Italy: Snap elections, Renzi’s gamble? - TDS

Research Team at TDS, suggests that while markets have shrugged off the Italian Referendum, the political situation on the ground remains fluid. 

Key Quotes

“In spite of Renzi’s defeat at the polls and conventional wisdom that he was done, recent developments seem to support our view that he has been written off too quickly.” 

“While he is still likely to step aside, and we would still put larger odds on Italy not seeing new elections until 2018, there is a rising risk that Renzi sees an opportunity to push elections much faster than expected, holding them as early as Q1, and catch his opponents off-guard.”

“While Renzi lost, details in the polling results suggest support for Renzi and his PD party has actually grown, at the expense of Berlusconi’s Forza Italia.”

“Renzi may take a gamble of pushing elections in February or March, where his PD party could find a coalition partner to control the Senate while the lower House of Deputies would come down to a showdown between PD and Five Star. If Renzi’s gamble paid off, he could strengthen his parties standing with a new mandate – but if not, Five Star could surprise and cobble together coalition partners in a new government or send Italy to a hung parliament if PD cannot control both Houses and ongoing electoral chaos.”

“This game of chicken would likely weigh substantially on EUR in the short-term if it materializes. Downside risks remain acute and we highlight options like our EURUSD parity option from our 2017 Outlook as near-term uncertainties rise and 2017H1’s European political risk calendar gets more dense.”