Investors fret that Italy may undermine ECB backstop

Wed Feb 27, 2013 5:28am EST
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By Mike Dolan

LONDON (Reuters) - Italy's fractious election results this week have raised investor suspicions that the euro zone's protracted debt crisis has reached a critical juncture.

The European Central Bank's support mechanism for the euro's ailing government debt markets - which has brought six months of relative calm across the region's markets - remains a powerful force in preventing another series of rolling creditor strikes.

ECB chief Mario Draghi's vow from last July to do "whatever it takes" to protect the euro continues to assure many asset managers the zone will not be pushed back to the cliff edge of last summer. And while stocks and bonds in Italy and across the bloc fell sharply on Tuesday, they stayed some distance from crisis peaks.

Yet the clearest signal from Italy's otherwise muddy election was its rejection of ever more austerity in a contracting economy.

The polls showed no single political force with a majority in Italy's two houses of parliament and about half the electorate opposed the prior government's policies of austerity.

Rejection of the sort of additional budget-cutting that any ECB backstop would require casts some doubt on what scope that leaves the central bank if it opts to execute the government bond buying program it calls Outright Monetary Transactions.

"This is a very clear protest against austerity and the implications are potentially profound," said Russell Silbertson, Head of Global Interest Rates at Investec Asset Management.

"The ECB last year made it clear it was willing to help, but only if a country requested that help and agreed to conditions. In other words, the OMT (the ECB's backstop) is a partnership and these anti-austerity votes question that partnership."   Continued...

An illuminated euro sign is seen in front of the headquarters of the European Central Bank (ECB) in the late evening in Frankfurt January 8, 2013. REUTERS/Kai Pfaffenbach