Greek contagion contained may weaken Tsipras bargaining position
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.
After a weekend that saw little progress in talks between Tsipras’s Greek government and international lenders, the extra yield investors demand to hold Italian and Spanish bonds instead of benchmark German bunds barely budged. Those yield spreads are close to the average of the past year, showing limited contagion compared with the blowout in borrowing costs they suffered 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. That 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 yield was at 1.86 percent at 8:29 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.
The spread between Spanish bonds and similar-maturity German debt was at 136 basis points, or 1.36 percentage point, compared with an average of 122 basis points during the past year. The Italian-German spread, at 138 basis points, was just one basis point higher than the one-year average.
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.
[Bloomberg]
