Italy political turmoil a headache for Europe's central bank

FRANKFURT, Germany (AP) — Italian Prime Minister Mario Draghi's offer to resign has sent unsettling ripples through financial markets, bringing back bad memories of Europe's debt crisis a decade ago and complicating the European Central Bank's job as it raises interest rates for the first time in 11 years to combat record inflation.

Draghi, a former ECB president, has pushed policies meant to keep Italy's high levels of debt manageable and boost growth in Europe’s third-largest economy. He suggested Wednesday that he was open to staying in power, but the threat of political changes as borrowing costs increase have raised concerns that the 19-country eurozone could head into another crisis.

It's a headache for the ECB as it seeks to return interest rates from sub-zero to more normal levels starting Thursday — without setting off bond-market chaos in a country with debt at 150% of economic output. The ECB has said it will raise rates a quarter-percentage point, though some analysts aren't ruling out a half-point increase.

The Frankfurt-based ECB will join the U.S. Federal Reserve, Bank of England and other central banks worldwide that have already raised rates several times to tame runaway inflation. But the ECB doesn't want jittery markets sending up the borrowing costs of some euro member countries beyond what's justified by their economic strength.

The bank's task is already hard enough with predictions growing of a recession next year due to exorbitant oil and natural gas prices fueled by the war in Ukraine.

So along with the rate increase, ECB President Christine Lagarde is expected to announce a financial backstop aimed at capping borrowing costs for governments and companies in eurozone countries that are less financially solid than the others.

It’s a hassle...