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Marcus Ashworth is a Bloomberg Gadfly columnist covering European markets. He spent three decades in the banking industry, most recently as chief markets strategist at Haitong Securities in London.

The Dec. 4 Italian referendum on constitutional reform is not looking good for Prime Minister Matteo Renzi, if the polls are to be believed. He's promised to resign if he loses, and on Saturday said that a technocratic government would most likely take his place.

This is, on the face of it, good news for Italian bonds, which did well the last time Italy was ruled by the so-called experts. In 2011, the European Central Bank's marked reluctance to support Italian government bonds drove 10-year yields above 7 percent -- this turned out to be the death knell for the premiership of Silvio Berlusconi, who left office that year to the sound of crowds chanting "buffoon, buffoon!"

Monti Magic
Replacing Berlusconi with a technocratic government helped ECB bond buying resume
Source: Bloomberg

The Italian president appointed former European Union Commissioner Mario Monti to lead a non-political, technocratic government, and with the ECB now willing to buy Italian debt, yields got down to around 4 percent by the time Monti stepped down in April 2013. 

Don't get your hopes up for a repeat performance. This time around, the European Central Bank isn't in a position to make a dramatic rescue. They've already bought 120 billion euros ($127.3 billion) worth of Italian debt, and with the Germans pushing policy makers' conversation toward tapering, a big round of purchases to control a selloff looks unlikely.

Other buyers look scarce -- plenty of capital has already left Italy, as this chart of balances in the region's payments system, Target2, shows. Bond yields have widened relative to German debt, and the country's bank stocks have been smashed. German short end paper is at all-time negative yields as investors seek safety. 

Money's Leaving Italy
The EU's payment system for banks shows increasing outward flows via Italy's central bank
Source: ECB, Bloomberg

This is why Italian President Sergio Mattarella may well hold off for as long as possible in calling another election. The opposition Five Star Movement favors exiting the euro, and calling an election now could pave the way for even more uncertainty about Italy's role in Europe. By delaying, Mattarella may give Renzi time to regroup. 

But the replacement government would have no real mandate other than crisis management until elections finally follow. Muddling through is not a compelling investment strategy, particularly when Italy is in such clear need of change, so it would likely be doomed to underperform its peers.

Referendum Risk
Italian 10-year bond yields soared as prospects for a `No' vote gained ground
Source: Bloomberg

Perhaps persuading Renzi to stay, which might be the most likely scenario, would allow an element of calm to return, particularly as Italian banks are already in the midst of a make-or-break restructuring. 

Damage control is crucial to keeping Italy's options open. The country has the third largest debt in the world, and any move toward the rollercoaster ride of even potentially exiting the euro would seriously jeopardize the stability of Italy, and the rest of Europe.

The ECB holds its monetary policy meeting just 4 days later, and on a "No" vote Mario Draghi will probably have to do "whatever it takes" again -- if indeed he is allowed to. Suffice to say the EU has deep experience of somehow emerging largely intact from their crises, but their Plan B better be quickly on the table after Dec. 4th.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Marcus Ashworth in London at mashworth4@bloomberg.net

To contact the editor responsible for this story:
Jennifer Ryan at jryan13@bloomberg.net