ECB fears populist backlash after Trump's win: sources

By Francesco Canepa and Balazs Koranyi

FRANKFURT (Reuters) - European Central Bank officials are growing increasingly worried that Donald Trump's victory in the U.S. presidential race may harm the euro zone by hurting trade with the United States and fuelling populism.

Speaking publicly and behind the scenes, ECB officials emphasise any U.S. shift towards protectionism under Trump could hurt the already fragile euro zone economy and pave the way for an even stronger backlash against globalisation and the euro project.

This could hinder the ECB's efforts to revive growth and inflation in the euro zone just as the economic picture was starting to look less bleak.

If they only looked at financial markets, ECB rate setters should be moderately pleased: euro zone inflation expectations, bond yields and stocks have all gone up since Trump's victory, showing investors are betting on spending-led stronger U.S. economic growth.

In addition, higher bond yields have eased immediate concerns the ECB may run out of German debt to buy in its 1.74 trillion euros asset-purchase programme, the centre-piece of its stimulus strategy.

However, top officials stress the situation is far more complex than this and the ECB still looks still set to announce an extension of its bond buying beyond their March deadline at the bank's Dec. 8 meeting.

First, rising borrowing costs for indebted peripheral governments show that investors are pricing in rising political risk in the euro zone as anti-globalisation and eurosceptic voices are emboldened by Trump's win, which came hard on the heels of the Brexit vote.

This was particularly visible in Italy where the government's borrowing costs were on track on Friday for their biggest two-week rise since the 2012 debt crisis and banking stocks fell ahead of a Dec. 4 referendum that could unseat pro-euro Prime Minister Matteo Renzi.

"The overall (market) signal is not clear cut," a central bank official said, stressing it was still too early to consider any countermove.

Second, Vice President Vitor Constancio has warned that any fiscal easing in the United States -- such as Trump's planned infrastructure spending -- may not benefit the euro zone if the new U.S. administration sticks to its 'America first' pledge, hurting Europe's exports to its biggest trading partner.

Even a hawkish member of the ECB's Executive Board, Yves Mersch, warned that growth in the euro zone was still "fragile" and the inflation pick-up not yet sustainable.

This was further emphasised by President Mario Draghi, who said on Friday the recovery relied on continued monetary support from the ECB.

Both Mersch and Draghi also warned that rolling back financial regulation could pave the way for a repeat of the 2008 crisis, a thinly veiled reference to Trump's campaign promise to ease those rules.

Meanwhile, confidence remains low that euro zone governments will heed the ECB's long-standing call for greater fiscal spending in surplus countries such as Germany, despite a European Commission's plea for looser strings this week.

"In principle, we welcome any proposal for growth supportive fiscal policy," Mersch told Reuters this week. "But we have not seen the details and there have been some disappointments in this regard in the past."

The momentum for ECB asset-buying thus remains in place.

(Editing by Jeremy Gaunt)