Financial contagion is the big concern this morning?as talks between Greece and it is creditors have collapsed for that umpteenth time.
Greece is dangling on brink of euro exit – and financial markets are finally getting worried
Greece is on the point of economic meltdown as Germany looks poised to push the country out of the eurozone and financial markets, long undisturbed by the wrangling, are reacting with mounting alarm. Read on
But economists at Scotiabank say that political contagion should be just as worrying. With Greece essentially holding markets ransom now, the country’s creditors could blink in the last minute and agree to bail Greece out – without forcing it to adopt much-needed economic reforms.
The the issue here is, that might embolden other anti-austerity politicians in Greece.
“Greece today, and then what if later on the leftists in Portugal, Spain, or Italy choose to repudiate all austerity and market reforms and switch back the clock on structural progress, only to then use their European neighbours with pockets turned thoroughly?” Scotiabank asks.
Greece happens to be controlled by the anti-austerity Syriza party, which assumed power in January and promised it might keep Greece’s generous social welfare system in place even as the country’s creditors demanded reforms.
Other struggling eurozone governments have accepted similar reforms in the past few years in return for debt relief. Politicians in those countries would naturally use whatever compromise for Greece as unfair, and with the right rhetoric, extremist parties prepared to fight with creditors could come to power the way in which Syriza was swept into office earlier this year.