While Italy’s decision to ignore the European Union’s budget deficit cap had an immediate negative impact on Greek bond yields on Friday – showing that Greece remains vulnerable to all crises – the government in Athens was seeking a way to express its decision not to reduce pensions in January without inciting the wrath of its creditors in the first budget draft on Monday.
“The budget draft will reflect the government’s intention not to slash pensions,” said a government source. How this can be achieved will be the subject of consultations throughout this weekend, with a source saying that the draft will neither include the reduction of the pensions nor the offsetting measures (aimed at boosting growth) in the hope that the latter would ease creditors’ concerns.
In any case the European Commission is expecting the budget version that Athens will send to Brussels on October 15, which may be different to Monday’s first draft. Comments by sources and analysts in Brussels and Athens suggested that the direction that Italy appears to be taking will likely increase the chances that Greece’s efforts to avoid the pension cuts will run into reservations or a negative response.
Regardless of the Commission’s response, another source warned that reversing the decision for the pension cuts, combined with the Italian unrest, could eventually lead Greece out of the money markets again.
“It’s still a bit early to know how developments in Italy will affect Greece, but any kind of unrest does not help,” a European official told Kathimerini a few hours after Rome announced that its budget deficit target will be three times as high as that of the previous government, and definitely a long way from the European Commission targets.
“Developments in Italy are not helping Greece’s cause,” a source in Athens said, explaining that the Europeans would rather not see the unrest spread to other countries and explode into a crisis. “They would prefer to contain the flames,” he said.
According to four European officials contacted by Kathimerini, it is certain that Brussels is closely monitoring the reaction of the markets and Greek bond yields – as on Friday the benchmark 10-year paper saw its yield rise to 4.2 percent.