders desperately need new investment, but a rejection of these key reforms could lead to an Italian banking collapse that sends shockwaves across the continent as the first eurozone crisis did in 2009.

Italy’s December referendum vote could help solve certain structural issues hindering the country’s economic growth. With 5-Star polling at about 30%, it has a chance at leading a new government.

In the past, Five Star’s Grillo has called for a referendum on whether Italy should keep the euro, and to reconsider the country’s role in the EU.

She said: “In Italy, this would represent a robust endorsement of the current coalition’s ambitious programme of reform”.

Italy’s 10-year bond yields IT10YT=TWEB stand at 2 percent, the highest level in more than a year but nowhere near the 7 percent level that prompted emergency European Central Bank purchases in 2010-11 and eventually led to the resignation of Prime Minister Silvio Berlusconi.

Italy’s 10-year yield, for example, touched a high of 2.16 percent on Friday and the spread to German equivalents hit 190 bps mark, the highest closing level since May 2014.

In this case, watch the banks as the outlet for investor fears – even though the banking sector is already down 48 percent so far this year. United Kingdom 10-year yields were also down by nearly 10 basis points to 1.24%.