Events of the last week have once more brought Italy back into the headlines. The decision of former Prime Minister Silvio Berlusconi to deny support to the technocratic government of Mario Monti sent alarm bells ringing in markets across the globe. But the excitement was short lived. Last Thursday Italy sold 3.5 billion euros of a new three-year bond at 2.50 percent, the lowest yield on similar-maturity debt since October 2010 and down from the 2.64 percent paid on 14 November.

The main reason for all this calm is the existence of Mario Draghi’s OMT programme over at the ECB. Investors are convinced that the central bank backstop is credible, and will be activated if events should ever start to get out of control. Tardy as Europe’s leaders are in taking decisions investors remain confident that the needed decisions eventually will be taken. Mario Draghi has undertaken to act, and said that what he does will be enough. For the time being financial markets remain convinced. But are they right to so assume?

For the time being Berlusconi’s threat remains hollow, and indeed he has already half backed down on it. But Italian voters are growing restless, and increasingly find it hard to see the light at the end of the tunnel. The structural reforms so far implemented, beyond the pension system, remain timid and ineffective.

The country’s economy has barely grown in a decade, was down 2.4% year on year in the third quarter and continues to contract. Output is moving back in time, but sovereign debt isn’t, and it is quite likely to hit 130% of GDP in 2013 from where it will continue onward and upward. The country has a demographic problem every big as Japan’s, and despite immigration the productivity level is so low that a million new workers have produced little in the way of extra output, except in the informal economy that is.

So while we think the latest move is yet another in a long list of Berlusconi false alarms and while the next 3-6 months may see some further respite to Italian asset markets (see our December Monthly report), we don’t think investors should be entirely laid back about the situation. The Democratic Party which is most likely to win the coming elections is a strange mixture of ex-communists and former Christian Democrats, and in any event will need the support of another party, possibly one further to the left, to form a government. And in the meantime a “coalition of the willing” – involving Berlusconi’s “House of Freedom”, the separatist Lega del Norte and the new “Five Star” movement of Beppe Grillo – could be forming in the wings, united by just one objective, taking Italy out of the monetary union. So tread carefully; grievances that get neglected, like women, have an uncanny habit of making their presence felt in strange ways.