Italy does not fear Greek contagion: finance minister

Italy’s finance minister on Monday played down the threat of Italy being hit by the fallout from market instability linked to the Greek crisis.

“I would not be surprised but neither would I be that concerned if there was an increase in market volatility. The European Central Bank has all the instruments at its disposal to deal with it,” Pier Carlo Padoan said in an interview with Corriere della Sera.

The interview was published as stock markets plunged in early trading following a series of dramatic developments over the weekend including the announcement by Athens of a July 5 referendum on whether to accept cuts demanded by international creditors as a condition of extending further funds.

The main concern for Italy is the possibility of its borrowing costs being forced up as a result of the crisis – a scenario Padoan insisted was unlikely.

“The BCE can intervene through QE (Quantitative Easing), the purchase of bonds on national markets to stabilise the spread,” he said.

The “spread” Padoan referred to is the gap between German borrowing costs on capital markets and those of Italy, a figure which is closely followed as a benchmark indicator of market confidence in the country’s economy and finances and ultimately its ability to remain part of the eurozone.

During an intense period of market turbulence in 2011, the German-Italy spread rose to a peak of nearly 575 basis points. But it has since fallen to around 150 basis points and there were no signs of it widening dramatically Monday in reaction to the weekend’s events.

“I’d remind you that we are no longer in 2011, today our (eurozone) institutions are much stronger, as is our economy,” Padoan added.

The minister said Italy’s exposure to Greece was 10.2 billion euros in bilateral loans and 27.2 billion in contributions to European bailout funds. He said the possibility of default had been accounted for and would have no implications for the government’s debt levels.

Padoan also said he remained hopeful a last-ditch deal could be done to avoid a messy Grexit, citing the ECB’s decision on Sunday to keep liquidity taps to Greece turned on.

“That was a very important political signal that, from the European institutions’ side, everyone has the intention of seeking an agreed and positive outcome,” he said.