After days of worrying over the possibility of debt contagion in the euro zone, investors breathed a sigh of relief as Greek and Italian lawmakers stepped up their game in containing risk aversion. In fact, I can name three things that they did right. First, Greece appointed a new Prime Minister. Secondly, the Italian Senate swiftly passed an austerity package. And third is…uhm… never mind. We’ll just concentrate on the two.
Lucas Papademos is Greece’s new Prime Minister
Yesterday the markets cheered when Greece had sworn in Lucas Papademos as the new Prime Minister in place of George Papandreou.
Papademos is expected to lead a temporary unity government consisting of members from the outgoing Socialist government, the conservative New Democracy party, and the right-wing Laos party. But as appealing as the idea of a united government is to the markets, what probably boosted risk appetite was Papademos’ determination to keep Greece in the euro block.
Being a technocrat (a fancy word for book smart) economist and a former ECB Vice President, Papademos immediately expressed his intention to get Greece’s much-needed tranche of bailout package on time in order to keep Greece from defaulting. Not surprisingly, Papademos’ decisiveness and determination was taken as a good sign by the market players.
Italy’s Senate speeds up Berlusconi’s resignation
Meanwhile, a few stones’ throw away from Greece, Italy’s lawmakers are also doing their share at boosting risk appetite. In a unanimous 156-12 vote, the Italian Senate passed an austerity package that promises around 59.8 billion EUR in savings, which will hopefully avoid the necessity of a bailout.
Some of the measures include a freeze on public sector salaries until 2014; an increase in VAT from 20% to 21%; a special tax on the energy sector, and the strengthening of anti-tax evasion measures. But wait, there’s more! For some analysts, the Senate’s swift action is not only a step forward in limiting–and hopefully reducing–Italy’s debts, but it also speeds up Berlusconi’s resignation.
Recall that a few days ago the high-yielding currencies rallied when Italy’s Prime Minister Silvio Berlusconi offered to step down from his post as soon as the government passes an austerity package. Now that the lower house is scheduled to pass the legislation over the weekend, Berlusconi might be saying “Ciao!” sooner than he first thought!
So do these news mean that all is well in the euro region?
Heck no! For one thing, Papademos and his gang only have around 100 days (until the election in February) to convince the majority of the Parliament to approve the notorious 130 billion EUR bailout package; convince the euro zone leaders to release the remaining 8 billion EUR worth of rescue loans, AND implement new austerity measures in the face of increasingly disgruntled Greek citizens. Yikes!
As for Italy, many market geeks believe that the passing of the austerity package isn’t enough to ease concerns on its economy. Once Berlusconi steps down, the new leader still has to deal with implementing the new austerity measures and prevent the country’s debt problems from escalating.
While the Greek and Italian lawmakers’ swift actions last week helped improve risk appetite in the markets, some are still concerned that the developments might be too little and too late for both the economies. Let’s hope that the latest developments live up to their promises in time to save Greece and Italy from more economic problems!