Investors may look to ECB for comfort after high-risk votes
By Balazs Koranyi
FRANKFURT (Reuters) - With Italy's constitutional referendum and Austria's presidential vote on Sunday both potentially underlining growing anti-establishmentism, the European Central Bank is preparing to set to try to bring some calm to the mix.
It is expected on Thursday to extend its already generous asset buys, emphasizing heightened risk, including from populist movements that could hijack governments' attention from what it sees as vital reforms.
Polls suggest that Sunday's Italian referendum on what Prime Minister Matteo Renzi says is a vote about streamlining public administration, will likely fail, perhaps bringing down the government and prolonging the county's turbulence.
Austria, meanwhile, may elect the European Union's first far-right head of state in its presidential vote.
Although markets have mostly priced in a "No" vote in Italy, it still comes at a sensitive time as troubled lender Monte dei Paschi (BMPS.MI: Quote) is trying to raise 5 billion euros ($5.3 billion) and market volatility could hamper its effort, potentially reverberating throughout the banking sector.
"We expect that under a 'Yes' vote the Italian equity market would have the potential to rally 5 to 10 percent in the short term, whilst a no vote might trigger a 5 to 10 percent correction should Matteo Renzi remain and 10 to 20 percent should the prime minister decide to resign," HSBC said in a note to clients.
The ECB will be ready to step up purchases of Italian government bonds if the referendum drives up borrowing costs but only if the volatility is temporary and the purchases could effectively support the market, sources told Reuters earlier.
But waning confidence in the Italian bank sector may be a bigger issue than sovereign debt yields and policymakers will have little ammunition to prop up the sector. Continued...