Troika demands on Spain, Italy will not be harsh: Unicredit

Marco Valli, chief euro-zone economist, Unicredit, explains to CNBC-TV18, in his analysis of the European markets in the light of ECB chief Draghi's speech on Thursday, that any additional demands made by the Troika (the European Union, the ECB and IMF) on Italy and Spain will not be severe.

This is because, Valli points out, both countries are already implementing the required reforms and fiscal consolidation. The economist also adds that the ECB wants both countries to sign a MoU to lock-in already existing policies and the assurance of a government that is committed. Below is an edited transcript of the analysis on CNBC-TV18. Q: What was so good about Draghi's speech that has the markets excited?
A: To start off with, it's important to stress on a couple of things. First of all, the market was disappointed because the commitment to carry out unconditional government bond purchases did not get any stronger.
At the same time, ECB chief Draghi issued some good news in the statements delivered on Thursday. The good news includes the ECB's commitment to use adequate resources to step into the government bond markets after government money had been used for EFSF support. That's a very bold commitment by the ECB.
Adequate resources means that purchases can actually be quite heavy if needed. Then the ECB also addressed the issue of seniority which means that the ECB is ready to give up its seniority after these purchases.
The market probably did not like the fact that the purchases of the ECB will be concentrated at the front-end of the yield curve. This is clearly a compromise and this is what the market did not favour. Q: The ECB chief pointed out that governments will have to make the first move. At what point do you think either Rajoy (Prime Minister of Spain) or Monti (Prime Minister of Italy) will give in and ask for help? Do you think that's likely in the near-term?
A: This is a very tough question. Obviously it will depend on market sentiment and the market's perception of risk. Today, the market has settled down. So it will depend on the kind of pressure on the markets, particularly in August, when volumes tend to be thin and on a few actions, the market could actually deliver and cause bigger swings in prices.
So I'm unable to give a straight answer. We are just sticking to the view that this is going to be highly market-dependent. But we have no doubt that if yields reach an unaffordably high-level that it will be in the interest of Spain and Italy to ask for EFSF support.
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Not so much for the EFSF support per se, because it is going to be limited, but because they really need and want the unlimited firepower of the ECB. Asking for help would therefore entail giving up in terms of conditionality, but I think that this is good. It will lock in the current reform process in Europe, but more importantly allow ECB support at the front-end of the yield curve. Q: Just to extend that point further. A bank bailout process is on in Spain. The country has also agreed to austerity measures. So what additional measures would the ECB want the Spanish government to undertake? What would prevent Spain from going and asking for help from the EFSF or ESM?
A: I think it is just a matter of stigma. Spain and Italy are already facing structural loss of sovereignty and I am very confident that either one of the two countries will need support.
The additional requests made by the Troika will not be particularly severe because these two countries are actually delivering quite a bit in terms of reforms and fiscal consolidation .Therefore it is very important to understand that the additional requests will not be particularly severe.
The ECB wants these two countries to sign a memorandum of understanding in case these two countries need ECB support which will lock-in already existing policies.
This is very important, particularly in Italy, which is going to face general elections in early 2013. Therefore it is important that the ECB knows that there is a strong government committed to the task if it has to step into the market.