Italian voters are really going to make Draghi “do whatever it takes”
In July, Mario Draghi, head of the European Central Bank (ECB), promised that the bank would “do whatever it takes” to protect the euro. That set off a six-month wave of “risk-on” sentiment among investors in Europe. But it was based on dubious assumptions. Though the euro zone had made progress on joint banking supervision and rectifying fiscal imbalances between different countries, in reality most investors credited Draghi’s promise, and his program of “Outright Monetary Transactions” (OMT)—where the ECB pledged to support countries in trouble by keeping their borrowing costs down if they asked for aid.
At the time, Spain was expected to request this kind of aid within a few months. But yields on Spain’s 10-year bonds—a measure of investors’ trust in a government’s ability to pay back its debts—which had topped 7.5% in late July before Draghi’s speech—fell sharply afterwards, as investors gained faith that the ECB would step in to save Spain if it had to. That belief meant Spain hasn’t had to ask for help. The same thing happened with Italy.
But Italy’s election result challenges those assumptions. As they did last year in Greece, voters have failed to do what investors thought they were “supposed to do.” Rather than support Mario Monti, the outgoing prime minister who tried to make Italy more competitive through austerity measures, and Pier Luigi Bersani, who would have continued much of Monti’s reform program, voters shifted much of their backing to the parties of former PM Silvio Berlusconi and Beppe Grillo, an anti-establishment populist. With a hung parliament or short-lived government in the offing, the fate of those reforms is unclear.
Greece and Italy mark a trend: Voters are moving away from career politicians whose top priority is European unity, and towards candidates who care (or claim to) that their populations are suffering now. Citi’s global head of FX strategy, Steven Englander, wrote in a note yesterday:
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http://qz.com/56961/italian-voters-are-really-going-to-make-draghi-do-whatever-it-takes
Worth reading the rest. Voters didn't do what "they were supposed to" according to the banks. Greece did what "they were supposed to" and they are predictably worse off.
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No contest. Aren't there still plenty of telephone poles and rope in Italy?
