Matteo Renzi To Resign After Referendum Rout, Leaving Italy In Limbo

Rome, Italy: Italian Prime Minister Matteo Renzi is set to resign on Monday after suffering a resounding defeat in a referendum over constitutional reform, leaving the euro zone's third-largest economy in political limbo.

His decision to quit after just two-and-a-half years in office deals a new blow to Europe's political establishment, already reeling from the Brexit vote and struggling to overcome populist forces.

It is a dramatic loss for Italy's youngest premier, who had been feted around the world as a pro-European reformer and lauded by US President Barack Obama for his "bold, progressive" leadership.

His resignation announcement followed a referendum that the 41-year-old turned into a de facto vote on his own domestic popularity - one he gambled everything on by pledging to quit if he lost.

The euro initially fell along with European stock and bond markets on concerns that early elections could follow, possibly paving the way for an anti-euro party to win power, but markets rebounded as European officials dismissed talk of a broader euro zone crisis.

It is unclear if Renzi will have enough support in his Democratic Party (PD) to remain party leader - a role that could give him a say in who becomes the next prime minister.

Economy Minister Pier Carlo Padoan, who has pulled out of meetings with European finance ministers in Brussels this week, is viewed as a possible candidate for prime minister. Senate President Pietro Grasso and Transport Minister Graziano Delrio have also been tipped as potential premiers.

The government crisis could open the door to elections next year and to the possibility of the opposition 5-Star Movement gaining power in the heart of the single currency area. 5-Star, which campaigned hard for a 'No' vote, wants to hold a referendum instead on membership of the euro.

"I take full responsibility for the defeat," Renzi said in his emotional, midnight speech.

"I will greet my successor with a smile and a hug, whoever it might be," he said, struggling to contain his emotions when he thanked his wife and children for their support.

"We are not robots," he said at one point.

Renzi has called a Cabinet meeting for 1730 GMT, after which he said he would formally tender his resignation.

SUCCESSOR

Sunday's referendum was over government plans to reduce the powers of the upper house Senate and regional authorities but was viewed by many people as a chance to register dissatisfaction with Renzi, who has struggled to revive economic growth, and mainstream politics.

"No" won an overwhelming 59.1 percent of the vote, according to the final count. About 33 million Italians, or two-thirds of eligible voters, cast ballots following months of bitter campaigning that pitted Renzi against all major opposition parties, including the anti-establishment 5-Star.

The euro briefly tumbled overnight to 21-month lows against the dollar, as markets worried instability could deal a hammer blow to Italian banks, which are looking to raise around 20 billion euros ($21 billion) in coming months.

By early in the European morning it had largely rebounded. But Italy's banking sector - which is weighed down by more than 350 billion euros of bad loans - was down about 3 per cent at 1610 GMT.

Monte dei Paschi shares closed down 4.2 per cent after as a consortium of investment bankers met to discuss a capital increase to raise 5 billion euros which the lender needs by the end of the month to avoid being wound down.

Yields on Italy's benchmark 10-year bond initially soared to more than 2.07 per cent, but then retreated back below 2 per cent.

Mattarella will consult with party leaders before naming a new prime minister - the fourth successive head of government to be appointed without an electoral mandate, a fact that underscores the fragility of Italy's political system.

In the meantime, Renzi would stay on as caretaker.

The new prime minister, who will need the backing of Renzi's PD to take office, will have to draw up a new electoral law, with 5-Star urging a swift deal to open the way for elections in early 2017, a year ahead of schedule.

"From tomorrow, we will start work on putting together 5-Star's future programme and the team of people that will make up a future government," said Luigi Di Maio, tipped to be the group's prime ministerial candidate.

Opinion polls put 5-Star neck-and-neck with the PD.

DEMOLITION MAN

Renzi 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 reshape creaking institutions.

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

In a moment of relief for mainstream Europe, Austrian voters on Sunday rejected Norbert Hofer, vying to become the first freely elected far-right head of state in Europe since World War Two, choosing a Greens leader as president instead.

But elsewhere, the established order is in retreat. French President Francois Hollande said last week he would not seek re-election next year, and even German Chancellor Angela Merkel looks vulnerable as she seeks a fourth term in 2017.

Renzi's departure would reflect this shift in the leadership of the Western world. Of the five leaders of the biggest Western economies at the beginning of 2016, only one - Merkel - is likely to still be in power through 2017.