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Italy's anti-austerity vote raises the spectre of a bailout Italy's anti-austerity vote raises the spectre of a bailout
(7 months later)
Political deadlock could push Italy towards a bailout, the Capital Economics thinktank has suggested. That prediction runs several steps ahead of events, since Italy's bond prices are not yet flashing red – the yield on 10-year paper is 4.8% – but it's a sharp rise from the 4.3% seen early on Monday, when it seemed voters would deliver a "market-friendly" outcome.Political deadlock could push Italy towards a bailout, the Capital Economics thinktank has suggested. That prediction runs several steps ahead of events, since Italy's bond prices are not yet flashing red – the yield on 10-year paper is 4.8% – but it's a sharp rise from the 4.3% seen early on Monday, when it seemed voters would deliver a "market-friendly" outcome.
It is still a long way from the 7% level of late 2011, which was the trigger for Silvio Berlusconi to be prised out of the prime minister's office and replaced by the technocrat Mario Monti.It is still a long way from the 7% level of late 2011, which was the trigger for Silvio Berlusconi to be prised out of the prime minister's office and replaced by the technocrat Mario Monti.
It's certainly very easy, though, to imagine how Italian bond yields could soar to danger levels. A grand coalition of Pier Luigi Bersani's centre-left grouping and Berlusconi's centre-right would probably not work for long. And fresh elections could deliver an even messier outcome, especially if Beppe Grillo's Five Star Movement, running on a eurosceptic, anti-establishment, anti-corruption ticket, were to increase its share of the vote beyond 27%.It's certainly very easy, though, to imagine how Italian bond yields could soar to danger levels. A grand coalition of Pier Luigi Bersani's centre-left grouping and Berlusconi's centre-right would probably not work for long. And fresh elections could deliver an even messier outcome, especially if Beppe Grillo's Five Star Movement, running on a eurosceptic, anti-establishment, anti-corruption ticket, were to increase its share of the vote beyond 27%.
Amid the uncertainty, the Italian economy, which is already expected to shrink 1% this year, could fail to meet even those low expectations. So, yes: the level of Italian bond yields in three, six or nine months' time is anybody's guess.Amid the uncertainty, the Italian economy, which is already expected to shrink 1% this year, could fail to meet even those low expectations. So, yes: the level of Italian bond yields in three, six or nine months' time is anybody's guess.
The open question is what the pledge by Mario Draghi at the European Cental Bank to do "whatever it takes" to save the euro would mean if Italy, in the midst of political gridlock and confusion, were to need a bailout.The open question is what the pledge by Mario Draghi at the European Cental Bank to do "whatever it takes" to save the euro would mean if Italy, in the midst of political gridlock and confusion, were to need a bailout.
Remember that the critical feature of the ECB's revamped Outright Monetary Transactions (OMT) scheme is "strict and effective conditionality" – in other words, a hard-and-fast reform programme, with the International Monetary Fund involved in its design and monitoring.Remember that the critical feature of the ECB's revamped Outright Monetary Transactions (OMT) scheme is "strict and effective conditionality" – in other words, a hard-and-fast reform programme, with the International Monetary Fund involved in its design and monitoring.
But how do you negotiate if there is no stable government in place to request a bailout, or indeed negotiate a strong conditional programme of reforms when Italians have registered such an unmistakable anti-austerity vote?But how do you negotiate if there is no stable government in place to request a bailout, or indeed negotiate a strong conditional programme of reforms when Italians have registered such an unmistakable anti-austerity vote?
Current bond yields suggest a touching faith that a workable political fudge will emerge sooner or later. What if it doesn't? What if those Italian yields do start to rise to unaffordable levels?Current bond yields suggest a touching faith that a workable political fudge will emerge sooner or later. What if it doesn't? What if those Italian yields do start to rise to unaffordable levels?
The eurogroup leaders in Brussels and Frankfurt would be faced with an extremely uncomfortable dilemma. On one hand, they might be tempted to let the crisis run for a while to encourage Italians to elect some supposed grownups next time. On the other hand, they would be fearful of the risks of playing hardball: they could feed more anti-euro feeling and end up having to ditch all their fine words about "conditionality", and support Italy regardless.The eurogroup leaders in Brussels and Frankfurt would be faced with an extremely uncomfortable dilemma. On one hand, they might be tempted to let the crisis run for a while to encourage Italians to elect some supposed grownups next time. On the other hand, they would be fearful of the risks of playing hardball: they could feed more anti-euro feeling and end up having to ditch all their fine words about "conditionality", and support Italy regardless.
To repeat, those plotlines and tensions are only one possible development. All the same, something has to give if the euro crisis is not to explode again. The subtle message of the election, as Lombard Street Research puts it, is that this was a vote against austerity. Over half the votes were shared between Grillo, arguing for a referendum on the euro and floating the idea of Italy defaulting on some of its debts, and the irrepressible Berlusconi. It's an astonishing result.To repeat, those plotlines and tensions are only one possible development. All the same, something has to give if the euro crisis is not to explode again. The subtle message of the election, as Lombard Street Research puts it, is that this was a vote against austerity. Over half the votes were shared between Grillo, arguing for a referendum on the euro and floating the idea of Italy defaulting on some of its debts, and the irrepressible Berlusconi. It's an astonishing result.
"Cheap, populist policies, certainly. But that is exactly what happens if you try to fight depression using austerity alone," comments Lombard's Dario Perkins."Cheap, populist policies, certainly. But that is exactly what happens if you try to fight depression using austerity alone," comments Lombard's Dario Perkins.
So, has the euro-club of power-brokers got the message that additional remedies are required? Nothing heard so far suggests so. German politicians sound so shocked that their reactions amount to little more than a wish that Italy had a different electorate. But it's too late for wishful thinking.So, has the euro-club of power-brokers got the message that additional remedies are required? Nothing heard so far suggests so. German politicians sound so shocked that their reactions amount to little more than a wish that Italy had a different electorate. But it's too late for wishful thinking.
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