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Italian prime minister Mario Monti named his new government this morning.With technocratic governments in Italy and Greece the hope is that both countries will move towards greater fiscal consolidation and structural reform.
But the Eurozone is still in crisis mode and often hangs on ECB intervention to support its banking sector and take on sovereign debt. A role that needs to be transferred to individual governments. And officials have categorically said that ECB can not permanently be used to finance countries.
In this backdrop, Societe Generale analyst James Nixon points out the biggest challenges that lie ahead.
- Italy and Greece face massive political wrangling before they can push through crucial reforms. In Italy, former prime minister Silvio Berlusconi has been pushing for early elections to limit new initiatives Monti’s government could pass, to the ones in his letter of intent to the European Commission. While in Greece, conservative leader Antonis Samaras has said he will not sign a letter of intent that the EU is demanding, in which Greece promises to abide with the IMF program. The most immediate challenge is the Greek government’s upcoming confidence vote.
- Guidelines on the enhanced EFSF are still sketchy. There is little consensus on the partial protection certificates (which cover a portion of the principal value of the bond, and that could be detachable from the bond and traded separately) for European sovereign debt. There has also been little progress on the special purpose vehicle aimed at attracting foreign investors. The ECB for now will have to continue to intervene on sovereign debt issuances.
- The Institute for International Finance (IIF) is still trying to protect its members and is proposing alternatives to private sector involvement (PSI) in the haircut on Greek debt. Details on Greek PSI are still unclear.
- Germany’s Christian Democratic Union (CDU) is preparing for deeper integration in the eurozone. German chancellor Angela Merkel wants EU treaties to enforce this budgetary limit but continues to reject the idea of Eurobonds.