Silver as an investment

Why Credit Suisse Sees Less Than 1% Chance Of Exitaly: The Answer In One “Simple Chart”

When it comes to looming risks facing Europe, the Italian constitutional referendum is, after the UK vote on EU membership, the key political event in Europe this year. Although there is not an official date yet, Italy’s prime minister said he expects it to occur between 15 November and 5 December. The date will be communicated at the end of September. According to Credit Suisse, the referendum will likely take place on 27 November.

A quick prime on the upcoming vote:

the referendum will allow Italian citizens to approve or reject a bill – already approved by Parliament – that aims to slim down and raise the efficiency of the political system. The bill, if approved, would reduce the number of MPs, essentially cutting from 315 to 100 the number of senators, making the government cheaper to run. More importantly, it would end the perfectly symmetric nature of the Italian parliamentary system, in which both the Senate and the Lower House have equivalent powers – meaning that the Senate can effectively veto the Lower House’s rulings and vice versa. The Senate would retain some control functions, but be essentially the chamber of the local authorities – with no veto power. 


The constitutional bill, presented by the government in 2014, went through a double round of parliamentary scrutiny and was approved by an absolute majority, although it fell short of the qualified majority of two-thirds required for it to become immediately current, as Berlusconi’s center-right party, after having supported the reform in its initial phase, decided to withdraw support for motives seemingly unrelated to the bill itself. The constitution requires a confirmatory referendum in that case: as such, the decision to hold a referendum was a legal requirement – a necessity more than a decision of the PM.


Theoretically, a “No” vote would have no consequences for the government, although the prime minister has committed a significant amount of political capital to this specific reform, and would probably be seriously weakened as a consequence. Although it should be easier to get a “Yes” vote in the Italian referendum compared to the Brexit one – given that the question asked is, basically, if one wants to cut the number of MPs and simplify the political system – as often happen with referendums it could morph into a judgement on the overall actions of the government rather than on the question asked.

And while many traders will lose sleep over “Italeave” or “Exitaly”, whatever the portmentau du jour is, when the day of voting comes, some time after the US presidential election, according to Credit Suisse “we see very little chance of truly systemic consequences, even in the event the proposed changes are rejected.

Why is Credit Suisse so optimstic. To be sure, the Swiss bank admits the vote “could go either way.”

First a little history: the vote was initially going to take place in early October. The delay is likely due to the intention to vote on the 2017 budget in at least one of the two Houses prior to the referendum. That should allow PM Renzi to a) incentivise “Yes” voters with policies such as new tax-cuts and spending increases, and b) reduce political and financial uncertainty in the case of a “No” victory – as in that case even a caretaker government would be able to approve the budget before year-end. Another reason for the postponement is also to campaign more vigorously for support, as polls have been showing a loss of momentum for the “Yes” campaign, with a good number of surveys even showing a lead for the “No” campaign since the beginning of the summer.


Renzi and most of his party – the center-left Democrats (PD) – as well as some centrist parties, are backing the “Yes” vote. The opposition parties, both on the right and the left, as well as Grillo’s anti-establishment M5S, are campaigning for “No”. Polls suggest around 40% of the voters say they are still undecided – all this making the forecast on the vote akin to the tossing of a coin.

Still, unlike Brexit where politicians had staked their careers on the outcome, when it comes to Italeave, the conditions are far more… fluid. Here, according to Credit Suisse, is what would happen if Italy votes “No.”

We think that a “No” vote is a real possibility, which could have negative political, economic and financial consequences for the country – but we also believe that the impact would be contained – and that it would not lead to Italy leaving the euro. The “domino effect” concern – from the constitutional referendum, to early elections, to a referendum on the euro and eventual “Exitaly” – is motivated by the earlier positioning of Renzi, who initially said he would resign and even suggested he would leave politics completely in case of a “No” vote, while also seeming to hint at precipitating early elections in that event. Were M5S to win those elections – and with its stated intention to call a referendum on the euro – that could open the way for “Exitaly” in short order.


We have explained above that some of the dominoes are not in place anyway, as even a victory after a “No” vote would still leave M5S, in all likelihood, short of a majority in the Senate. Over the past few weeks, moreover, Renzi seems to have back-tracked from his original position. He has stopped mentioning his pledge to resign – though not denying it either – and has said that new elections will take place in 2018, as scheduled, whatever happens with the referendum. Moreover, it must be noted that it is contrary to the Italian Constitution (art. 75) to hold a referendum on decisions taken through international treaties, such as the membership of the European Union and the euro area.


Besides, a referendum on the euro would not be possible per se, as leaving the euro but not the EU is impossible, according to the EU Treaty. Again, this would be an issue for M5S, whose leaders have stated they would like to hold a referendum on the euro, but not on the EU – which is an internally inconsistent proposition. Finally, support for the EU has fallen but remains sufficiently high in Italy, meaning that even in the unlikely event of a referendum, “remain” would likely win.


In summary, Credit Suisse believes the Exitaly scenario requires a sequence of unlikely or even internally inconsistent events. Which is why the bank’s subjective assessment of the probabilities leads it to to assign a mere 1% (or less) chance of it happening.  Then again, we wonder what CS’ estimate of Brexit odds was.

Finally, here is the “simple” chart showing how the Swiss bank ends up with a less than 1% chance of Exitaly.

Got all of that?