LONDON Italy's fractious election results this week have raised investor suspicions that the euro zone's protracted debt crisis has reached a critical juncture.
The European Central Bank's support mechanism for the euro's ailing government debt markets - which has brought six months of relative calm across the region's markets - remains a powerful force in preventing another series of rolling creditor strikes.
ECB chief Mario Draghi's vow from last July to do "whatever it takes" to protect the euro continues to assure many asset managers the zone will not be pushed back to the cliff edge of last summer. And while stocks and bonds in Italy and across the bloc fell sharply on Tuesday, they stayed some distance from crisis peaks.
Yet the clearest signal from Italy's otherwise muddy election was its rejection of ever more austerity in a contracting economy.
The polls showed no single political force with a majority in Italy's two houses of parliament and about half the electorate opposed the prior government's policies of austerity.
Rejection of the sort of additional budget-cutting that any ECB backstop would require casts some doubt on what scope that leaves the central bank if it opts to execute the government bond buying program it calls Outright Monetary Transactions.
"This is a very clear protest against austerity and the implications are potentially profound," said Russell Silbertson, Head of Global Interest Rates at Investec Asset Management.
"The ECB last year made it clear it was willing to help, but only if a country requested that help and agreed to conditions. In other words, the OMT (the ECB's backstop) is a partnership and these anti-austerity votes question that partnership."
Yves Bonzon, Chief Investment Officer at Pictet Wealth Management, doubts this is another "inflection point" in the crisis but remains underweight euro assets and wary of developments.
"The most annoying thing about this outcome is that the ECB might be constrained in launching an OMT program. Without a strong government in Italy, it will have difficulty reaching any memorandum of understanding with European authorities."
Others who had been concerned about the election outcome in Italy see little reason to return yet.
"I sold out of all my Italian bonds in mid January, taking peripheral euro zone exposure to zero, because markets appeared to be pricing in very little risk of anything going wrong," said Mike Riddell, fixed income fund manager at M&G Investments. "I'm not yet a buyer again as things easily have the potential to get a lot worse."
For many euro zone bears then, the main impact of Italy's potential hiatus is to return market pricing to levels better reflecting the region's persistent recession and debt difficulties, with some doubts on the OMT support.
"We've had months of unusual calm in the euro crisis and we feel this is more of a reality check than a brand new phase," said Iain Stealey, portfolio manager in the International Fixed Income Group at JP Morgan Asset Management, adding it was best to steer clear of euro markets until better levels emerged.
"There will be a return of uncertainty and volatility for a few weeks at least and we see no reason why the Italian 10-year (bond yield) will not top 5 percent again," said Stealey, noting the rise in 10-year rates to 4.90 percent on Tuesday was still far short of 2011 crisis peaks of more than 7 percent.
"But people will be very wary of fighting the ECB on this."
While the OMT plan may look less formidable in the face of growing public resistance to its conditions, the central bank had already proven inventive in providing liquidity where necessary, even if it was constrained from following counterparts in the United States, Japan and Britain in outright money printing.
What's more, the recent shrinkage of its balance sheet - due to euro banks paying back some of last year's emergency loans - arguably offers it more scope to loosen again if necessary to indirectly soften the pain of recession and austerity.
"The ECB is the only institution really capable of putting out fires. An ECB rate cut next week now looks likely," said Tristan Cooper, analyst at Fidelity Worldwide Investment.
He thinks there may be less instability in Italy that the results suggest and that significantly higher yields may prove attractive buying opportunities across the euro periphery.
"A new government in Italy, when it is eventually formed, is more likely to be unstable and ineffective than unorthodox and radical," he said. "Fiscal discipline is likely to be broadly preserved even if serious structural reforms are now off the agenda."
Others point to a better global economic environment in 2013 and a belief that the deepest fiscal cuts in the euro zone have already been made. They see any market shakeout as a opportunity to build up strategic positions.
"There is a clear vote in southern Europe against austerity alone," said Giordano Lombardo, Group CIO at Pioneer Investments in Milan, saying momentum was building and the direction was now set toward policies to encourage economic growth.
"Beyond the volatility of the immediate aftermath, that's not necessarily a bad outcome," he said, adding recent ECB balance sheet shrinkage also boosted its potential armory.
(Editing by Ruth Pitchford)