LONDON: Italian bonds steadied on Wednesday ahead of a major debt auction that is threatened by worries political deadlock will cripple efforts to reform its indebted economy.
This week's general election produced a hung parliament and showcased the Italian population's lack of support for budget cutbacks, raising worries that whatever new government is formed may be unable to keep its 2 trillion euro debt burden under control.
The political deadlock could escalate into a new wave of contagion in the euro zone, seven months after European Central Bank President Mario Draghi won some respite with his pledge to do "whatever it takes" to save the euro, analysts say.
The ECB's bond-buying programme (OMT) is still seen as a force acting against debt costs reaching unsustainable levels. But it requires countries to first apply for aid and then stick to an agreed programme of austerity, raising questions about how soon it could be activated.
"Italy has reminded everyone that triggering the OMT ... is not as easy as the market thought," said Gilles Moec, economist at Deutsche Bank. "As it is a reminder of the fragility of the entire system, it has a negative impact for the risk premium for the entire periphery."
"Now, is it enough to send us into the kind of mayhem in which we were last summer? No. It raises the bar for ECB intervention but it doesn't kill the idea."
Italian 10-year bond yields were steady at 4.90 percent, having risen about half a percentage point this week. They are still well below last July's highs of about 6.7 percent.
Spanish, Portuguese and Irish yields, which have been dragged up by Italy this week, were also stable on Wednesday.
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