special report italy: what if matteo renzi lost the referendum on the

ITALY: WHAT IF MATTEO RENZI LOST THE
REFERENDUM ON THE SENATE?
SPECIAL REPORT
27 July 2016
Italy: "What will you vote for the Constitutional
referendum in October?" (%)*
80

Italian political risk could make a comeback for the first time in two
years. In October, a referendum on the constitutional Senate reform will
be held in Italy. This reform, the flagship of Matteo Renzi’s programme, will
lead to a profound change in Italy’s institutional organisation with a view to
improving its governability.

Prime minister Matteo Renzi sees it as extremely important, to the point
that he has already announced that he would resign and retire from
political life in the event of a victory for the "no" side. The "yes" and "no"
sides are neck-and-neck according to the most recent opinion polls. There
is, accordingly, a real risk that the referendum may fail, that Matteo
Renzi is forced to resign and that a new period of major political
uncertainty starts in Italy.

In anticipation, we have therefore decided to play "What if?": how could
events unfold if the Italians decide to vote "no" to the reform or
"against Renzi" in October?
80
*Considering only "Yes"/"No" votes
70
70
60
60
50
50
40
40
Yes
No
30
30
20
a-16
j-16
j-16
a-16
m-16
f-16
j-16
m-16
Sources: Sondaggi Politico Elettorali, Natixis
20
Italy: Voting intentions for the second round of the
next general election at the Camera (%)
60
60
Democratic Party (Renzi)
58
58
Five Star Movement (Grillo/Maio)
56
56
54
54
52
52
50
50
48
48
46
46
44
44
42
42
40
a-16
j-16
j-16
a-16
m-16
f-16
m-16
j-16
d-15
o-15
s-15
a-15
j-15
j-15
n-15
Sources: Sondaggi Politico Elettorali, Natixis
40
Alan Lemangnen
Tel. +33 1 58 55 61 63
[email protected]
Study carried out with the participation of Thibault
Cézanne
www.research.natixis.com
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SPECIAL REPORT
The symptoms of political risk are clearly present in Italy
As we mentioned in our outlook for political risk in the euro
zone in 2016, the symptoms of political risk1 are clearly
present in Italy:
Chart 1A
Italy : voting intentions for the next general election
(%)
45
n-14
d-14
j-15
f-15
m-15
a-15
m-15
j-15
j-15
a-15
s-15
o-15
n-15
d-15
j-16
f-16
m-16
a-16
m-16
j-16
j-16
45
Others
Populist parties
20
15
15
10
10
5
5
0
0
In addition to these symptoms, there is a potential factor of
instability: Italy is in the middle of a major transition
towards a new institutional system. Last year, Matteo Renzi
managed to push through a new electoral law for the Chamber
which guarantees the majority of the seats for the party that
wins the election. The idea of this institutional reform is to
strengthen the country’s political stability. Out of the 36
governments Italy has had since 1972, only six have lasted
longer than one and a half years. Furthermore, the Italian
legislative process is among the slowest in Europe because the
two chambers have exactly the same power. But to succeed in
this overhaul, Matteo Renzi must still get the Senate to adopt
the constitutional reform, which aims to remove most of its
legislative powers and control over the government.
Accordingly, the executive would be guaranteed to be able to
govern for five years with the support of the Chamber, where it
would enjoy a majority thanks to the new electoral law. But
unless the Senate reform is adopted, the upper house will keep
all its powers and, above all, its current election procedure. This
is based on a pure proportional system by region, which makes
it very difficult to form a majority. If elections were to be held
without the reform being adopted in advance, Italy could
therefore easily become ungovernable again (for more detail,
see Special Report: "Matteo Renzi’s institutional reform: The
mother of all reforms in the parliamentary arena").
j-16
20
m-16
25
m-16
25
j-16
30
n-15
30
s-15
35
j-15
35
m-15
40
n-14
65
60
55
50
45
40
35
30
25
20
15
10
5
0
Sources : Datamedia, EMG, Winpoll, Natixis
40
Lega Nord
Forza Italia
FdI-AN
NCD-UDC
SEL
M5S
PD
*Democratic Party, Forza Italia, NCD-UDC and SEL
** Northern League, Fratelli d'Italia and M5S
Traditional parties
Erosion of Matteo Renzi’s legitimacy. With his reform
agenda, which is considered as (too) liberal, the prime
minister has alienated the left wing of the PD and its voters.
This explains the erosion of the party’s dominant position in
the polls, as well as the fragility of Matteo Renzi’s coalition
in Parliament. It is actually based on an alliance between his
party and several small centre-right formations (the PD by
itself does not have the majority in Senate or in the
Chamber, the lower house). Matteo Renzi has therefore
several times been forced to make the rebels on his left
aware of their responsibilities, staking confidence in his
government to push through reforms. But due to the decline
in his popularity and the defeat of the PD in the latest partial
municipal elections, Matteo Renzi now has much less
leverage over his majority.
m-15

Crisis for the traditional parties and rise of populism
(Chart 1A). Since 2013, Silvio Berlusconi’s party Forza Italia
(centre-right) has been in full decline, while many leftwingers are disappointed with the Democratic Party (centreleft) due to its shift towards the centre orchestrated by
Matteo Renzi. The flipside of this crisis among the traditional
parties is the rise of populism led by the Five Star
Movement (M5S), a catch-all party whose ideas stem from
the right as from the left of the political landscape, and
which recently has become the country’s largest political
force in the opinion polls. Likewise, on the right, the
Northern League is undergoing tremendous change driven
by Matteo Salvini, who intends to transform the regional and
anti-European party into an Italian-style National Front, with
national ambitions. The League is from time to time backed
on its right by the neo-fascists Brothers of Italy. When we
add up the voting intentions in favour of the populist parties,
we notice that they are now neck-and-neck with the
traditional parties (Chart 1B).
j-15

65
60
55
50
45
40
35
30
25
20
15
10
5
0
Chart 1B
Italy : opinion polls for the next general election ,
"conventional"* vs. "populist"** parties (%)
Sources: Datamedia, EMG, Natixis
Which we describe in our Special Report "Political risk in the euro
zone: symptoms, factors and impacts"
1
2
SPECIAL REPORT
Italy's institutional system before Renzi's reform:
Perfect bicameralism
GOVERNMENT
Controls
Controls
CHAMBER (CAMERA)
SENATE
630
321
LEGISLATES
LEGISLATES
Source : Natixis
Italy's institutional system after Renzi's reform (hypothetical):
Imperfect bicameralism
GOVERNMENT
Controls
CAMERA
✘
Controls
SENATE
✔
340
630
LEGISLATES
above all Parliament that will determine whether it is adopted or
not. But if a majority in the chambers is reached in the reform
vote but this does not exceed a certain threshold, the
parliamentarians and/or the regional elected representatives
are entitled to call for a referendum to be held to finally approve
the text. In the case of the Senate reform, Matteo Renzi
anticipated this request and announced a referendum in
October even before the last vote in Parliament.
✘
100
321
✘
LEGISLATES
Source : Natixis
The symptoms of political risk are clearly present, but until
now there has been no triggering event leading to a
concrete materialisation of the political risk, i.e., in this
specific case, an election. The reason is simple: the three
forces that are able to trigger an election - the "PD rebels",
Matteo Renzi’s centre-right ally and the prime minister himself have no interest in doing so: the rebels have more clout inside
the government than outside; the main centre-right party, the
UCD-NCD of Angelino Alfano (Berlusconi’s previous heir
apparent at Forza Italia), has less than 5% of the voting
intentions; and Renzi must wait until the reform has been
approved by the Senate before shortening the parliamentary
term, which will theoretically end in 2018.
But could a defeat for Renzi at the October referendum
speed up events?
What will the Italians vote on in October?
On the reform of the Senate mentioned above. This text,
which aims to reduce the upper house’s power, is a
constitutional reform. In the Italian institutional system, it is
The Jobs Act, the Italicum (the new electoral law for the
Chamber mentioned above) and the Senate overhaul form
Matteo Renzi’s trilogy of reforms: these reforms are key
elements in the prime minister’s agenda, in which he has
invested a significant part of his political capital. The first
two were adopted in 2015. Some would argue that this is
already a lot. But in reality, the success of Renzi’s mandate will
be judged on his ability to convince the Italians to approve the
third reform: actually, without a Senate reform, the Italicum
would no longer make sense and in the current institutional
system, it would be difficult for Matteo Renzi to push through
more reforms of the same magnitude as the Jobs Act. It is
therefore an absolute priority for the prime minister to get
the law adopted. That is why, as he usually does during
crucial votes in Parliament, he has announced that he will
resign if he is defeated. But this time around, it is not
elected representatives who are anxious to keep their
elected office he is asking to toe the line, but Italian voters.
Has the risk that Renzi may lose the referendum
increased?
Yes. The former mayor of Florence has recently lost some
of his lustre in the eyes of the electorate. On the domestic
front, even though the overall economic situation has
improved, growth is struggling to pick up. Unemployment
stopped falling in the autumn of 2015, and even though youth
unemployment has noticeably declined, the new permanent
contracts now provide much less protection (on this issue, see
our Special Report "The Jobs Act one year later"). Above all,
the bail-in of 17,500 savers in the resolution of four regional
banks in November 2015 - which drove one saver to suicide had a very negative impact on the prime minister’s image.
The situation is fairly similar on the European front. Matteo
Renzi had promised to use all his influence in the European
institutions to counterbalance the German influence on the
European policy mix. At the end of 2015 he did actually obtain
an easing of the EU budgetary rules with the help of France but that is about all. Matteo Renzi’s efforts to transpose his
reformist vision to the European level (implementation of
common unemployment insurance, strengthening of the
banking union, etc.) have been rejected by his main partners. In
return, some Member States have put pressure to limit banks’
exposure to sovereigns, which would have a very negative
impact on Italian banks, while an ECB request for additional
information on bad debts at the start of the year once again
turned the spotlight on the Italian banking sector.
On the economic front, the Italians are therefore clearly
less confident than when Matteo Renzi came to power in
February 2014. On the political front, the situation is quite
similar: wariness towards national and European
institutions has increased markedly.
This increased wariness became clear during the latest
municipal elections on 5 and 19 June this year (details on
the stakes of this election can be found in the Special
Report "Municipal elections in Italy: Could the tide turn for
3
SPECIAL REPORT
Chart 2B
Italy: "What will you vote for the Constitutional
referendum in October?" (%)*
80
*Considering only "Yes"/"No" votes
70
60
60
50
50
40
40
Yes
No
30
In short, we do not believe it is appropriate to add up the
voting intentions of the different parties to obtain a proxy
of the voting intentions in October’s referendum. For the
time being, opinion polls show us a far more complex
situation. The abstention rate could be quite high, since around
40% of those polled still do not know how they will vote, or do
not even know whether they will vote at all (Chart 2A).
Consequently, even though the momentum has clearly been in
favour of a "no" since March this year, despite the recent
rebound in "yes" (Chart 2B), it is still very difficult to get a clear
message from the opinion polls.
Chart 2A
Italy: "What will you vote for the Constitutional
referendum in October?" (%)
70
70
Won't vote / Don't know
60
60
50
50
40
40
30
30
20
20
10
10
a-16
j-16
m-16
a-16
m-16
f-16
20
But we see that the risk of Matteo Renzi losing the
referendum is increasing, such that we feel it would be
appropriate to ask the question: if that were to happen,
which scenarios could we imagine?
Which scenarios in the event of a defeat for Renzi?
As we have said, Matteo Renzi has put his career on the line in
this election. Given the opinion polls, we estimate the
probability of him winning the election at 50%. Conversely, we
see three conceivable scenarios in the event of a victory for the
"no".
Scenario 1: Matteo Renzi resigns, early elections are held
after several months of political stalemate (probability =
25%)
This is the most negative scenario. Matteo Renzi is the
architect and the glue of the fragile coalition currently in
place in the Chamber and the Senate (Charts 3A and B), so
they would definitely not survive in the event of his
resignation. After several attempts to appoint a new prime
minister (which could take several months), the president of the
Republic Sergio Mattarella would then be forced to dissolve
Parliament and call early elections.
Chart 3A
Italy: Distribution of seats in the Chamber
(as of July 5, 2016)
Ruling
coalition. 386
303
13
23
33
M5S 91
Left-wing
opposition. 150
10
31
18
630
53
16
0
a-16
j-16
j-16
m-16
m-16
f-16
j-16
a-16
Sources: Sondaggi Politico Elettorali, Natixis
0
30
Sources: Sondaggi Politico Elettorali, Natixis
20
j-16
But can local elections be a proxy of the voting intentions
for the October referendum? That is difficult to determine.
What is certain is that they reflect the electorate’s growing
rejection of the Renzi government (and of the traditional political
elite). And it is also certain that the opposition, crystallised
around the M5S and the Forza Italia, Northern League and
Brothers of Italy trio, will do anything to turn this vote into an
anti-Renzi plebiscite. However, let us not forget that one of the
reasons for the success of the M5S in the latest municipal
elections was the low participation rate (close to 50%).
Moreover, we are not convinced that the opposition voters will
blindly follow the directions issued by the leaders of their
respective parties. For example, we do not believe all Forza
Italia voters are radically opposed to the Senate overhaul. On
the other hand, we can hardly see a majority of Democratic
Party voters voting in favour of a Renzi resignation.
80
70
j-16
Matteo Renzi?"). The fact that the M5S won in Rome was not
a surprise per se. On the other hand, the score obtained by its
candidate, Virginia Raggi, against the PD candidate Roberto
Giachetti, was a surprise: 67%(!) of the votes cast, with 317,000
positive votes in the second round versus only 57,000 for
Giachetti, which is some mandate. Likewise, the victory for the
M5S candidate Chiara Appendido against the outgoing
Democratic mayor Piero Fassino in the historic centre-left
stronghold of Turin, was also a surprise. Once more, the ability
of the M5S to mobilise voters in the second round was
demonstrated: Appendido’s score increased from a little less
than 120,000 votes to more than 200,000, while Fassino’s
score increased by only 8,000. Turin had been governed by the
centre-left since 1993.
Right-wing
opposition. 88
6
Non-inscrits
Possibile
Partito Socialista Italiano (PSI)
PD
Scelta Civica
Forza Italia
Conservatori e Riformisti
Autres
420SEL
M5S
Alleanza Liberalpopolare – Autonomie
Per l'Italia - Centro Democratico
NCD-UDC
420Fratelli d'Italia
Lega Nord
Sources: Camera, Natixis
4
SPECIAL REPORT
Chart 4B
Italy: Projection of seats in the Camera if the election
was to be held today*
Chart 3B
Italy: Distribution of seats in the Senate
(as of July 5, 2016)
Ruling
coalition. 182
M5S 340
Misc.
opposition 55
31
113
NCD-UDC 13
35
20
Forza Italia 54
40
20
321
18
8
PD 129
Right-wing
opposition. 76
10
12
14
630
FdI-AN 17
SEL 13
208 Alleanza Liberalpopolare – Autonomie
SEL
Per le Autonomie
Area Popolare (NCD-UDC)
SCPI
Divers
Conservatori, Riformisti italiani
Grande Autonomie e Liberta
PD
Per l'Italia
M5S
Forza Italia
208 Lega Nord
Sources: Senato, Natixis
We believe the risk is high that Parliament would be
ungovernable after such elections.
According to the polls, it is very likely that the M5S would
take the majority of seats in the Chamber (Charts 4A and
B). How would that be possible when the movement of Beppe
Grillo and Luigi di Maio is only neck-and-neck in the polls with
Matteo Renzi’s Democratic Party? The answer is in the new
electoral law for the Chamber that Matteo Renzi managed to
push through last year. It provides for a majority premium of 340
seats for the party that wins the election. If a party wins more
than 40% of the votes cast in the first round, it pockets the
premium and the remaining 290 seats are distributed to the
other parties in proportion to their score in the first round. In the
opposite case, a second round is organised between the two
parties obtaining the most votes and the victor gets the
premium.
Chart 4A
Italy: Voting intentions for the second round of the
next general election at the Camera (%)
60
PD
58
54
54
52
52
50
50
48
48
46
46
44
44
NCD-UDC
420 Italia
Forza
Lega Nord
FdI-AN
Autres
*Based on a EMG poll of 4 July 2016
Sources: Camera, Natixis
Current polls show that the second round would take place
between the Democratic Party and the M5S (as the two
parties have no more than 30% of the voting intentions). So
it would be crucial how the voters of the right-wing parties such
as Forza Italia, Northern League and Brothers of Italy vote in
the second round. As we have seen previously, June’s
municipal elections showed that these votes to a large extent
favour the M5S. National polls confirm this idea. According to
the polls (Charts below), the centre-right and extreme-right
voters feel closer to the M5S than to the Democratic Party. It is
difficult to determine whether this is due to a rejection of Matteo
Renzi or real conviction. But it is true that the M5S economic
programme, which is rather anchored on the right, pleases this
electorate, as does the movement’s clear-cut position against
immigration.
Italy : percentage of people, among voters of each party, declaring
themselves close to M5S
18%
17% 16%
13%
28%
40
a-16
j-16
j-16
m-16
a-16
f-16
m-16
j-16
d-15
n-15
o-15
s-15
j-15
a-15
PD
M5S
42
Sources: Sondaggi Politico Elettorali, Natixis
j-15
SEL
58
56
40
Autres 7
60
M5S
56
42
LN 58
Source : La Repubblica
5
SPECIAL REPORT
Italy : percentage of people, among M5S voters, declaring
themselves close to another party
Chart 5
What would be the composition of the Italian Senate
if a ballot was held today?*
M5S 71
Others 48
NCD-UDC 11
17%
19%
16% 9%
Senators for life
6
FI 30
8%
6%
PD 99
LN 39
321
FdI 17
Source : La Repubblica
A loss at the referendum for Matteo Renzi could therefore
ultimately tip the Chamber into the hands of M5S. But the
situation in the Senate could be far more confusing. In the
upper house, the seats are attributed by region according to
their demographic weight and the election is based on a pure
proportional principle. Until 2013, there was a system of
majority premium by region: the party where the coalition won
the election de facto obtained 55% of the seats attributed to the
region. This premium system was cancelled in 2013 by the
Constitutional Court, at the same time as that of the Chamber.
With the Italicum, Matteo Renzi has reintroduced a majority
premium, but only for the Chamber (given that his plan is to
remove the Senate’s powers with the constitutional reform). If
elections take place after a defeat at the referendum, it will
therefore be without a majority premium, with purely
proportional voting.
In Chart 5, we have projected what the composition of the
Senate would be (based on regional opinion polls in
February 2016) if proportional elections were to be held
now without a majority premium by region. The result is
conclusive: the Senate would be highly fragmented and
none of the three large blocs (centre-left, M5S, right) would
be able to obtain a majority.
PD
NCD-UDC
M5S
Others
Senators for life
FI
LN
FdI
* Polls by region as of February 2016
Sources: Scenari Politici, Winpoll,
Natixis
In this context, M5S would find it impossible to govern
even if it controlled the Chamber. In other words, a defeat
for Matteo Renzi at the referendum would above all mark
the start of a period of major uncertainty for Italy.
Scenario 2: Matteo Renzi resigns, a technocrat government
is formed after several months of political stalemate
(probability = 15%)
The purpose of the technocrat government would be to
deal with current business and, above all, establish a new
electoral law, at least for the Senate, in order to strengthen
its governability with a view to the 2018 elections. Needless
to say, this would be complex, already because it would be
difficult to form a coalition without Matteo Renzi based on the
current composition of the chambers, and also because the
different parties’ interests in terms of the type of electoral
system to adopt clearly will diverge. The risk that the
government would be overthrown before 2018 would therefore
remain high. Moreover, it would not have enough political
capital to implement structural reforms. In other words, while
this scenario is less negative than the first one, it is far from
being a panacea.
Scenario 3: Matteo Renzi does not resign (probability =
10%)
There could be two reasons for a decision to remain: waiting for
the end of the parliamentary term in 2018 and trying to reap the
fruits of the reforms to be re-elected; revisit the electoral law in
the Chamber and the Senate before 2018 to reduce the
chances of M5S winning.
This scenario would be the least negative, since it would
rule out the risk of an early election in the short term.
Nevertheless, beyond the fact that we do not really believe
in it, this scenario involves a high risk of a government
crisis and/or an internal Democratic Party crisis. The
probability of having early elections before 2018 would
therefore remain high. Furthermore, Matteo Renzi would have
lost his entire political capital. For the economy, the confidence
shock would remain significant, while the prime minister would
6
SPECIAL REPORT
have lost any legitimacy and credibility to continue to implement
his reform programme.
example), particularly in the scenario where M5S controlled the
Chamber but not the Senate.
What would be the main consequences of a victory for the
"no"?
Estimating the impact of a political shock on activity
In order to estimate the impact of a victory for the "no" at the
October referendum on the Italian economy, we have used a VAR
model. It enables us to quantify the impact of an uncertainty shock
(represented by the index of uncertainty on economic policies) on
GDP, inflation and the unemployment rate in Italy. These data
have been available at quarterly intervals since 1997. These four
series were first made stationary: we therefore used (as a monthly
moving average) the changes in log for the uncertainty index and
GDP and the changes in percentage points for the unemployment
rate. No restatement was carried out concerning inflation. We
then drew on the number of delays that minimise the Schwarz
criterion, i.e. 1 delay. Lastly, the residuals resulting from the
model appeared stationary and without autocorrelation. By
denoting the log-variation ∆, the equation of the model is written:
We believe a defeat for Renzi at the referendum would have
three major consequences.
1 - On growth
We have transposed to Italy the model we had developed to
estimate the economic impact of a vote in favour of Brexit
on the euro zone (see our Cross expertise study Brexit to
Hell). It shows that a victory for the "no" and the associated
confidence shock could have a direct impact2 of -0.3
percentage point on the Italian economy’s growth rate at a
12-month horizon. In other words, we would not revise our
2016 annual growth forecast downwards (currently at 1.1%,
slightly higher than the consensus), but we could lower the
2017 forecast from 0.9% currently to 0.6% (Chart 6). Because
of the calibration of the model, the confidence interval is wide,
which is not very surprising given the nature of the exercise
(impact of a political shock on activity). According to the
circumstances, we could therefore revise our forecast for 2017
more severely, by as much as a -0.6 percentage point deviation
from our baseline scenario.
Chart 6
Italy : estimation of the impact of an uncertainty
shock on growth (pp.)
0,4
0,3
0,2
0,1
0,0
-0,1
-0,2
-0,3
-0,4
-0,5
-0,6
-0,7
{
∆𝑉𝑡 =‒ 4.30 ‒ 0.28∆𝑉𝑡 ‒ 1 ‒ 3.90∆𝑌𝑡 ‒ 1 + 2.04𝑃𝐼𝑡 ‒ 1 ‒ 4.43∆𝑈𝑡 ‒ 1
∆𝑌𝑡 = 0.38 ‒ 0.006∆𝑉𝑡 ‒ 1 + 0.48∆𝑌𝑡 ‒ 1 ‒ 0.17𝑃𝐼𝑡 ‒ 1 ‒ 0.31∆𝑈𝑡 ‒ 1
𝑃𝐼𝑡 = 0.02 ‒ 0.003∆𝑉𝑡 ‒ 1 + 0.31∆𝑌𝑡 ‒ 1 + 0.96𝑃𝐼𝑡 ‒ 1 + 0.40∆𝑈𝑡 ‒ 1
∆𝑈𝑡 =‒ 0.06 + 0.0002∆𝑉𝑡 ‒ 1 ‒ 0.13∆𝑌𝑡 ‒ 1 + 0.04𝑃𝐼𝑡 ‒ 1 + 0.25∆𝑈𝑡 ‒ 1
With:
V: the political uncertainty index
Y: GDP
PI: inflation
U: the unemployment rate
The rise in absolute interest rates would entail three major
risks for Italy:
 First, it would put an end to the boost that public
finances had enjoyed thanks to the ECB’s very
accommodative policy. The Italian government (if there was
a government) would, as a result, very definitely abandon or
reduce its programme of tax cuts - particularly for companies which has been one of the main drivers of the recovery.
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
Quarters
95% confidence interval
Source : Natixis
Average impact
2 - On sovereign interest rates
According to our strategists, the shock, particularly if it led
to an electoral victory for M5S in the Chamber, could push
the 10-year yield on BTPs to levels close to those reached
in the summer of 2015 during the peak of the Greek crisis,
i.e. 2.5% in March 2017. The flight-to-quality could push the
10-year Bund yield to -0.4% at the same horizon, leading to a
widening of the BTP/Bund spread to 290 basis points. The
longest part of the curve would in our opinion be the most
affected, as the markets would probably not price in a default
premium in the short end (as was the case with Greece, for
 Subsequently, the markets would again question the
sustainability of the debt. With a nominal growth rate of
1.5%, a primary surplus of 2% and an average funding cost of
3%, Italy could see its public debt ratio falling below 130% of
GDP, without counting privatisation-related gains. But with a
rise in interest rates and a downward revision of growth and
inflation forecasts (a -0.1 percentage point deviation at a 12month horizon), we would undoubtedly be forced to revise our
public debt estimates upwards. Needless to say, this as a
whole could lead the credit rating agencies to revise their view
on Italy, and we would not be surprised to see the country
placed on negative outlook.
 Lastly, the rise in interest rates would give rise to
concern about the banks, which hold large amounts of
national sovereign debt. In Italy, it accounts for more than
10% of the banks’ balance sheet and almost 100% of their
capital (Charts 7A and B).
Our model only estimates the impact of a confidence shock on activity.
It does not take into account the indirect effects a no vote could have on
activity: rising sovereign interest rates, deterioration in financing
conditions for companies, etc.
2
7
SPECIAL REPORT
500
450
Chart 7A
Italy: Domestic general government securities held
by domestic banks (€bn)
60
Outstanding (LHS)
Monthly changes (RHS)
400
Conclusion: October’s referendum, possibly a major event
for Italy and the euro zone

The uncertainty surrounding the outcome of the
referendum and the consequences of a negative vote
have forced us to revise our assessment of Italy’s
macroeconomic situation: while we have been
resolutely optimistic since 2014, we are becoming
neutral. We will make a new assessment of the situation
after the results of the referendum have been announced.

We do not believe the market in any way has completely
priced in the issues associated with the election yet, as
attention for the time being is focused on the bank
issue. In this respect, we believe that since the
beginning of the month, these banks have been the
collateral victims of Matteo Renzi’s campaign for the
referendum. It was actually the prime minister who after the
Brexit referendum decided to bring the issue of the capital
requirements for the banks back to the forefront - and not
the market, let alone the ECB. We believe Renzi is playing a
strategy to obtain flexibility from Brussels on the banks
before the referendum is held - while he has taken a lot of
criticism in Italy for his supposed inability to defend the
national interests on the European stage. We nevertheless
remain sceptical about this strategy: first, it has dragged
down prices of bank shares drastically; second, we doubt
whether it will be profitable even in the event of success:
even in the event of a bail-out (a scenario we do not believe
in), we doubt the voters will be pleased to see public capital
injected into the financial sector.

Regardless of the outcome of the banking problem in
the short term, we therefore remain convinced that it is
the result of the October referendum that will have a
decisive impact on the performance of Italian financial
assets for the end of 2016 and for 2017.
40
350
300
20
250
200
0
150
100
Sources: ECB, Natixis
-20
03 04 05 06 07 08 09 10 11 12 13 14 15 16
120
Chart 7B
Euro zone : domestic sovereign debt held by banks
as a percentage of their equity capital
Germany
France
italy
Spain
100
120
100
80
80
60
60
40
40
Sources : BCE, Natixis
20
20
03 04 05 06 07 08 09 10 11 12 13 14 15 16
3 - On the reforms
The arrival of Matteo Renzi to power in February 2014 marked
the start of a new cycle of structural reforms. Italicum, Jobs Act,
reforms of the Senate, the justice system, the banks, etc.: we
have to go back to Mario Monti’s mandate in 2011-12 to find a
similar proactivity. According to the European Commission, Italy
was in 2015 the Member State with the highest response rate to
its recommendations in terms of structural reforms to
implement.
A victory for the "no" - and regardless of Matteo Renzi’s choice
to remain or resign - would very definitely put an end to this
reform cycle. A technocrat government would be formed
primarily to adopt a new electoral law - for the Senate in
particular - with a view to the 2018 elections and to deal with
current business. Its legitimacy would probably be too weak to
push through in-depth reforms. The same would apply if Matteo
Renzi decided to remain: a victory for the "no" would seriously
dent his credibility and, above all, would weaken his
government significantly, thereby preventing him from
continuing his reform agenda.
With a victory for the "no", one of the main factors - the reforms
- that have restored investor confidence would therefore
disappear.
8
SPECIAL REPORT
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