Italian election turmoil threatens EU bailout
ECB plan hinges on austerity measures
ROME Why has Italy’s muddled election result spooked global investors so much? Because it raises unsettling questions about the availability of the financial safety net that has kept Europe from catastrophe for the past six months.
That safety net is a crucial offer from the European Central Bank to buy unlimited quantities of struggling countries’ bonds. The one catch is that participating countries had to commit to austerity measures — such as spending cuts and tax increases to lower their deficits.
And if there’s any clear message from the Italian elections, it’s that voters rejected austerity.
If Italy can’t — or won’t — agree to cuts and reforms to promote stronger growth, the ECB can’t help.
That would leave Italy defenceless if its borrowing costs rise to unmanageable levels and into default territory. And if Italy fails, Europe can’t afford to bail it out.
A top European Central Bank official underlined Wednesday that any country that wants to use the crucial backstop will have to meet stiff conditions and agree to take steps to cut its deficit.
Peter Praet, the top ECB official in charge of its economic analysis and forecasts, did not mention Italy in the text of his speech in Frankfurt, Germany. But he warned that the bond-purchase shield “will only be activated in cases where the benefiting country has signed up to strict and effective conditionality,” meaning an agreement to take concrete steps to curb its financial problems.
Praet’s warning came as Italy saw its borrowing costs rise as it sold $8.5 billion of 10-year and five-year bonds. The interest yield rose to 4.83 per cent from 4.17 per cent a month ago for the 10-year and to 3.59 per cent from 2.94 per cent for the five-year.
So far, Italy’s borrowing costs have risen only moderately. But the fear is that continuing turmoil could let them climb toward the heights of late 2011 and early 2012 — a hefty seven per cent.
Pier Luigi Bersani and his centre-left allies appear to have won a narrow victory in the lower house of parliament, but the Senate looks split with no party in control.