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Renzi Announces Intention to Resign After Losing Crucial Reform Referendum

Italian Prime Minister Matteo Renzi said on Sunday he will resign after suffering a humiliating defeat in a referendum over his plan to reform the constitution, throwing the country and the euro zone into confusion.

Matteo Renzi

Renzi said voters had shown a “clear” rejection of legislative reform measures and that he would meet with his cabinet on Monday and then hand in his resignation to the President Sergio Mattarella, taking full responsibility for the defeat.

“The experience of my government ends here,” Renzi said in a televised address to the nation as results showed his ‘Yes’ camp was well on track to lose the referendum.

What was originally a rather dry referendum on constitutional change has turned into a high-stakes game with the political and economic stability of Italy—and ultimately the euro zone—at risk.

Sunday’s vote was on whether the country’s second chamber should be stripped of some of its powers. The country’s government is hamstrung by procedure and delays to legislation. A “Yes” vote in the referendum would have meant that laws would only need the approval of the lower house to be passed.

Renzi had pinned his political future on the vote, saying he would resign if a “Yes” vote is rejected.

Populist parties such as the 5-Star Movement had campaigned for a “No” vote, saying the change to the constitution would lead to a concentration of power.

As well as throwing the political future of Italy into doubt, a “No” could hit the country’s already-fragile economy hard.

After his televised resignation announcement, the euro was down 1.17% to 1.0545 to the dollar.

Renzi’s resignation could lead to early polls in the second or third quarter of 2017, according to analysts.

However, Megan Greene, chief economist at Manulife Asset Management, told CNBC last week that she believed that the referendum in Italy could also provoke another banking crisis in Europe.

Italy’s stricken banks are holding nearly a third of the 990 billion euros (or more than $1 trillion) of unpaid loans at top euro zone lenders, according to the European Central Bank data.

The 14 large Italian banks sit on 286 billion euros (more than $300 billion) of bad loans, debt securities and off-balance sheet items. That corresponds to more than one in every 10 Italian loans. The Italian banking sector has already been performing badly this year, down some 48 percent on the start of 2016.

The high levels of toxic loans are a throwback to the euro zone’s financial crisis, and what’s worse is that they are stopping the banks from lending more, which could kick-start the Italian economy.

The market’s fear is that a “No” vote would stymie any attempts to restructure the country’s banking system as the cost of financing the rescue through issuing bonds could prove prohibitive for the Italian government. This instability and uncertainty could spread to the rest of the euro zone economy.

“In my view the biggest risk is actually for the banking sector, even more so than political risk, and there will be some political instability,” Greene told CNBC on Tuesday.

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