With Italy’s government in tatters after a crushing referendum defeat and the euro falling to a near two-year low, investors will look to the European Central Bank this week to bring some calm to the mix.

Meeting on Thursday, the ECB is expected to extend its already generous asset buys, emphasising heightened risk, including from populist movements that threaten to hijack governments’ attention from what it sees as vital reforms.

Italian Prime Minister Matteo Renzi said early yesterday he would resign after suffering a crushing defeat in a weekend referendum on constitutional reform, tipping the eurozone’s third-largest economy into turmoil and serving another blow to EU, which is struggling to overcome anti-establishment forces.

Though the “No” vote has been mostly priced in, the shake up comes at a sensitive time as troubled lender Monte dei Paschi is trying to raise €5 billion and a political void could easily torpedo that effort, potentially reverberating throughout the banking sector.

“The fate of the ongoing capital raising of Monde dei Paschi di Siena is first on the line, and its success or failure will have material consequences for the other banks,” Nordea economist Holger Sandte said.

“The need for further government support, in one form or another, has increased with the clear ‘No’ vote,” Sandte added. “Still, the outlook for the State being able to contribute to solving the problems of the Italian banks for good would require a strong government – something that looks unlikely for now.”

The ECB will be ready to step up purchases of Italian government bonds if the referendum drives up borrowing costs but only if the volatility is temporary and the purchases could effectively support the market, sources told Reuters earlier.

The ECB is likely to argue that underlying inflation remains stubbornly weak, so its asset buys will need to be continued beyond March, possibly for another six months, to prop up growth and inflation

But waning confidence in the Italian bank sector may be a bigger issue than sovereign debt yields and ECB policymakers will have little ammunition to prop up the sector.

Indeed, Italian newspaper Corriere della Sera reported on Friday that Italy was in talks with the European Commission on a possible state bailout for Monte dei Paschi, suggesting mixed confidence in the planned capital hike.

Seeking to calm markets, ECB policymaker Francois Villeroy de Galhau said Italy’s vote was nothing like Britain’s referendum earlier this year to leave the EU, a blow that has left the bloc searching for direction.

“The referendum in Italy yesterday may be deemed as another source of uncertainty,” Villeroy, who is also governor of the Bank of France said in Japan yesterday.

“However, it cannot be compared to the British referendum: Italian people have been called to the polls to vote on an internal constitutional matter, and not on Italy’s long-standing EU membership.”

With elections looming in France, Germany and the Netherlands, all facing strengthening populist parties, political risk has become a key issue for the ECB, which has been looking for government support to prop up growth as much of its own firepower has been exhausted.

Meeting on Thursday, the ECB is likely to argue that underlying inflation remains stubbornly weak, so its asset buys will need to be continued beyond March, possibly for another six months, to prop up growth and inflation.

Government bond yields have already been on the rise with Germany 10-year yields up 35 basis points since mid-October and spreads with the periphery widening, suggesting renewed fragmentation.

Money flowed out of Italy for the eighth straight month in October, ECB data showed, indicating that investors and banks are reluctant to put money into weaker economies despite higher yields, moving cash into countries like Germany, despite punitive rates and negative yields.

Still, the ECB is expected to at least debate sending a formal signal that asset buys will eventually end, a small concession to hawks and an acknowledgment that stimulus cannot go on forever as the ECB has already exhausted much of its firepower, sources told Reuters earlier.

It has already spent €1.4 trillion to buy bonds, pushing borrowing costs to record lows, leaving it relatively few assets to buy and raising concerns that such stimulus loses effectiveness over time.

Its new forecasts will also show inflation returning to target by 2019 while the recent oil price surge could also add to calls to ease back on the asset buys.

In other key central bank meetings, the Reserve Bank of India is seen cutting interest rates but the Reserve Bank of Australia and the Bank of Canada are both seen firmly on hold.

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