A dramatic anti-austerity vote leaves Italy lying outside the fortress the ECB constructed around the eurozone last year, and vulnerable to a market attack.
The Italian election leaves slim prospects for a durable, reform-minded government in Rome, and exposes a flaw in the bond-buying defence plan the ECB put together last September - a weakness that could see the eurozone crisis roar back to life. After vowing to do "whatever it takes" to save the euro, the ECB's Italian chief Mario Draghi launched a plan - dubbed Outright Monetary Transactions (OMT) - in September which promised potentially unlimited buying of a struggling country's bonds.
Market pressure on the eurozone's high debtors has subsided ever since, to the extent that even the most cautious policymakers have declared the worst to be over. The catch is Draghi is ready to do whatever it takes "within our mandate". To satisfy this caveat, the scheme requires a country whose bonds the ECB buys to sign up to a European aid programme with debt-cutting conditions attached. But Italians overwhelmingly rejected Prime Minister Mario Monti's austerity policies in a February 24-25 election that gave no party a parliamentary majority and threatens prolonged political instability in the eurozone's third largest economy. Markets are unnerved. Italian borrowing costs have risen sharply and jitters have spread to Spain But fear could turn to greed if investors sense Italy is unprotected.
The ECB is conscious of the risk of contagion from Italy to Spain, but insists it will not intervene to help Italy if it does not have a credible government capable of the reforms required for support in the debt market.
With Italy showing no appetite for the reforms that are a pre-condition for OMT support, a sustained attack on its sovereign bond market could throw the eurozone back into the depths of crisis and land the ECB with a new policy conundrum. Under its previous bond plan, the Securities Markets Programme (SMP), the ECB could intervene without necessarily attaching conditions.
In the event of a market onslaught and no reform commitment from Italy, one option for the ECB now would be to sit back and hope the increase in borrowing costs pushed Rome into action. Germany's Bundesbank, the biggest stakeholder in the ECB, would certainly disapprove of bond buying. Even with strict conditions, Bundesbank chief Jens Weidmann regards ECB bond buys as tantamount to financing governments by printing banknotes.
Full article
© Reuters
Key
Hover over the blue highlighted
text to view the acronym meaning
Hover
over these icons for more information
Comments:
No Comments for this Article