Analysis: ECB, global recovery behind markets' mercy on Italy

Tue Mar 12, 2013 7:59am EDT
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By Gavin Jones

ROME (Reuters) - Italy's election produced the hung parliament investors said was the worst possible outcome, recession is deepening, debt is rising and its credit rating has just been downgraded.

So why do markets seem largely unconcerned?

Italy's benchmark borrowing costs have edged up to around 4.6 percent from 4.5 before the election and the gap between safer German Bunds has risen to 3.1 percentage points from around 2.9 points.

That is a negligible reaction to economic sickness and political gridlock in the euro zone's third largest economy. The crippling bond yields above 7 percent at the height of the euro zone debt crisis in November 2011 remain a distant memory.

"I'm surprised and it may be complacent," said Gilles Moec, European economic research head at Deutsche Bank.

Other economists were equally puzzled, and wonder whether this is just the calm before a market storm. The trigger could be another ratings downgrade, a failed attempt to form a government or even bad economic data from the United States.

However, there are logical explanations for markets' relative indifference.

The first and most important is that the euro zone debt crisis has subsided and Italy is proving a major beneficiary of last summer's pledge by European Central Bank chief Mario Draghi to do "whatever it takes" to save the currency bloc.   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