Though the victory of the pro-bailout New Democracy in Sunday's elections eases concerns of Greece's imminent exit from the euro-zone, the country still faces the risk of leaving the single-currency bloc at the end of this year, Capital Economics European Economist Ben May said in a note Monday.
According to the firm, policymakers will need to take much greater action, perhaps including significant steps towards full fiscal and banking union, to prevent a bigger, more damaging form of break-up.
Capital Economics assessed that the existing bail-out conditions that allow fiscal tightening measures to be delayed in the event of a deeper-than-anticipated recession have already been met, with business and consumer sentiment still close to record lows and the unemployment rate rising sharply. The coalition government led by New Democracy, despite its pro-bail-out stance, is likely to seek to renegotiate some crucial elements of the rescue deal, and the troika may agree to some changes, it said.
However, Greece is unlikely to gain all the concessions that New Democracy is demanding, especially those pertaining to relaxation of the austerity package. Also, some policymakers' apparent preference would be to give Greece emergency assistance as part of a managed exit, rather than sanction wholesale changes to the existing bail-out deal.
Even if both sides agree modifications to the bail-out package, the deal could still collapse as it is yet to be seen whether all the coalition partners would agree a common line on what fiscal measures to implement and the exact form that structural reforms should take.
Capital Economics expects the Greek economy to remain in recession for much longer than the troika currently expects. So, the country is likely to struggle to meet its fiscal targets even if all the three parties agree on a common line, the firm said.
by RTT Staff Writer
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