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December 6, 2016

How Italy’s ‘no’ vote might be the ECB’s silver lining

Alaric Securities

Italian uncertainty is pushing the ECB to deliver ‘bare minimum’ on Thursday, analyst says.

The resounding “no” vote in Italy’s weekend referendum may have put another cloud over Europe’s financial landscape, but there could be a silver lining for the European Central Bank.

As the ECB gets ready for its policy-setting meeting on Thursday, the political uncertainty in Italy and its banking system’s woes are giving the central bank’s doves — including President Mario Draghi — a perfect excuse to extend their quantitative-easing program, analysts said.

 “If anything, the Italian referendum should have provided [Draghi] the final argument to convince the ECB hawks to deliver the bare minimum at Thursday’s meeting and extend QE beyond March 2017,” said Carsten Brzeski, chief economist at ING, in a note.

While the ECB has been widely expected to extend its bond buying by another six months, recent upbeat data and a rise in inflation have given the hawks on the governing council fresh ammunition to put a brake on aggressive easing measures. Additionally, the anticipated negative impacts from political upsets such as the U.K.’s Brexit vote and Donald Trump’s win in the U.S. have hardly left any scratches on the eurozone economy.

That’s likely to be reflected in the updated staff projections that will be published alongside the rate decision on Thursday, which could make it harder for Draghi to argue for an extension of QE, Brzeski said.

“We expect Draghi to stress the high uncertainty in markets and, by extension, surrounding the staff projections,” he said. “In this regard, the ECB might not be extremely unhappy with the ‘no’ vote in the Italian referendum, as it could provide more persuasive power to the ‘uncertainty’ argument. It will not be the first ever time that the governing council’s economic assessment diverts from staff projections.”

ECB to the rescue in Italy?

The Italian vote to reject Prime Minister Matteo Renzi’s proposed constitutional reforms was largely expected, but the margin — about 60% against vs. 40% in favor of the overhaul — is seen as another victory for an antiestablishment wave that has swept across large parts of Europe and the U.S. as well.

Renzi said he would resign after losing the referendum, and analysts now worry that will pave the way for populist, “euroskeptic” parties, such as the 5 Star Movement, to gain more power. In a worst-case scenario, the “no” vote is feared as laying the groundwork for an Italian departure from the eurozone and sparking a systemic crisis in the currency union.

While that is not the base-case expectation, Italian stocks and bonds still took a beating following the vote. The yield on 10-year Italian government paper TMBMKIT-10Y, -1.39% moved back above 2%, while banks led the FTSE MIB index I945, +1.15% lower.

Those market jitters also could impact how the ECB carries out its bond purchases. One possibility being eyed by analysts is for the central bank to tilt toward Italian bonds in its QE program.

“The ECB meeting on Thursday provides a window for the central bank to act swiftly to prevent any significant damage to the Italian economy with expectations for Mario Draghi, et al., to extend the current QE policy with a particular focus on Italian government bonds,” said Henry Croft, research analyst at Accendo Markets, in emailed comments.

The ECB announces its rate decision at 12:45 p.m. London time, or 7:45 a.m. Eastern time. Draghi’s press conference starts at 1:30 p.m. London time, or 8:30 a.m. Eastern.

Article and media originally published by Sara Sjolin at