Published: Tue, December 06, 2016
Economy | By Melissa Porter

Italy hit by market volatility after referendum defeat

"When a prime minister who will always be remembered for taking office through an old-style party coup calls a national referendum in a country that's still struggling to emerge from a triple-dip recession, he can expect an unfavorable result", said Nicholas Spiro of Lauressa Advisory.

Mattarella will have to embark on a round of consultations with party leaders before naming a new prime minister - Italy's fifth in as many years - who will be tasked with drawing up a new electoral law.

The value rebound, according to analysts, was largely the result of exaggerated expectations for the euro's response to the political discord in Italy.

Meanwhile financial markets have stabilised after initial falls on news of Mr Renzi's defeat.

However, there are concerns about Italy's fragile economy in the longer term.

Though Mr Renzi has already met Mr Mattarella, he will not hand in his resignation to him until after a final cabinet meeting.

Mr. Renzi is widely expected to be asked to stay on at least until a budget bill can be passed later this month.

Some relief for the euro may have also come from Austria's rejection of an anti-immigrant populist in its presidential election earlier this weekend.

Last night's referendum result could also help propel anti-EU parties to victory during elections in France, the Netherlands and Germany next year.

Anti-referendum militants gather in downtown Rome after Italian Premier Matteo Renzi conceded defeat in a constitutional referendum and announced he will resign in Rome, early Monday, Dec. 5, 2016.

The No campaign, which gathered roughly 60% of the vote, was a very composite group, which included moderate and pro-Europe voices that feared constitutional change would give too much power to the government.

"Mr. Renzi lost basically because of his stubbornness in binding his political future to the referendum".

The current election law, which Renzi wanted to reform, would hand a huge bonus of seats to the lower house while maintaining a proportional system for the upper house, raising the potential for parliamentary gridlock.

The movement, which began in 2009, is led by former stand-up comedian Beppe Grillo.

He also insisted the the result was not an anti-Europe or an anti-EU vote. "It looks more likely every day that they will need it and I think the NO vote hasn't changed that feeling", Hughes added.

"I don't think there is reason to talk about a euro crisis", German finance minister Wolfgang Schaeuble told reporters in Brussels before a gathering of his euro-area counterparts.

Despite the relatively calm reaction, the political instability caused by Renzi's resignation calls into question the recapitalization plan of MPS. "Starting tomorrow we'll be working on a government of the 5-Stars, we'll involve the energies and the free persons who want to participate".

What will it do to the economy?

Rome was one of the stops on Mrs May's whirlwind tour of European Union capitals in the days after she took office in July, when she was given a red-carpet welcome by Mr Renzi for talks over lunch.

Stocks in Shanghai fell 1.2% and stocks in Hong Kong shed 0.3% even after the much-anticipated trading link connecting the Shenzhen and Hong Kong stock exchanges launched Monday.

But Italy is no stranger to this kind of crisis - it has had more than 60 governments since World War II, almost one a year.

The banks remain weak and the country's debt-to-GDP ratio, at 133%, is second only to Greece's.

Italy's banks are weighed down by more than 350 billion euros of bad loans.Shares in Monte dei Paschi fluctuated wildly on Monday and were down nearly 5 percent at 1320 GMT, as a consortium of investment bankers met to discuss a capital increase to raise 5 billion euros which the lender needs by the end of the month to avoid being wound down.

The bank is trying to raise new capital to the tune of €5bn (£4.2bn; $5.3bn).

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