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Jun 18, 2012, 12.28 PM IST | Source: CNBC-TV18

Best outcome for Greece, but euro trouble persists: FT

Greece’s election results were long awaited and the victory of the pro-bailout New Democracy party has averted the potentially catastrophic consequences of the country leaving the euro zone. James Fontanella Khan of Financial Times tells CNBC-TV18 that the best possible result for Brussel has come.

Greece's election results were long awaited and the victory of the pro-bailout New Democracy party has averted the potentially catastrophic consequences of the country leaving the euro zone. The global markets took this as a favourable cue and James Fontanella Khan of Financial Times tells CNBC-TV18 that the best possible result for Brussel has come and it will now be a matter of negotiating a suitable way forward.

Khan feels that there is some good news and markets may rally just a bit. However, he cautions, "We shouldn't get overexcited because Europe and the eurozone is still going through a tough period and will continue to be going through a tough period." He believes that hereafter, Spain is a greater worry. Khan is also concerned about Greece's banking sector and the problems associated with Italy's soaring debts.

"We have seen Italy's sovereign debt reaching new highs, higher than the previous government under Berlusconi. So this is a matter of extreme concern because Italy is the third largest economy in euro zone after Germany and France and if Italy needs a bailout, there is a question of whether the EU can afford a bailout," explained Khan.

Below is the edited transcript of the interview on CNBC-TV18. Also watch the accompanying video.

Q: Give us a word on what you think the medium-term impact maybe of events in Greece because a suggestion seems to be that now the ECB will be a bit more open in terms of liquidity easing while the other side of the coin seems to indicate that maybe they won't feel the urgency to move in a hurry?

A: I think certainly today in Europe, the European leaders will be relieved to know that a pro-European EU bailout party has won the majority and will have the right to form the government. Obviously, the way ahead is complicated, so the New Democracy party which won the allied majority will have to form a coalition with a centre left party which is not the radical party that came second.

There will be some time before they form a new government but certainly the ECB and the European leaders might now be willing it to disburse the USD 1 billion tranche that is pending and which will be able to keep the Greek economy going. Therefore, it will not cause havoc in contingent throughout Europe, but eventually there will be a point where they will be re-negotiating, potentially rediscussing the terms that cannot be ruled out. But, certainly the best outcome for at least what was considered in Brussel has come and now it will be a matter of negotiating the best possible way forward.

Q: What do you hear in terms of what the new government, whenever it is formed, will try and do in terms of renegotiating the austerity pack that was signed with the EU, do you see any hiccups emanating from that front?

A: Obviously there is a risk simply because Germany is very reluctant for renegotiating any of the terms that have been agreed in the previous bailout. On the other hand, now we have Hollande in France who is coming to power, Mario Monti in Italy and a new government in Spain. They are a little concerned about the harsh times because they might at some point suffer the same kind of conditions.

So they all are thinking a little ahead of themselves, maybe we should try to help out Greece, introduce kind of pro-growth packages together with the kind of austerity, fiscal measures that we are imposing on them so that we can have a kind of a two way recovery.

Germany is going to stay firm and obviously Germany has a lot of say in whatever is decided in terms of a new potential Greek bailout or a renegotiate bailout. But even Draghi at the ECB has pointed out that he is willing to help if he sees a government that is willing to cooperate. Had an anti-EU or anti-eurozone bailout government been formed in Greece, it would have been disastrous. There would not have been much ground for negotiation and discussion.

At the moment, it is positive. But, it is definitely going to be complicated where there will be hiccups. Therefore, we are expecting a kind of a rally which we saw today in the Asian markets. That is obviously because everybody is happy about some good news. But we shouldn't get overexcited because Europe and the eurozone is still going through a tough period and will continue to be going through a tough period.

Q: Where would you watch for the next pitfall to emerge in the eurozone, will it be on news coming out from Italy or Spain or more of these peripheral countries?

A: The big concern now is Spain. It has been a USD 100 billion bailout. But, in Spain the terms weren't made as harsh as in for Greece. They kept the same kind of rules that they had agreed upon earlier in terms of kind of broader, cutting off fiscal or expenditure.

But Greece's banking sector is a matter of great concern for Europe and obviously then the bigger problem becomes Italy. We have seen Italy's sovereign debt reaching new highs, higher than the previous government under Berlusconi. So this is a matter of extreme concern because Italy is the third largest economy in eurozone after Germany and France and if Italy needs a bailout, there is a question of whether the EU can afford a bailout.

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