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Q&A: Why Italian Election Has Shaken Investors

Q: If the ECB is on standby with its offer to buy bonds issued by struggling countries, why would it matter if Italians say no to austerity?

A: The ECB stressed that for it to buy an indebted country's bonds, that country must agree to take steps to reduce its deficit and ask for help from the eurozone's bailout fund.

If a government can't â¿¿ or won't â¿¿ agree to an austerity plan, the ECB can't help. Hence the concern that the eurozone debt crisis could return.

Q: What could happen next?

A: Worst case: Analysts at Capital Economics in London see a worsening of Italy's financial situation and an eventual move for a bailout. That would probably be preceded by serious financial turmoil that would drive whatever government is in charge to agree to one.

Others, however, think the post-election market turbulence will be temporary.

Analysts Joerg Kraemer and Ulrike Rondorf at Commerzbank point out that Monti had already pushed through all the cuts and pro-growth reforms he could.

A government that does nothing "need not be all that bad for fiscal policy, because it is unlikely that the tax cuts frequently demanded during the election campaign will be passed in the near future," they wrote.

While growth reforms are still needed, inaction would be "no dramatic change compared with the situation under the Monti government."

Copyright 2011 Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.
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