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Hello, forex friends! Several days ago, Italians overwhelmingly voted “No!” during the Italian referendum for constitutional reform. And if you’ve been wondering what happened after that or maybe you just wanna know what the referendum’s relationship is to the euro, then today’s roundup will get you up to speed.


The Italian referendum and the Euro


If you’re wondering how the Italian referendum affected (and will likely continue to affect) the euro, then just know that there are mainly two narratives that you have to keep in mind:

  • The referendum’s implication for the Euro Zone
  • The referendum’s impact on Italy and Italian banks

Let’s briefly discuss each, shall we?

The referendum’s implication for the Euro Zone

In Pip Diddy’s more recent Top Forex Market Movers of the Week (such as this one and this one), he has been mentioning that there’s a running narrative that Brexit and Trump’s victory in the U.S. presidential elections are signs that populist, anti-establishment, and right-leaning movements are gaining ground in the West.

This has caused uncertainty in the Euro Zone to increase lately because these movements are indeed on the rise. And just as important (if not more), these movements are also usually hard Eurosceptics – they very strongly oppose the European Union. It’s therefore only natural that the euro got weighed down after Trump’s victory and in the run-up to the Italian referendum.

Now for the newbies out there, I have to be very clear here. The Italian referendum was about constitutional reform, and not about leaving the European Union like the Brexit referendum was, as I briefly mentioned in an earlier write-up. Having said that, the Italian referendum does pave the way for the possibility of an Italeave should a Eurosceptic party like the Five Star Movement win in the next elections.

And this possibility of an Italeave and the further breakdown of the European Union has been keeping market players on edge (and will likely continue to do so). However, some of the pressure related to the breakdown of the European Union eased on Monday, helped in part by the former Greens leader Alexander Van der Bellen’s victory over the right-leaning Freedom’s Party’s Norbert Hofer in a rerun of the Austrian elections.

In fact, Hofer’s defeat is being cited by market analysts as one of the reasons why the euro and European equities snapped back after slumping in the wake of the Italian referendum. Basically, Hofer’s defeat puts a dent on the narrative that populist, Eurosceptic movements are gaining momentum, which allowed market players to breath a sigh of relief.

The referendum’s impact on Italy and Italian banks

The other major way in which the Italian referendum impacts the euro is how the referendum will potentially affect the troubled Italian banks and Italy itself. You see, Italian banks have a whopping €356 billion in bad loans in their books. Of that €356 billion, Monte dei Paschi di Siena holds €46 billion. And in order to avoid getting wound down, there is a private recapitalization plan to raise €5 billion by the end of the month.

However, the “No” vote has resulted in increased uncertainty, so Monte dei Paschi is having trouble attracting enough capital. And remember, that €5 billion private recapitalization plan is for Monte dei Paschi alone. Unnamed sources cited by Reuters say that UniCredit also has a privately-backed recapitalization plan in the works for €10-15 billion by February 2017, so that’s two, and there are more of ’em.

Anyhow, if the recapitalization plan fails, then the Italian government would have to pony up the cash (i.e. a bailout). And if the Italian government is unwilling or unable to do so, then that and the lack of investors may lead to a possible recession, as well as a contagion effect in the banking sector that may spark another financial crisis. Obviously, you don’t wanna hold onto the euro if that does happen. And keep in mind that Italy already has one of the highest levels of government debt in the Euro Zone. Also, Italy is part of the Euro Zone, so it can’t easily print euros as it pleases.


So, what are the most recent major updates?


Renzi resigns

Italian Prime Minister Matteo Renzi formally resigned yesterday, fulfilling his promise to do so should the “No” camp win in the referendum. Mattarella, the Italian president, supposedly asked Renzi to stay in a caretaker capacity to smooth the transition amid calls by rival parties for an early election. It sure would be interesting to see who would replace Renzi, huh?

Court to hold hearing on electoral law

According to reports that came out on Tuesday, Italy’s constitutional court “will hold a hearing on the legitimacy of a new electoral law on Jan. 24as Reuters puts it. There was actually already a hearing scheduled as early as September of this year, but that kept getting pushed back because of the Italian referendum. And while no date is set on when a ruling will be delivered, this event is something you may want to keep an eye on, since the electoral law is one of the biggest hindrances to an early election.

Monte dei Paschi asks for an extension

Due to the referendum, Monte dei Paschi has been having difficulty in getting the €5 billion it needs by the end of the month to avoid getting wound down. As such, it requested the ECB for an extension to January 20, 2017. The troubled bank was probably forced to ask for an extension after reports from unnamed sources cited by Reuters said that the Qatar Investment Authority was not yet willing to jump in with a €1 billion infusion until a new government is formed. However, other unnamed sources cited by Reuters say that investment banks such as JP Morgan “will make up their mind by Friday.”

No word yet from the ECB, but we may get one later during the ECB statement.

Moody’s downgrades Italy’s ratings outlook

In a press release yesterday, Moody’s announced that it changed the outlook on Italy’s Baa2 long-term issuer rating from “stable” to “negative” while affirming Italy’s long-term senior unsecured government bond rating at Baa2 (two levels above junk) and its short-term commercial paper rating at P-2.

According to Moody’s the downgraded outlook was due to the following:

  • “the slow and halting progress on economic and fiscal reform in Italy, the prospects for which have diminished further following the ‘no’ vote in Sunday’s constitutional referendum”
  • “the resulting rising risk that the reduction in Italy’s large debt burden will be further postponed given subdued medium-term growth prospects and recent fiscal slippage, thereby prolonging the sovereign’s exposure to unforeseen shocks.”

Final Thoughts


Overall, nothing really major yet. Renzi’s resignation was widely expected, since he said so himself before the Referendum. The scheduling of the court hearing is actually an old story and has no immediate impact, but it may become a major event come January next year. Moody’s downgrade is also something to be expected, given Italy’s precarious financial situation. As for Monte dei Paschi asking for an extension, that’s also to be expected, although it may become a major event sooner or later, depending on how the story evolves.

Given all that, and with the upcoming ECB monetary policy decision in focus, it’s therefore only natural that the euro has been trading mostly sideways after the initial surge in volatility in the immediate aftermath of the referendum.

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