Beware of the Italian referendum
The next wave of turbulences will be expected in December, as soon as Italians vote for or against the constitutional reform aiming to drastically curb the power of the Senate. Currently, both chambers have equal powers in the decision-making process. Under reform, however, the number of senators will be reduced significantly (from 314 directly elected to 95 indirectly elected by the regional councils); and the participation of the Senate in the law-making procedures will be drastically diminished.
The reform is supposed to make Italian more governable and more responsive to the bad occurrences in Italian economy. A referendum is needed because the aforementioned reform failed to receive the necessary two-thirds endorsement from the parliament earlier this year. Mateo Renzi, desperately seeking to propel it, even decided to step in front of a moving train and tied the results of the referendum to his own political career. In case of defeat, he will have to step down as Italian Prime Minister, opening up the possibility of new elections. This “Cameronlike” behavior makes this referendum even more special, earthshattering in a certain extent. Why it’s so? Because the Renzi’s failure will heighten policy uncertainty and throw open the doors for the internet-based Five Star Movement, founded by a comedian, Beppe Grillo, and composed of political novices. In the unpracticed hands, the worst is yet to come for Italian economy and the Eurozone.
So far, what we can do with this information to offset the risk of “No” vote?
As one of the possible way out of the situation, we suggest hedging against a potential escalation of Italian risks by selling 10 year Italian bonds versus US Treasuries.