Markets take Renzi´s defeat in their stride

Both the euro and Italian banking shares have rallied from early losses after Italy´s voters rejected the constitutional reforms proposed by prime minister Matteo Renzi.

Renzi tendered his resignation after the referendum results suggested that around 60% of voters had voted `No´ to the reforms and only 40% supported them. The turnout was nearly 70%. The prime minister said that he took responsibility for the outcome and would submit his resignation to the Italian president.

Renzi wanted to alter the country’s cumbersome political system by strengthening central government at the expense of the Senate, the upper house of parliament. However, opponents and also some within his own party argued that the changes would give the prime minister too much power.

Political analysts now expect Renzi’s administration to be replaced by a caretaker government dominated by his Democratic Party, which will continue in power until an election, which is due to be held by the spring of 2018.

Economic reform in Italy is likely to be further delayed. Growth has been negligible since the end of the Nineties and the country´s performance since the 2008 financial crisis is the worst in the eurozone after Greece.

The referendum result also revives concerns over how the bad debts at some of Italy´s biggest banks will be resolved; in particular the world´s most oldest operating bank, Monte dei Paschi (BMDPF), which needs a €5bn capital injection after failing a test of its financial health earlier this year.

A new political storm… could unleash financial market volatility at a time when Italian banks need to raise capital to cover losses from fresh write downs and planned bad debt disposals,”wrote Raj Badiani, senior Italian economist at IHS Insight.

UniCredit confirmed that it is in exclusive talks to sell its asset management arm, Pioneer Investments to Amundi of France, which has offered more than €3.5bn according to reports.

The bank is also scheduled to announce a strategic plan next week, which could include a share rights issue of up to €13bn.

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Mark Carney Bank of England