The European Central Bank is watching the political crisis in Italy but is unlikely to intervene at the moment, according to sources.
Three sources at the ECB told Reuters that the central bank would not take any action because indicators are not yet showing signs of stress among banks.
They also said they did not have the tools or mandate to solve what is essentially a political crisis.
One ECB source said: “No central bank would act on the back of the events of a few days”.
Italy has been without a government since inconclusive elections on 4 March, when voters backed anti-establishment and far-right parties the 5-Star Movement and League Nord, leaving a hung parliament.
Efforts to form a government collapsed over the weekend.
A deal between the president and 5-Star/League would bring some certainty but would still mean a coalition wanting to increase spending in a country already heavily in debt.
If the stalemate continues, Italy will have another election, possibly as soon as July, but investors fear this could become a poll on Italy’s use of the euro.
:: Why markets are fretting over Italy’s coalition
Italy’s bond markets saw their worst sell-off in 26 years and the euro hit a 10-month low against the US dollar on Tuesday but by Wednesday things looked to be improving slowly.
Milan’s FTSE MIB was up 1.8% on Wednesday afternoon, having tumbled by 2.7% the previous day.
London’s FTSE 100 was up 0.5%, Frankfurt’s DAX 30 gained 0.6% and the Paris CAC 40 was down half a percent.
VTB economist Neil MacKinnon said: “Risk aversion in financial markets is increasing in response to the Italian political crisis.”
Craig Erlam at Oanda added: “Political uncertainty in Italy continues to act as a drag on risk appetite.”
More from Italy
Also on Wednesday, the OECD warned that Italy’s political chaos, along with the Brexit negotiations, poses a major risk to the European economy.
Earlier in the week, the ECB’s vice president Vitor Constancio warned that any help for Italy would come with conditions, such as controls on government spending.
Source: Sky