This weekend, Italy will hold a referendum on constitutional reform.
If successful, it will reduce the influence of the Italian upper house (Senate), eliminate some layers of administration and re-allocate some autonomy from regional governments to the state.
If the opinion polls and betting markets are anything to go by — a dangerous premise given recent failures to predict political outcomes — it look set to be voted down.
Italian prime minister Matteo Renzi has stated publicly that he will step down should the referendum fail.
As the third largest economy in the eurozone, and a G8 member, the referendum could spark renewed political instability, potentially leading to concerns over the Italian banking system and, further down the track, its very place in the European Union.
As we’ve seen with Brexit and the US election already this year, no one can be sure of the vote, or what will happen.
Thankfully, Dansk Bank has every angle covered, producing this excellent flow chart that looks at a whole series of potential outcomes.
According to Dansk, a resounding “no” vote will increase volatility in financial markets, particularly Italian bonds, banking stocks as well as European equities.
It will also place pressure on the euro, it says, and increase the risk of political and financial instability in Europe, something its describes as a “tail risk”.
On the contrary, should the “yes” vote get up — currently seen as unlikely by markets — Dansk says this will lead to the “pain trade” for investors, sending the euro sharply higher and opening the door to a less dovish European Central Bank ahead of its December 8 meeting.
The referendum will be held on Sunday, December 4.
Voting runs from 7am to 11pm in Italy, with counting to begin after the polls close. That means Asian markets will be in the thick of it early on Monday morning.
A 50% majority is required to decide the referendum, and will not take into consideration voter turnout.