Franklin Templeton's Zahn - Trump win raises risk of Italy 'No' vote

By Dhara Ranasinghe LONDON (Reuters) - U.S. Republican Donald Trump's unexpected win in the U.S. presidential election suggests a stronger-than-expected chance of a 'no' vote in Italy's upcoming referendum, the head of European fixed income at Franklin Templeton said on Wednesday. Italy holds a referendum on constitutional reform on December 4 in what is shaping up to be the next major risk event for euro zone markets. Prime Minister Matteo Renzi says his plan to curb the roles of the upper house Senate and regional governments will bring greater stability to Italy and accelerate lawmaking. Critics say the changes would remove checks and balances, over-centralise power and hurt democracy. Opinion polls generally put the 'no' camp ahead. "The Trump win does show that populism continues in 2016 and suggests a 'no' vote in the Italian referendum could be stronger than we assumed," Franklin Templeton's David Zahn told Reuters. "That is something that could become an issue for the market and something people will focus on." Concerns about growing political uncertainty in Italy - the euro zone's third biggest economy - have weighed on Italian government bonds, which have underperformed top-rated German bonds as well as southern European peers in recent months. The gap between Italian and Spanish 10-year bond yields is trading at around 50 basis points, its widest level since the bloc's 2012 debt crisis. Zahn declined to comment on any changes in market positioning following the U.S. election results. He confirmed that the funds he oversees, specifically the Franklin European Total Return fund, had scaled back exposure to Italian bonds earlier this year. Zahn oversees Franklin Templeton's European fixed income strategies, which total over 2 billion euros ($2.2 billion). Earlier this year, Italy's prime minister, Matteo Renzi, repeatedly said he would resign in the case of a referendum defeat. More recently he has declined to confirm that, saying discussion of his own future deflected attention from the merits of the reform. The main opposition party, the anti-establishment 5-Star Movement, says that if he loses Renzi must "keep his promise" to quit and new elections should be held in early 2017, a year ahead of schedule. Rising populism globally, highlighted by Trump's win, not only puts the focus on Italy but also on elections in Germany and France next year, said Zahn. He added that Trump's election win had a number of implications for Europe as a whole. "He has been quite negative on NATO and this will make European leaders sit up," said Zahn. "He also wants to renegotiate several trade issues and third is what the relationship with Russia will be like." (Reporting by Dhara Ranasinghe, editing by Nigel Stephenson and Raissa Kasolowsky)