ECB ready to buy bonds if Italian vote goes against Renzi
The European Central Bank is ready to temporarily step up purchases of Italian government bonds if the result of a crucial referendum on Sunday spooks the market, according to central bank sources.
Italian government debt and bank shares have sold off ahead of the December 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 €80bn a month bond-buying programme to counter any immediate spike in bond yields after the vote, smoothing market moves and supporting bonds, according to four euro zone central bank sources.
The proposed reforms have no relation to sovereign debt or economic policy, but with Renzi staking his premiership on the outcome of the vote it has become a flashpoint for financial markets. Italian bond yields fell to a one-week low yesterday in response to the Reuters report.
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 December 8.
Bond purchase support will only be short-term. If Italy or its banks needed longer-term support, Rome would need to formally ask for help, which could potentially ignite a wider Euro zone crisis. (Reuters)