Editorial & Advertiser Disclosure Global Banking And Finance Review is an independent publisher which offers News, information, Analysis, Opinion, Press Releases, Reviews, Research reports covering various economies, industries, products, services and companies. The content available on globalbankingandfinance.com is sourced by a mixture of different methods which is not limited to content produced and supplied by various staff writers, journalists, freelancers, individuals, organizations, companies, PR agencies Sponsored Posts etc. The information available on this website is purely for educational and informational purposes only. We cannot guarantee the accuracy or applicability of any of the information provided at globalbankingandfinance.com with respect to your individual or personal circumstances. Please seek professional advice from a qualified professional before making any financial decisions. Globalbankingandfinance.com also links to various third party websites and we cannot guarantee the accuracy or applicability of the information provided by third party websites. Links from various articles on our site to third party websites are a mixture of non-sponsored links and sponsored links. Only a very small fraction of the links which point to external websites are affiliate links. Some of the links which you may click on our website may link to various products and services from our partners who may compensate us if you buy a service or product or fill a form or install an app. This will not incur additional cost to you. A very few articles on our website are sponsored posts or paid advertorials. These are marked as sponsored posts at the bottom of each post. For avoidance of any doubts and to make it easier for you to differentiate sponsored or non-sponsored articles or links, you may consider all articles on our site or all links to external websites as sponsored . Please note that some of the services or products which we talk about carry a high level of risk and may not be suitable for everyone. These may be complex services or products and we request the readers to consider this purely from an educational standpoint. The information provided on this website is general in nature. Global Banking & Finance Review expressly disclaims any liability without any limitation which may arise directly or indirectly from the use of such information.

WHAT DOES A ‘NO’ VOTE MEAN?

Jaisal Pastakia, Investment Manager at Heartwood Investment Management

In all probability the Italian electorate is likely to reject Prime Minister Renzi’s proposals for constitutional reform. Essentially, Renzi wants to reduce the power of the Senate – the upper chamber of parliament, allowing for smoother implementation of legislation and potentially a more stable political system. However, the referendum has turned into a vote on Renzi himself, whose popularity has taken a sharp dip since his election in September 2014.

A ‘no’ vote will reduce hopes of advancing the structural reform agenda, resulting in weaker growth for an already struggling economy. Italy’s growth rate in 2016 has been one of the weakest among its euro peers, weighed down by high unemployment rates and a stalling credit cycle. Loan growth has fallen back into negative territory and demand is expected to be further constrained by tighter credit standards for both mortgages and corporates.

Economic confidence relies on a healthy and functioning banking system. Italian banks’ ability and willingness to support investment remains a key headwind to economic growth, given high levels of non-performing loans (NPL). There have been some improvements to asset quality, but stronger growth is vital to avoid any further increase in NPL stock and support the drive to improve banks’ capital buffers and future profitability.

In addition, Unicredit and Monte di Paschi plan to raise capital in December and these events will be another key gauge of investor sentiment. In the short term, we are likely to see further risk aversion in Italian assets, particularly bank shares. However, it may not be all bad news. European Union rules prevent any state intervention to support the banks unless their capital ratios fall below a certain level. If we were to see a significant fall in bank shares, then the negative impact on capital buffers would probably allow for government support, which would be a longer term positive to restoring the health of Italy’s weak banks.

More broadly, we expect the political fallout to be contained. Even if Renzi resigns, recent history suggests that there is more probability of a technocrat government being installed. If a general election were to happen, the likelihood is that it would result in a fragmented coalition government that would find it difficult to pass legislation, owing to the very parliamentary system that Renzi is trying to reform.