(Bloomberg) -- Italy fell into political limbo after Prime Minister Matteo Renzi announced his resignation, with rival parties jockeying to fill the power vacuum following his crushing defeat in a constitutional referendum.
Financial markets reversed an initial sell-off as investors came to terms with Renzi’s impending departure. The premier is preparing to hand in his resignation to President Sergio Mattarella on Monday afternoon having signaled that he won’t stay on to help stabilize a caretaker administration. Renzi met with Mattarella for informal talks on Monday morning, according to a senior state official who could not be identified as the meeting was private.
“The idea of this leading to new elections and a euro exit always was far fetched,” said Claus Vistesen, chief euro area economist at Pantheon Macroeconomics in London. “Markets now are likely getting prepared for a long period of gridlock, which is not unusual in Italy.”
European stocks gained and the euro climbed back to trade 0.3 percent higher at $1.0699 as of 1:20 p.m. in Rome, after falling to a 20-month low shortly after Renzi’s defeat.
‘A Banking Story’
Much of the attention remains on Banca Monte dei Paschi di Siena SpA, which is in the middle of a 5 billion-euro ($5.3 billion) capital raising and is vulnerable to government instability. Monte dei Paschi shares were down 4.7 percent in Milan trading. Its stock has fallen 83 percent this year and a third of its loan book has soured.
“From today on, this becomes a banking story,” Megan Greene, chief economist at Manulife Asset Management, told Bloomberg Television’s Francine Lacqua. “This was such a definitive defeat.” In failing to predict the margin of Renzi’s loss, “the opinion polls got it wrong once again,” she said.
The 41-year-old prime minister announced his decision to quit in the early hours of Monday after his proposal to rein in the power of the senate was rejected by 59.1 percent to 40.9 percent.
Renzi’s resignation halts his reform agenda, with his key measure to date the so-called Jobs Act to make it easier for businesses to hire and fire. For the near future, he had pledged tax cuts, more state investment, and steps to tackle corruption and make the state sector more efficient. But the referendum campaign had put much of his agenda on hold.
Many Italians voted not on the complex constitutional reform but to get rid of Renzi -- especially after he repeatedly promised to quit if he lost. Latest economic signs were promising, with the euro region’s third-biggest economy expanding 0.3 percent in the third quarter and unemployment falling slightly to 11.6 percent in October. But the pace of recovery remained subdued -- and was too slight to impress voters.
“The Italy vote was mainly a vote about Renzi; it wasn’t a populist vote against the mainstream, it wasn’t a vote against the euro,” Wolfango Piccoli, the co-president of Teneo Intelligence in London, said on Bloomberg Television.
Renzi becomes the second European leader this year after David Cameron to be toppled by an anti-establishment revolt that is propelling Donald Trump into the White House and Britain out of the European Union. The result leaves Mattarella seeking a new government chief who can provide a firebreak against the insurgents; polls suggest an early election would see the anti-euro Five Star Movement swept into power.
Mainstream parties are, however, pressing for electoral reform before early polls. The current system has different election laws for the lower house and the senate. In the lower house, the leading party would automatically gain a big majority, which mainstream parties fear could benefit the anti-establishment Five Star.
Five Star is neck and neck with Renzi’s Democratic Party in opinion polls, and wants a referendum on membership of the euro area. Still, a poll last month showed only 15 percent favored leaving the single currency and 67 percent were self-described single-currency believers.
Finance Minister Pier Carlo Padoan, a potential replacement as premier, canceled a planned trip to Brussels on Monday to meet with his euro-area counterparts. Other possible successors who might be asked to lead a caretaker government include Transport Minister Graziano Delrio, Culture Minister Dario Franceschini and Senate Speaker Pietro Grasso. The country’s mainstream parties have been preparing contingency plans to ensure a government would keep functioning if Renzi was forced out.
“I don’t believe the ‘No’ vote in the referendum will lead to a major crisis in Italy,” Alain Bokobza, head of global asset allocation at Societe Generale SA, told Bloomberg Television. “In the end the major question we’re facing in Italy -- this is the most important one -- is are we going to have early elections for the parliament or not.”
The Italian referendum kicked off a year of voting with establishment parties across Europe threatened by upstarts channeling voter anger at immigration and economic stagnation. Anti-Islam, EU-skeptic Freedom Party leader Geert Wilders is vying to place first in Dutch elections in March, while French President Francois Hollande last week declined to seek a second term, leaving the Republican Francois Fillon as the main opponent to the anti-immigration Marine Le Pen.
German Chancellor Angela Merkel will run for a fourth term, with the anti-immigration Alternative for Germany party branding her public enemy no. 1. In Austria, the populists suffered a setback on Sunday when the environmentalist Alexander Van der Bellen defeated Norbert Hofer of the nationalist Freedom Party in a presidential runoff.