“We trust that the government will take all the appropriate actions” – Jean-Claude Trichet. Mario Draghi. That was the sign-off for the now infamous ECB letter sent to Silvio Berlusconi’s government during the height of the European sovereign debt crisis. Nearly seven years on, Italy has once again experienced financial market turmoil and the ECB this week will no doubt be asked many questions about the situation.
Political risk is back with a vengeance in Italy. As the third largest global issuer of government bonds after the US and Japan, the country is too big to be allowed to fail without severe contagion to the global financial system. However, it is also too big to bail out comfortably using tried and tested mechanisms.