Tags: greek | europe | Tsipras | debt deal

Greek Contagion Contained May Weaken Tsipras Bargaining Hand

Monday, 01 June 2015 08:01 AM

Alexis Tsipras’s claim that a financial collapse in Greece would drag down the rest of the euro region is looking increasingly like a hollow threat.

While the yield gap widened between Spanish and German debt after a weekend that saw little progress in talks between Tsipras’s Greek government and international lenders, the increase was smaller than the move on Friday. The spread is close to the average of the past year, showing limited contagion compared with the blowout in Spain’s borrowing costs when Greece last faced a euro-area exit in 2012.

This time, the European Central Bank’s quantitative-easing program is holding down borrowing costs for the euro area’s indebted nations. While banks including Morgan Stanley say investors are too complacent, the absence of a sense of panic may be a blow to Tsipras, who has argued since he came to power in January that Greece’s creditors need to make concessions to avert a systemic crisis.

Without QE “they would have had more cards up their sleeve there’s no doubt,” Marc Ostwald, a strategist at ADM Investor Services International Ltd. in London, said on May 29. “Contagion risk has been contained by a number of factors but the primary one is the ECB purchases.”

While the ECB said May 28 that a failure to agree on financial aid to Greece may push up bond yields for its peers, the risk is yet to be borne out in debt markets.

Spain’s 10-year bond yield rose five basis points, or 0.05 percentage point, to 1.88 percent at 10:26 a.m. London time. While that’s up from as low as 1.048 percent in March, it’s less than a fourth of the euro-era record 7.751 percent reached in July 2012, on the day before ECB President Mario Draghi pledged to do whatever it took to defend the euro.

Yield Spreads

The yield spread between Spanish bonds and similar-maturity German debt increased four basis points to 139 basis points, compared with an average of 122 basis points during the past year. The Italian-German spread widened seven basis points to 143 basis points. That’s the biggest move since May 26, and just six basis points higher than the one-year average.

While falling bond prices in Greece have so far not spilled over to Spanish or Italian spreads in a “meaningful” way, investors are complacent about the risks stemming from a missed payment to the International Monetary Fund, according to Morgan Stanley analysts.

If Greece failed to pay the IMF, peripheral spreads may widen 10 basis points, Anthony O’Brien and Jesper Rooth wrote in a client note on Friday.

Greece must make four payments totaling almost 1.6 billion euros ($1.8 billion) to the International Monetary Fund this month and its bailout package backed by the euro region expires at the end of June. The government’s self-imposed deadline for securing a deal slipped away this weekend as disagreements between the two sides on budget targets persisted, a person familiar with the matter said.

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Alexis Tsipras's claim that a financial collapse in Greece would drag down the rest of the euro region is looking increasingly like a hollow threat.
greek, europe, Tsipras, debt deal
Monday, 01 June 2015 08:01 AM
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