What's going on?

Most government bonds have had a tough time since Donald Trump was elected, but Italy�s bonds are having a particularly rough go of it as political risks rise ahead of a key referendum next month.

What does this mean?

Italy is holding a vote on December 4th concerning wide-ranging political reforms within the country (it�s supposed to make it easier for the government to pass laws). Italian Prime Minister Matteo Renzi has staked his reputation and, possibly, his political future on the referendum: he suggested on Monday that defeat could result in his resignation (as he has hinted at before). Partly because Renzi�s political future appears to be on the line, the referendum has become something of a plebiscite on establishment politics in Italy. And, it hasn�t been a good year for establishment politics�

Why should I care?

For markets: Investors are worried about an Italy without Matteo Renzi.
Italy�s economy is operating at stall speed and its banks are desperate for more investment. The country has a bunch of laws that limit the efficiency of the economy (e.g. lots of cumbersome government regulations) and investors are hoping that comprehensive political reform will usher in better, long-term economic growth. Alternatively, a referendum defeat could mean much higher uncertainty and an immediate hit to the already struggling economy.


The bigger picture: Countries in the eurozone face a fundamentally higher risk of not being able to pay back their debt.
If the US (or Britain or Canada or any other country that controls its own currency) has to pay back debt, it has the option of, essentially, printing more money. For that reason, it�s virtually impossible for the US to be forced to default on (i.e. not pay back) its lenders. Countries in the eurozone, however, do not control their own currency: Italy cannot print liras to pay back its debt. While the European authorities (e.g. the European Central Bank and/or other eurozone governments, perhaps led by Germany) could bail out other eurozone countries (as they did with Greece), it�s far from guaranteed. While still very remote, the heightened risk of an Italian default is being reflected in lower prices for Italian government bonds.