Sunday December 4th, Italians will go to the polling stations to vote on a constitutional reform. Most media outlets call it an ‘Italexit vote’, but that’s not really true. Italy will NOT be voting about staying in or leaving the European Union, but will merely vote on the new ‘Italicum’, the country’s electoral law.

The updated Italicum would tackle several key weaknesses in Italy’s political structure, and would this improve the stability in the country. The power of the senate and the regions would be decreased, whilst the central government in Rome would gain strength. So basically, what’s at stake during Sunday’s poll is whether or not the Italian population agrees to give the reigns back to the Italian central government.

The proposed Italicum gives the winning party of future elections an immediate ‘bonus’ to ensure it has a majority in the parliament (340 seats of the 630 in the lower house, the ‘Camera dei Deputati’). That’s a bold move as it would allow a winning party to push forward with its own agenda without getting too much opposition from non-governing parties, and this in fact does sound a little bit like Germany in the thirties when the largest party, but this basically isn’t much different from the British system, or even the American system using the ‘winner takes all’-system in the states.



So technically, whilst potentially dangerous, the advantages of the Italicum are more important than the potential disadvantages, as the Italian political system has historically been very unstable. That’s obviously negative in volatile times as it limits the government’s possibilities to act swiftly in case unpopular measures (like saving the banking sector) will have to be taken. Basically, the poll is about a constitutional reform, but stupidly enough, prime minister Renzi made the same dumb mistake David Cameron did.

Instead of considering the referendum to be what it is, literally asking the population for the approval of just another law, Renzi connected his personal fate and the fate of his government to the outcome of the referendum. Cameron did the same thing with the Brexit vote. He was so certain the NO-camp would win, he personalized the poll and was expecting to be stronger in the saddle after the Brexit referendum.


Source: Danske Bank

Not only did he completely fail, Renzi is doing the exact same thing. Renzi explicitly said he would resign in case the outcome of the referendum would be a ‘no’. He also seems to be pretty certain (at least, he was when he called the vote), but this political move might actually completely blow up in his face, as the no-votes are leading the polls (and since it started to look like the Italicum would not be approved, Renzi has been trying to backpedal the connection between his resignation and the outcome of the referendum).


Source: Danske Bank

In any case, the image above (courtesy of Danske Bank) shows the flow chart of what will happen once the poll results are in. A snap election was likely, but is now uncertain as Renzi has been retracting its previous statements about resigning.

The ECB is bracing for impact

Anyway, the Italian financial sector is keeping its fingers crossed for a YES-vote, as a NO would put the country once again in political distress, and that’s definitely a huge issue for Italy, whose banking sector is in dire need of substantial reforms and recapitalization.

Unicredit will announce its recapitalization plans a week after the Italicum-poll, and will need to raise approximately 10-13B EUR, whilst Italy’s oldest bank, Monte dei Paschi will also require a multi-billion euro cash infusion, and in a new update of its recapitalization document which warns for a negative outcome of the poll, there were no less than 30 warnings about a ‘bail-in’.

A NO-vote would include substantial risks for the financial system, and the timing of the poll might be ‘perfect’ for the ECB to extend its ‘free money policy’, as the board of the European Central Bank has scheduled a meeting to take place on December 8th. ‘A combination of polity tools’ is being considered, but there’s little doubt the asset purchase program will be extended, as that could allow the markets to (partly) take care of the Italian problem.

Source: Danske Bank

A NO-vote will very likely cause the interest rates on the Italian government debt to spike, and it will be very interesting to see if the ECB adds more Italian debt to its balance sheet as part of the asset purchase program. If it doesn’t want to interfere, everything might start to spiral out of control really fast.

Don’t wait for a bail-in to happen. Read our Guide to Gold right now, and sleep well at night.