After a recent quiet bout in financial markets, the Eurozone looks as if it is heading towards another period of uncertainty. Over the last few days events in Italy and Spain have rattled stock markets. In Italy, the collapse of the Eurosceptic coalition between the Five Star Movement and Lega party resulted in a populist coalition government led by former IMF Fund official Carlo Cottarelli, which was sworn in on Friday. On the same day in Spain, Mariano Rajoy was ousted as Prime Minister after a vote of no confidence triggered by a corruption scandal. Events in Italy, European Union’s third largest economy, have raised concerns both with investors and in Brussels, whilst the Spanish vote seems to have had less impact. The question remains whether this is a mainly an Italian problem, with Italian voters seeking a tougher approach towards Brussels, or one that risks having negative knock-on effects for Greece.
Greek officials are closely watching events in Italy, as Greece aims to return to capital markets once its third and last EU-IMF funded bailout officially expires in August. Any prospect of Athens making a clean break and assuming post bailout normality without assistance has been put into question given the recent Italian, and to a lesser extent, Spanish turmoil. Bank of Greece Governor Yiannis Stournaras has long argued that Greece requires a precautionary credit line “as a protective cushion”, as the country endeavours to stand on its feet after the worst financial crisis in modern times. The Syriza-led government, keen for a clean exit, has dispelled any such notion. We view that the Greek government will stick to its current fall-back view that fiscal over-performance, completion of the 4th review, debt relief, a strong cash buffer and post-programme monitoring should be sufficient to ensure that Greece continues on its path to recovery.
This article originially appeared on Banks.com.gr