Italy Says 'No' To Referendum; Now What?

December 05, 2016

Italy voted against a referendum that would have changed the country’s constitution, limiting Senate power and streamlining the country’s government in an effort to pass swift economic reforms.

Markets seemed, thus far, relatively un-phased by the outcome of the vote, but analysts remain concerned about what a “no” vote means for Italy and the global economy going forward.

Italy remains one of the worst-performing markets in the eurozone since the 2008 financial crisis. And there are a few now questioning whether Italy should remain in the eurozone.

“A ‘no’ vote means the government remains fat and stuck,” Steve Blumenthal, head of ETF strategist firm CMG Capital Management Group, said in a commentary.

‘Economic Stagnation’ Will Persist

“A ‘no’ vote would prolong Italy's political and economic stagnation,” he said. “Structural reforms would be put off while Italy's lawmakers haggle over voting systems. Such government inertia is nothing new in Italy. But the country may no longer be able to afford it.”

According to Blumenthal, the risk centers on Italy's third-biggest bank, Monte dei Paschi di Siena, which is in serious trouble. And without this referendum, it’s unlikely that investors will help recapitalize the bank as the government had hoped.

“Should the bank collapse, it could ignite a full-blown—and potentially global—banking crisis,” Blumenthal said. “Bottom line, a ‘no’ vote could unleash a devastating financial chain reaction.”

Among the key risks he sees are a possible run on Italian banks, as well as a spike in Italian bond yields, and a new crisis within the European Central Bank.

‘Geopolitics Matter More’

That’s important because, as Dave Mazza, head of ETF research at State Street Global Advisors, recently put it, we are living in an environment where “fundamentals have mattered less and geopolitics mattered more in driving markets. The macro continues to matter.”

To ETF investors, so far this year, the iShares MSCI Italy Capped ETF (EWI) has significantly underperformed a basket of European stocks, as measured by performances of the $6.8 billion iShares MSCI Eurozone ETF (EZU) and the $10.2 billion Vanguard FTSE Europe ETF (VGK).

Italy represents just over 6% of EZU’s country allocation—which is led by France and Germany—while VGK allocates only about 3.5% to Italy.


Chart courtesy of


Throughout 2016, investors have yanked roughly $400 million in net assets from EWI, which today has $509 million in total assets under management. EZU, too, has seen sizable net redemptions totaling $6.7 billion year-to-date, while VGK has bled $3.6 billion.

Contact Cinthia Murphy at [email protected]


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