* Praet says Italy concerns are impacting markets
* ECB cannot tailor measures to support individual countries
* Politicains have been looking at ESM options (Adds ESM comment, background)By Marc JonesLONDON, Nov 13 (Reuters) - Euro zone policymakers havediscussed using the bloc's bailout fund to stem any contagionfrom Italy's debt woes to other euro zone countries, theEuropean Central Bank's chief economist said.A jump in Italy's borrowing costs since its coalitiongovernment proposed a deficit-boosting budget last month, hasreignited concerns that the euro zone still cannot put its debtwoes behind it.The ECB's Peter Praet said this was starting to fan worriesabout Greece again too, and that policymakers were looking atwhether the European Stability Mechanism (ESM) could be used toprevent further contagion.
"There is one discussion, which is at the political level,about precautionary measures we could take if there would bespillovers to (other) countries," Praet told an audience at aUBS conference in London."(These are) not central bank measures. It is related to theESM and to countries ... having spillovers to some externalevents."
As part of plans to shore up the euro zone, its financeministers have been discussing an idea to grant governmentseasier access to precautionary credit lines from their ESMbailout fund.
The discussions started well before Italian policies createdthe contagion risk, at a meeting in September officials pointout, but the rising tensions around Italy have increased thelevel of focus on what safety nets are available.The bailout fund has two credit lines, the PrecautionaryConditioned Credit Line (PCCL) and the Enhanced ConditionsCredit Line (ECCL), but institutions like the IMF also say themoney available would not cover a full scale Italian crisis.Euro zone officials also argue that such credit lines andthe attached conditions they come with, carry a stigma that putscountries off applying for them.
EASIER ACCESSPraet sent a clear signal that ECB was not consideringmeasures to ease the current market pressure on Italy.Investors have been trying to gauge whether tighterfinancing conditions in Italy could derail the ECB's plans tostop adding to its 2.6 trillion-euro pile of bonds at the end ofthis year and raise rates after next summer.Referring to the still unused programme the ECB createdafter Mario Draghi said he would do "whatever it takes" to keepthe euro zone together, Praet said: "The conditions under whichwe would independently decide (on OMT) are very clear and we arenot changing them."And on the APP (the ECB's subsequent quantitative easingprogramme) that is not destined to support a particularcountry."
An ESM spokesperson said about the plan to beef up itsfirepower to prevent contagion: "The aim is to make these twotools more effective by allowing eligible countries access withappropriate conditionality."
To get the ESM's 'precautionary' support programme, whichcarries fewer conditions, countries must have sustainable publicdebt and abide by EU budget rules.The Enhanced Conditions Credit Line stipulates thatcountries have to take certain correctional measures. Theadvantage is, though, that it would make it eligible for theECB's OMT emergency programme which would see it buy its bondsto bring the government's borrowing costs down.Investors have also been trying to gauge whether theturbulence in Italy could force the ECB to rethink its plans toend its stimulus and ultimately raise interest rates.Praet said it would take something major to push that offcourse, but was clear in his warning to Italy."It is unavoidable that would have an impact on lendingconditions. So this situation cannot last too long, it is not apleasant environment for the time being." (Reporting By Marc Jones and Jan Strupczewski; writing byFrancesco Canepa in Frankfurt; editing by Balazs Koranyi, AndrewHeavens and Ed Osmond)
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