The European Central Bank is ready to temporarily step up purchases of Italian government bonds if the result of a crucial referendum on Sunday sharply drives up borrowing costs for the euro zone’s largest debtor, central bank sources told Reuters.
Italian government debt and bank shares have sold off ahead of the Dec. 4 referendum on constitutional reforms because of the risk of political turmoil. Opinion polls suggest the ‘No’ camp is heading for victory, which could force out Prime Minister Matteo Renzi in the latest upheaval against the ruling establishment sweeping the developed world.
The ECB could use its 80-billion-euro ($84.8 billion) monthly bond-buying programme to counter any immediate, further spike in bond yields after the vote, smoothing market moves and supporting bonds, according to four euro zone central bank sources who asked not to be named.
The preparations show that even though the proposed Italian reforms – such as reducing the powers of the upper house of parliament – have no relation to sovereign debt or economic policy, the fact Renzi has staked his premiership on the outcome of the vote has made it a flashpoint for financial markets.
Italian bond yields fell to a one-week low on Tuesday in response to the Reuters report.
The sources said the ECB bond-buying scheme was flexible enough to allow for a temporary increase in Italian purchases and that such a move would not necessarily need to be rubber-stamped by the ECB’s Governing Council, which is due to meet on Dec. 8 to decide on whether to keep buying bonds after March.
But they stressed this would be limited to days or weeks, to counter any immediate market volatility, because the asset-purchase programme was designed to shore up inflation and economic growth in the entire euro zone and was not intended to fight crises in individual countries.
This means that, if Italy or its banks needed longer-term financial support, Rome would need to formally ask for help.
“The Governing Council understands that there is some space to help Italy, which will be used, if needed. The asset purchase programme has built-in flexibility,” said one of the sources. “The key is that the ECB has to be convinced the volatility can be overcome by using this flexibility.”