Italy: Political fallout of the referendum – Goldman Sachs

Francesco Garzarelli, Research Analyst at Goldman Sachs, currently put the odds of a ‘Vote No’ victory at 55% in the upcoming Italian referendum, up from the 50% probability assessed previously.

Key Quotes

“The corresponding 45% chance we assign to a ‘Yes’ outcome is materially higher than what opinion polls imply. The main reason why our subjective probability is high is because we calculate that, if all undecided voters do cast their ballot, only 60% of them voting in favour would be required to swing the vote to the ‘Yes’ side. This does not seem to be a tall order (if, instead, only 55% of those undecided were to vote, in line with the predicted overall turnout rate, the required percentage voting ‘Yes’ would need to rise to 70% for the reforms to go through). We also take into account the fact that, historically, the turnout among young people has been materially lower than that for the broader electorate.”

“If the ‘Vote No’ camp prevails (55% subjective chance), Mr Renzi would most likely formally tender his resignation to the President of the Republic. From there we see at least three main possible course of events:

A caretaker government is appointed (45%): The most likely scenario, in our view, is one where Mr Renzi steps down to deflect the political fallout on those who have not supported the government and to prepare for the next general elections. In this case, the Democratic Party and centrist political formations would back an interim coalition government led by a political figure drawn from their ranks (we do not see a technocrat being appointed as this choice would likely be unpopular). The new government would likely have a limited policy agenda consisting mainly of: (i) overseeing the recapitalization of the partly state-owned Monte dei Paschi de Siena and potentially other smaller banks; and (ii) re-drafting the electoral laws for the two Chambers of Parliament ahead of a general election in the Spring of 2018.

Mr Renzi carries on (35%): If the share of the ‘Yes Vote’ is sufficiently high (i.e., greater than 45%; assuming a turnout of 55%, this would equate to around 12 million votes), Mr Renzi could claim that his personal support is higher than that of his detractors on the centre-left. This may allow him to retain a majority in Parliament, probably after a reshuffle of the Cabinet. We see this as the secondmost-likely outcome. The agenda of a ‘Renzi-2’ government would not be materially different from that of the interim government: to oversee the recapitalization of banks and the re-writing of the electoral laws. 

Early general elections (20%): The political fallout from the vote could be bad enough to lead to early elections in 2017. We see this outcome as quite unlikely as Parliament would still need to redraft the electoral laws, and material market turbulence would suggest that it would be appropriate to postpone the polls. The vote would come in the second half of the year at the earliest.”