THE response of bond, stock and currency markets to the result of Italy’s referendum, and the resignation of its prime minister, Matteo Renzi, was a jaw-breaking yawn. The euro fell a bit against the dollar, and then rallied. The yield on Italy’s ten-year bonds ticked up a few basis points and then fell to 1.89%. The markets had expected a No vote and priced it in, is one view. The calm probably also owed much to a belief that the European Central Bank (ECB) would act to stem any panic.
As The Economist went to press, the ECB’s governing council was widely expected to extend its monthly purchases of government and other bonds (“quantitative easing”, or QE) beyond March 2017. These purchases (which began at a monthly rate of €60bn and then increased to €80bn), plus the ECB’s myriad schemes to provide long-term liquidity to banks, have worked like a charm. Financing costs in the euro zone’s periphery have converged on those of core countries (see chart). All governments, apart from Greece, can borrow in bond markets at tolerable rates. A nagging worry is that the ECB cannot keep up this support...Continue reading
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