"The US election will help all those who have not had the courage to come out and say 'I will vote No'," proclaimed one of Italian PM Renzi's opponents as The FT reports the centre-left prime minister’s referendum on change is threatened by the global populist wave. Even before the US election, he faced a struggle to secure victory in the referendum, with most polls tilting in favor of voting 'No', albeit with many undecided voters, but opponents claim "many undecided voters in the polling booth will say ‘No No No’, just like Trump voters."
As The FT reports, Mr Renzi has said he will resign if his flagship changes to Italy’s political system are rejected in a referendum on December 4, making him a casualty of the populist insurgency sweeping western democracies and increasing investor concern for the eurozone’s third-largest economy.
That fear is most evident in Italian sovereign bonds which have collapsed dramatically in the last weeks (accelerating in the last few days) with 10Y BTP yields above 2.00% for the first time since July 2015 and the spread to Bunds at its highest in 2 years (despite collossal buying from the ECB)...
Mr Trump’s win has further encouraged those in the No camp, which is dominated by anti-establishment parties that have questioned Italy’s membership of the eurozone and Nato, and pushed for a crackdown on migrants.
In an interview with newspaper Corriere della Sera at the weekend, Silvio Berlusconi, the media tycoon and former prime minister who is often compared to Mr Trump, said the “same spirit of rejection” that drove the US election would “induce” Italians to vote No in the referendum.
Beppe Grillo, the comedian who leads the Five Star Movement, an anti-establishment party running neck and neck with Mr Renzi’s Democratic party in national polls, praised Mr Trump’s victory as the triumph of “failures and misfits” against an intellectual elite. “Those who dare, the stubborn, the barbarians will carry the world forward, and we are the barbarians,” Mr Grillo added.
Mr Renzi has rejected any comparisons between the referendum and Mr Trump’s win, or the UK’s in June to leave the EU. “These are profoundly different elections in different countries,” he said via social media after Mr Trump’s win.
But lawmakers and officials from Mr Renzi’s ruling Democratic party suggest he must now do more to emphasise his reformist credentials, by pointing out that the constitutional changes would break the mould of Italy’s traditional political system while a No vote would enshrine the status quo.
“We are not the establishment, we are a new political class,” Graziano Delrio, the transport minister, has said.
In addition, Mr Renzi and his allies may try to use the vote for Mr Trump to highlight the danger that a No vote could give more momentum to populist parties, which many moderate Italian voters fear, particularly if it were to trigger turmoil in financial markets.
“The American example will be proof to Italian voters that dissatisfaction and rage can take two paths: either protectionism and isolation, like Trump and Brexit, or reforms, which this government is carrying forward,” said Andrea Romano, a Democratic party lawmaker close to Mr Renzi.
The challenge for Mr Renzi posed by the US election result is compounded by the fact that it has also energised leftwing dissidents within his party, who are also campaigning against the constitutional changes.
Both Pier Luigi Bersani, the former party secretary, and Massimo D’Alema, the former prime minister, have depicted the US election as a defeat for the moderate centre-left politics that Mr Renzi has embodied.
And as if more evidence of the growing concerns over Italy's future were needed, Italy's TARGET2 balance just hit a record high (these balances, or rather imbalances, reflect the direction of the capital flight... and there is only one direction as is very clear from the chart below: from Southern Europe into Germany.) As we noted previously, positions within the Target2 system, which settles cross-border payments in the euro zone, are monitored because in a world where all other market signals are corrupt and distorted by central banks, they remain a reliable, concurent indicator of financial stress, for example when banks in a country lose foreign funding. Which is why we were surprised to learn that in the latest monthly update, Bank of Italy's liabilities toward other eurozone nation soared by over €60 bilion in the last two months to a new record high,of €355 billion, notably surpassing the previous records set in 2012, just prior to Draghi's infamous "whatever it takes" speech.
What makes the surge in liabilties particularly notable is that Italy continues to sport a healthy current account surplus, suggesting the source of the outflows is likely found inside Italy's banking sector. In July, the Bank of Italy said that the recent increase in its Target 2 position was driven by foreigners selling Italian assets, especially bonds, and Italians buying foreign assets, movements which were only partially offset by Italian banks raising more funds on international markets. In August this trend picked up dramatically, prompting questions just how dire is the true state of Italy's banks, behind the shiny and cheerful facade presented on a daily day by Matteo Renzi, and whether this has anything to do with the recent decision by Milan prosecutors to end the probe for market manipulation, false accounting and corruption by insolvent Monte Paschi's CEO and former chairman which "risked undermining investor sentiment."
And now most recently we see capital flight accelerating as the refendum looms and is increasingly signaling "Italeave" is on the cards.