Banks Take Italian Referendum Risk In Their Stride

Italian Sovereign bond yields have been trending higher ahead of the referendum on Sunday which may decide the fate of Renzi, the reforming Prime Minister. They are currently showing that ‘No’ is ahead by 5-7 points, but this is a year when political polls have been proven wrong more than once.

Although Renzi’s reforms are aimed at breaking political deadlocks, they are viewed by many as a centralisation of power which actually favours the status quo. This is one reason why the populist 5 Star party has been able to raise its profile and gather support for a manifesto which includes an EU membership referendum. Bond and CDS markets are currently focused on that possibility; but even if Renzi loses, Italy’s political future has a number of possible paths and most of those involve a some form of coalition. There is some way to go before 5 Star are in a position to force an EU vote

Crowd-sourced credit data suggests that the banks are taking a relaxed view. It indicates that the risk of Sovereign default trended higher in late 2015 and early 2016, but it peaked in summer and has been in gentle decline ever since.

Italian politics has a habit of confounding forecasters. Banks appear to be taking the view that even if Sunday’s vote is the expected ‘No’, the EU is likely to include Italy for some time yet.

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