Has The ECB Left The Italian Rearguard Wide Open To Speculative Attack?


Photo: AP

During the ongoing debt saga in Europe’s periphery, the European Central Bank (ECB) has actually had some success fending off speculative attacks.Hedge fund manager Hugh Hendry, for one, sounded like he was licking his wounds when he remarked last year that trying to short Europe had in effect become too ‘expensive’.

The ECB’s working assumption has always been that preventing the spread of contagion to Spain was of paramount importance. While it’s true that Italy has most always been included when discussing the PIIGS debt problem, there was a sense that because Italian debt is largely held domestically by Italians (like Japan’s situation) that the risks of unstable debt dynamics there were relatively low.

All that apparently changed suddenly on Friday as Italian bond spreads widened and, perhaps even more troubling, key Italian bank stocks plunged. As Italian regulators race to curb short selling, today both Italy’s largest bank, UniCredit, andIntesa Sanpaolo are limit down, which triggered a halt to trading in their shares.

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