Halister News

(Bloomberg) -- Italian sovereign bonds to trade above Spain’s unless any change in opinion polls suggesting the ‘Vote Yes’ camp is gaining ground ahead of Italy’s vote on constitutional reform this year, Goldman Sachs analysts including Francesco Garzarelli write in research note.

• Goldman assigns a 40% probability to the constitutional reforms being rejected
• With a low likelihood of early elections even if the ‘No’ camp wins, and with Bank of Italy buying bonds, doesn’t see scope for a material widening in BTP spreads
  • Likely increased political volatility following a ‘No’; the political fortunes and the agenda of the opposition 5SM party would be scrutinized even more closely
    • It wouldn’t be surprising to see Italy temporarily trade as wide as 40bps above Spain, levels not seen since the start of QE; assumes some risk contagion from Italy to Spain leading to a widening of peripheral spreads
• In such a scenario, the likelihood of successful market- driven recapitalizations of the weaker Italian retail banks would diminish, and chance of a government-led restructuring would increase; government bonds, supported by QE, would suffer less
• A ‘No’ vote could cast doubt on Italian banking group BMPS’s plans to raise up to EU5b of fresh capital through a rights issue, if the referendum is held toward the end of November; Goldman expects the vote on Nov. 20 or 27
  • Investors may prefer to wait until there is more clarity, with spillover effects to other lenders
• Sees a 60% probability PM Renzi would be forced to step down were there to be a ‘Vote No,’ hence a 25% probability that Renzi is out of office by early 2017
• Investors link a 5SM victory with a higher probability of an EU or EMU referendum; Goldman says the possibility of a vote and the probability of a vote to leave the EU or the Euro area appear remote at the moment