By Marc Jones
LONDON (Reuters) - Euro zone policymakers have discussed using the bloc's bailout fund to stem any contagion from Italy's debt woes to other euro zone countries, the European Central Bank's chief economist said.
A jump in Italy's borrowing costs since its coalition government proposed a deficit-boosting budget last month, has reignited concerns that the euro zone still cannot put its debt woes behind it.
The ECB's Peter Praet said this was starting to fan worries about Greece again too, and that policymakers were looking at whether the European Stability Mechanism (ESM) could be used to prevent further contagion.
"There is one discussion, which is at the political level, about precautionary measures we could take if there would be spillovers to (other) countries," Praet told an audience at a UBS conference in London.
"(These are) not central bank measures. It is related to the ESM and to countries ... having spillovers to some external events."
As part of plans to shore up the euro zone, its finance ministers have been discussing an idea to grant governments easier access to precautionary credit lines from their ESM bailout fund.
The discussions started well before Italian policies created the contagion risk, at a meeting in September officials point out, but the rising tensions around Italy have increased the level of focus on what safety nets are available.
The bailout fund has two credit lines, the Precautionary Conditioned Credit Line (PCCL) and the Enhanced Conditions Credit Line (ECCL), but institutions like the IMF also say the money available would not cover a full scale Italian crisis.
Euro zone officials also argue that such credit lines and the attached conditions they come with, carry a stigma that puts countries off applying for them.
EASIER ACCESS
Praet sent a clear signal that ECB was not considering measures to ease the current market pressure on Italy.
Investors have been trying to gauge whether tighter financing conditions in Italy could derail the ECB's plans to stop adding to its 2.6 trillion-euro pile of bonds at the end of this year and raise rates after next summer.
Referring to the still unused program the ECB created after Mario Draghi said he would do "whatever it takes" to keep the euro zone together, Praet said: "The conditions under which we would independently decide (on OMT) are very clear and we are not changing them.
"And on the APP (the ECB's subsequent quantitative easing program) that is not destined to support a particular country."
An ESM spokesperson said about the plan to beef up its firepower to prevent contagion: "The aim is to make these two tools more effective by allowing eligible countries access with appropriate conditionality."
To get the ESM's 'precautionary' support program, which carries fewer conditions, countries must have sustainable public debt and abide by EU budget rules.
The Enhanced Conditions Credit Line stipulates that countries have to take certain correctional measures. The advantage is, though, that it would make it eligible for the ECB's OMT emergency program which would see it buy its bonds to bring the government's borrowing costs down.
Investors have also been trying to gauge whether the turbulence in Italy could force the ECB to rethink its plans to end its stimulus and ultimately raise interest rates.
Praet said it would take something major to push that off course, but was clear in his warning to Italy.
"It is unavoidable that would have an impact on lending conditions. So this situation cannot last too long, it is not a pleasant environment for the time being."