The European Central Bank is ready to temporarily step up purchases of Italian government bonds if the result of a crucial referendum on Sunday sharply drives up borrowing costs for the euro zone's largest debtor, central bank sources told Reuters.
Italian government debt and bank shares have sold off ahead of the 4 December referendum on constitutional reforms because of the risk of political turmoil.
Opinion polls suggest the 'No' camp is heading for victory, which could force out Prime Minister Matteo Renzi in the latest upheaval against the ruling establishment sweeping the developed world.
The ECB could use its €80 billion monthly bond-buying programme to counter any immediate, further spike in bond yields after the vote, smoothing market moves and supporting bonds, according to four euro zone central bank sources who asked not to be named.
The sources added the scheme was flexible enough to allow for a temporary increase in Italian purchases and that such a move would not necessarily need to be rubber-stamped by the ECB's Governing Council, which is due to meet on 8 December to decide on whether to keep buying bonds after March.
But they stressed this would be limited to days or weeks, to counter any immediate market volatility, because the asset-purchase programme was designed to shore up inflation and economic growth in the entire euro zone and was not intended to fight crises in individual countries.
This means that, if Italy or its banks needed longer-term financial support, Rome would need to formally ask for help.
"The Governing Council understands that there is some space to help Italy, which will be used, if needed. The asset purchase programme has built-in flexibility," said one of the sources.
"The key is that the ECB has to be convinced the volatility can be overcome by using this flexibility."
The ECB declined to comment.
With one of the world's largest public debt piles, Italy's borrowing costs are closely watched as a potential flashpoint for market instability in the wider euro zone.
They risked spiralling out of control during the sovereign debt crisis until ECB President Mario Draghi pledged in 2012 to do whatever it took to save the euro.
Mr Renzi has said he will resign if Italians reject his constitutional reforms, which would drastically reduce the powers of the upper house of parliament and take back some decision-making powers from the regions.
Investors worry that his departure would lead to political instability and bolster the anti-establishment 5-Star Movement, which has called for a referendum on euro zone membership.
Speaking in public, ECB officials remain sanguine.
