(Repeats with no change.)
By By James Saft
Nov 29 Italy's Sunday vote on government reform
will likely be 2016's third major victory for anti-globalization
It may also be unlike the U.K. Brexit vote or the U.S. Trump
presidential victory in that it will not be a surprise but
financial market reaction will be worse than expected.
Prime Minister Matteo Renzi's package of constitutional
reform, which would centralize power, looks set to get the
thumbs down from Italian voters December 4, an outcome he has
said he would meet by resigning.
That could impede recapitalization efforts by a group of
enfeebled Italian banks, notably Monte dei Paschi di Siena
, and provide an opening for euro-sceptic political
parties which polls show already garner the support of 44
percent of voters.
In turn that could give the European Central Bank reason to
re-think if and how it might honor its "whatever it takes"
pledge to defend the euro as an institution.
As once-in-a-generation revolutions against economic and
political orthodoxy go, 2016 has been a remarkably benign period
for investors and financial markets.
That's especially true given that, unlike the fall of Soviet
power in the 1990s, this year's backlash implies barriers to
trade, higher inflation, and lower growth.
The FTSE All-World Index of stocks is marginally higher than
where it began the year, U.S. stocks are at all-time highs and
the recent sell-off in bond markets seems to have spooked few.
That may be because the reality of pre-exit Brexit is by
nature less painful than the long term implications. It may also
be because Trump's plans are seen as good for financial
intermediaries and risk given the gamble for economic growth.
Still, while the Italian vote has little of the shock and
awe of the other two, and has drawn fire from prominent
defenders of the existing order for not going far enough, a "no"
vote does have the potential to ignite the kind of brush fire
which spreads in dry weather.
"The political atmosphere isn't getting any less fraught. In
many parts of Europe, we see widespread dissatisfaction with
globalization, the rise of populism, and a frustration with
incumbent politicians. The consequent rise in popularity of
anti-elitist politicians is gaining ground with unpredictable
consequences," Colin Moore, global chief investment officer at
Columbia Threadneedle Investments wrote in a note to clients.
CENTRAL BANKS TO YIELD THE FIELD
In the event of a "no" vote, the immediate issue is who
governs Italy and under what mandate.
Deutsche Bank analysts argue that a "muddle-through"
compromise is one strong possibility, with or without Renzi.
In either case the likely outcome would be another attempt
at electoral reform next year but little progress on the
fundamental economic issues, thus potentially increasing the
popularity of the broad array of parties who object to the euro
Even more upsetting would be a call for an early election,
maybe early in 2017 which could lead to a non-binding referendum
on support for the euro itself.
Note that spreads of Italian 10-year government bonds over
German peers were at about 190 basis points on Monday, the
highest such premium investors have demanded for more than two
This is not the kind of backdrop you want if many of your
banks are seeking to raise capital, and some of which may
otherwise need to seek government support which could trigger
politically painful losses among bondholders, many of whom are
small retail Italian investors.
Also of concern is the way in which all of this could serve
to sideline the European Central Bank, the one European
institution which has moved both with dispatch and great effect
at times of crisis.
"The rise of euro-sceptic parties could prevent the
pro-active use of the ECB's OMT - Draghi's 2012 "whatever it
takes" - in a post-QE world," Marco Stringa and Simon Carter of
Deutsch Bank wrote in a note to clients.
The ECB's Outright Monetary Transaction program, which
provides for buying bonds, has been in part predicated on
cooperation towards what it views as reform. Discussing euro
exit from a position of political power might not be viewed
inside the ECB as consistent with reform.
This makes an interesting parallel with the way in which the
advent of Trump as U.S. President-elect seems to have
transformed the role of the Federal Reserve.
While the Fed two weeks ago was seen as a safety net, the
implication of Trump's taxing and spending plans, if
implemented, is that the Fed will now tighten monetary policy
In other words, the former savior could become a purveyor of
Central banks tried to save globalization from itself in the
wake of the 2008 financial crisis, but once it begins to unravel
they may be of less use.
(At the time of publication James Saft did not own any
direct investments in securities mentioned in this article. He
may be an owner indirectly as an investor in a fund. You can
email him at email@example.com and find more columns at blogs.reuters.com/james-saft)