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Published: Sat, November 26, 2016
Business | By Patricia Jimenez

The next populist shock may be Italy's Dec. 4 referendum

The next populist shock may be Italy's Dec. 4 referendum

Renzi has faced growing pressure ahead of the December 4 referendum on which he has staked his political future, and the anti-austerity budget is seen as a bid to galvanise support for his planned political reforms. Brought by former constitutional court judge Valerio Onida [official website, in Italian], the challenge alleged that grouping referendum topics into one yes or no question was improper.

Italian stocks have lost almost a quarter of their value this year, and government bonds are also under attack, as the nation nears a referendum that, if the polls are correct, could prompt Renzi to quit, his government to crumble and the euro to take a hit. He'll also have a chance to sit at the table with Germany in an effort to break a more advantageous deal aimed at easing the stringent austerity measures imposed by the the EU Commission to boost the stagnant Italian economy.

By Mark Gilbert In less than two weeks, Italians will vote in a referendum on whether to change the nation's constitution. An election victory by the Five Star Movement is seen as a long shot, but in a year in which Britain voted to leave the European Union and Donald Trump won the USA presidency as an outsider, Europe is bracing for another potential shock.

What's more, the momentum created by the unexpected outcomes of Britain's European Union referendum and U.S. election could help the Italian public to envisage a similar rebellion happening in their own country. But regular elections would be held in 2018 in any case.

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While most analysts believe that some form of cut will be agreed, it is uncertain whether it will be enough to prop up a market that has been dogged by a supply overhang for more than two years, according to the International Energy Agency (IEA).

On this basis, it is possible that a scenario could evolve in which the referendum could lead, via a sequence of steps, to Italy exiting the Euro. Unsurprisingly, the Italian stock market is down by about 20 per cent year to date, the most of any European index. Renzi says the reason no government lasts is because there are too many politicians and with too many politicians, very little can get done, he says.

The problem, as Marco Travaglio, a leading independent journalist and editor in chief of the fiercely anti-establishment newspaper "Il Fatto Quotidiano", puts it, is that those who will compose the reformed upper chamber represent "the most corrupted section of the Italian political body" often involved in corruption scandals, pointing out that even the trustworthy ones will not be able to serve both mandates effectively. Italy's benchmark 10-year bond yield, which rose above 2 per cent this month for the first time since mid-2015, is at 2.07 per cent. He said they are voting in favor of the proposal because they want "to protect their investors and shareholders". And now, if markets start to become concerned about euro-area risk, it will affect not just Italian spreads but the spreads on government bonds in general. "That would be like buying a lottery ticket", said Gilles Guibout, AXA's head of European equity strategy, explaining that the banks' outlook was not all doom and gloom. Credit default swaps have increased in cost to insure the event, but some investors point to the positive equity market outcomes in the wake of Brexit and the Trump election.

The eurozone could be in for a rough few months.

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