Contagion risk
This leaves the question how big the risk is that the Italian misery will spread to other peripheral countries in Europe. While it won’t take much to spark a crisis, as we saw in 2011, the difference is perhaps the “Draghi-put”. “The muted reaction of equity markets to the vote could be interpreted as an expectation of the ECB announcing extra stimulatory measures [on its board meeting] on Thursday,” says Viviani (pictured right). Karni also believes that the constitutional referendum and the ECB meeting should be considered a “combined event”.
Obviously, most investors seem to consider the Italian problem as one confined to Italy. However, the country risks ending up in a vicious circle, if it’s not already in there. “In the medium term Sunday’s outcome will make it increasingly difficult for Italy’s ailing banking system to recapitalise itself,” says Stephan Isaacs, deputy head of retail fixed interest at M&G. “This will in turn continue to weigh on economic growth and continue to raise doubts about the long run sustainability of Italy with the current EU framework. We do not believe current valuations adequately compensate investors for the risks involved and therefore remain cautiously positioned.”
Italy’s rejection of PM Renzi, who rather ironically was voted in a couple of years ago thanks to a strong reform agenda, will reinforce the status quo, making it unlikely Italy will emerge from the vote economically stronger.
As more and more Italians come to realise that their economy has actually stopped growing in the same year as it adopted the euro, 1999, calls for a referendum on euro membership will increase. However, and again rather ironically, the very rejection of constitutional reform by the Italians has made it less likely that a necessary referendum law will ever pass both houses of parliament.
