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Italy reignites sovereign debt crisis concerns

Analysts expect European Central Bank to wait and watch

Gulf News

Frankfurt: Concerns that political gridlock in Italy could reignite the sovereign debt crisis and choke off tentative green shoots of recovery look set to dominate a European Central Bank meeting this week, analysts say.

Nevertheless, the central bank’s governing council, at its regular monthly policy meeting on Thursday, is not expected to cut key interest rates or announce any other policy measures, at least for the time being, ECB watchers argue.

“We expect the ECB to leave its monetary stance unchanged,” said UniCredit analysts in a weekly note to investors.

Compared with last month’s meeting, “the picture is one of more tense financial markets, but a weaker currency. In terms of implications for conventional monetary policy, these two factors will broadly offset each other,” the analysts argued.

“The ECB’s wait-and-see stance is further supported by the continuation of the moderate recovery trend in growth indicators,” they added.

“In a nutshell, we expect the ECB to keep rates on hold at 0.75 per cent and no further non-standard measures to be announced,” agreed Newedge Strategy analyst Annalisa Piazza.

“The ECB will reiterate that the current monetary conditions are accommodative and liquidity conditions are still very ample,” she said.

ECB chief Mario Draghi has repeatedly stated that with interest rates currently at a record low of 0.75 per cent, an unprecedented amount of liquidity pumped into banks and a key bond-purchase programme in place, the central bank has already done its utmost and it is up to governments to resolve the long-running crisis.

However, the outcome of last week’s general elections in Italy, where “over half of the Italian electorate voted for anti-austerity parties casts clear doubt over whether (Italy, for one) will ever achieve sustainable public finances,” said Jennifer McKeown at Capital Economics.

Italian-born Draghi is unlikely to let himself be drawn into making any comment on domestic political issues in his home country.

But political developments there “will be a topic in the question-and-answer session” of the traditional post-meeting news conference, said the UniCredit analysts.

Italian bond yields have been rising again in the wake of the election outcome. And that has triggered a debate among ECB watchers whether the ECB might finally bring into action its “big bazooka” or OMT bond purchase programme to help curb the rise.

The problem here is that the OMT is only open to countries that have applied for a bailout by Europe’s ESM rescue fund and which accept the associated conditions of fiscal and structural reform.

And Italy does not fulfil those criteria, said McKeown at Capital Economics.

Commerzbank chief economist Joerg Kraemer believed that “before things actually get to the point at which the ECB begins buying Italian sovereign bonds, it might first try verbal intervention.”

Also on the agenda of Thursday’s meeting will be the ECB’s updated staff projections for growth and inflation.

Piazza at Newedge Strategy said she was expecting “no significant changes” to the forecasts, which in December had foreseen a contraction in the eurozone economy of 0.3 per cent this year followed by growth of 1.2 per cent in 2014.

However, “the recent uncertain political situation in Italy clearly adds pressure on the scenario of moderate recovery for late 2013,” even if ECB chief Draghi is likely to suggest that a rate cut is not necessary at the current juncture, the analyst said.

By contrast, Commerzbank economist Michael Schubert said he felt the projections were “likely to be revised upwards rather than downwards”.