By Eric J. Lyman
ROME, Sept. 8 (Xinhua) -- The Italian economy went into the weekend on a high note, with the stock market rising dramatically over the previous two days and bond yields falling to their lowest levels since March on the back of what Italian newspapers are calling the "Draghi Effect," a reference to European Central Bank governor Mario Draghi.
On Thursday, Draghi unveiled a plan in which the European Central Bank would step in to bond markets to buy debt when yields represented "risks to financial stability."
The remarks sparked a surge in investor confidence in Italy and in other struggling economies, most notably Spain. But commentators and analysts are not so sure such exuberance is warranted.
On Friday, German economists advised the government that the risk of giving so much power to the European Central Bank could eventually ruin the euro because of the high costs of such a move and the message that countries would not be forced to fix their own problems.
The conservative German daily newspaper Die Welt on Friday ran a headline reading "Draghi sets off Germany's alarm bell," while Bild ran a front-page story complaining about "Help without end for crisis countries." Germany would be forced to foot the bill for much of any European bailout.
And even in Italy, economic analysts warned that such a policy would be unsustainable over the long haul, and that even if it succeeded it would do little to address the overall structural problems of the troubled economies.
"How long can such a policy last?" asked ABS Securities analyst Oliver Rosetti. "It depends on when the ECB steps in and for how long, but there's little doubt that we're talking about a question of months and not years before it becomes too expensive. Will Europe be out of crisis mode by then? I wonder if the debt that would rack up in healthy economies could actually lengthen the crisis."
Javier Noriega, chief economist with investment bankers Hildebrandt and Ferrar, agreed. "If Italy and Spain and other countries are allowed to appear healthier than they are, that is not a good long-term strategy," he said.
"Governments must stand ready to activate the (European financial Stability Facility and the European Stability Mechanism) in the bond market when exceptional financial market circumstances and risks to financial stability exist -- with strict and effective conditionality in line with the established guidelines,"Draghi said.
"We need to be in the position to safeguard the monetary policy transmission mechanism in all countries of the euro area," he added.
Those remarks were music to the ears of investors, who poured money -- at least in relative terms -- into Italian investment vehicles.
Over the last two trading sessions of the week, the blue chop stock index on Milan's Italian Stock Exchange added nearly 1,000 points to close the week at 16,110, a two-day rise of 6.5 percent and the index's highest close since March 28.
That is just two days after the last time yields on Italy's benchmark 10-year bonds traded lower than Friday's close on secondary markets. Entering the weekend, bonds closed at 5.06 percent after falling for the third consecutive session. As recently as July 24, yields were 6.61 percent, precariously close to the 7-percent threshold economists say is unsustainable.
Lower yields are good for governments because that means they can borrow money at lower rates.
But the fact that both the stock and bond markets were at similar levels in late March and then went sour again after that is proof that this latest "Draghi effect" could be short lived.
The strong performance at the end of March came after stronger-than-expected economic news, and signs of increased tax revenue that could help the government pay down debt. The tide turned again a short time later, and the gains from late March were forgotten.
"This enthusiasm based on Draghi's comments could be short lived, especially if there is some bad economic news or if there is some indication that the ECB is wavering on its stance," Noriega told Xinhua.
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