Pain of defeat. Italian Prime Minister Matteo Renzi's face says it all. Photo: Reuters/Alessandro Bianchi
Pain of defeat. Italian Prime Minister Matteo Renzi's face says it all. Photo: Reuters/Alessandro Bianchi

The euro was under the gun on Monday, skidding to a 20-month low after Italian Prime Minister Matteo Renzi said he would resign following a stinging defeat on constitutional reform that could destabilize the country’s shaky banking system.

Renzi’s defeat deals a body blow to the European Union already reeling under anti-establishment anger that led to the shock exit of UK from the club in June this year.

The single currency, which slumped as much as 1.4% to US$1.0505 after opening at around US$1.0685, recovered a bit to US$1.056.

The drop to its session low was the sharpest fall since June and opened the way to a retest of the March 2015 trough around US$1.0457.

“The ‘no’ vote was priced in to a certain extent in advance. So I do not expect a freefall in the euro in the near term,” said Minori Uchida, chief currency analyst at the Bank of Tokyo-Mitsubishi.

“But in the long run, this will delay progress in Italy’s efforts to get rid of banks’ bad debt and is likely to widen the yield spread of German Bunts and the Italian bonds,” he added.

Renzi’s resignation represents a fresh blow to the European Union, the euro zone’s heavily indebted third-largest economy which is struggling to overcome a raft of crises

“For markets, the risks posed by Italy’s ‘no’ vote are about the potential for political instability and the possibility of an election in Italy rather than with any missed opportunity for long term constitutional reform,” Ric Spooner, chief market analyst at CMC Markets in Sydney, wrote in a note.

“The real concern for markets is whether this situation may ultimately lead to election of the Five Star Movement whose policy is to hold a referendum on whether Italy should remain in the Eurozone.”

“I take full responsibility for the defeat,” Renzi said in a televised address to the nation, saying he would hand in his formal resignation to President Sergio Mattarella on Monday.

Mattarella will have to embark on a round of consultations with party leaders before naming a new prime minister – Italy’s fifth in as many years – who will be tasked with drawing up a new electoral law.

Early projections said Renzi managed to win little more than 40%of the vote on Sunday following months of bitter campaigning that pitted him against all major opposition parties, including the anti-system 5-Star Movement.

Italy’s parties will now have to work together on the new electoral law, with the 5-Star urging a swift deal to open the way for elections in early 2017, a year ahead of schedule.

Opinion polls show Renzi’s Democratic Party (PD) is neck-and-neck with the 5-Star, which has called for a referendum on Italy’s membership of the euro currency.

Supporters wave flags in favour of Yes, but voters said No. Photo: Reuters/Remo Casilli

Demolition man

Renzi, 41, took office in 2014 promising to shake up hidebound Italy and presenting himself as an anti-establishment “demolition man” determined to crash through a smothering bureaucracy and redraw the nation’s creaking institutions.

Sunday’s referendum, designed to hasten the legislative process by reducing the powers of the upper house Senate and regional authorities, was to have been his crowning achievement.

However, his reforms so far have made little impact, and the 5-Star Movement has claimed the anti-establishment banner, tapping into a populist mood that saw Britons vote to leave the European Union and Americans elect Donald Trump president.