Italian impact highlights need for a precautionary credit line

Italian impact highlights need for a precautionary credit line

The recent rally in Greek bond yields due to the political crisis in Italy once again illustrated how vulnerable Greece is to external shocks. Analysts at foreign firms told Kathimerini that the Italian unrest will have consequences on Greece, stressing that the choice of a “clean exit” contains great risks as it must come with a huge cash reserve.

They add that the current instability in the markets is not conducive to a new bond issue and recommend that Greece reviews the option of a precautionary credit line.

Goldman Sachs managing director Silvia Ardagna warned in an interview with Kathimerini that Greek bonds are the most vulnerable in the eurozone, and that this will become even more evident after the country exits the bailout program in August.

Likewise, Jens Peter Sorensen, chief analyst at Danske Bank, told Kathimerini that the climax of the Italian crisis unfortunately has a negative impact on Greece even though this country has seen some progress with positive elements that have led to credit rating upgrades. The biggest emerging problem is the increase in the cost of Greece’s borrowing and heightening investor fears.

The Italian crisis highlights how dangerous the Greek government’s insistence on a “clean exit” is, according to Wolfango Piccoli, co-president at Teneo Intelligence. He noted to Kathimerini that increased volatility in the bond market, created by the unrest in Rome, could affect Greece’s exit from the program in two ways: first, by undermining the country’s capacity to keep building the cash buffer through new bond issues, and, second – the worst scenario for Athens – by forcing the government to reconsider the option of a precautionary credit line.

Bruegel Institute senior fellow Zsolt Darvas is also reserved about the government’s decision for a “clean exit” after the Italian developments; speaking to Kathimerini, he said that the key issue for Greece is whether last week’s crisis will affect economic activity in Europe, as that would complicate Greece’s exit from the program. The question, he stresses, is whether Greece will be credible after the end of the program and whether its economy will slow down or not, something he expects to happen in Greece in a few years.

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