Mounting danger that Greece could find itself outside the euro zone within weeks has prompted a bout of contagion in financial markets, the first since the radical left Syriza movement took power in Athens last January.
For all the volatility, however, market participants say the basic calculation remains that Greece will reach some kind of a deal with creditors before a €1.6 billion International Monetary Fund debt falls due on June 30th. If investors really thought otherwise, markets and assets outside Greece would be in the grip right now of much more violent swings. Still, tension is evident.
"Volatility in bond and foreign exchange markets has increased over the past 12 months. This has been more noticeable over the past 72 hours, as the deadline to approve a meaningful compromise on the Greek situation is now very real," says Garret Grogan, head of long-term interest rate trading at Bank of Ireland.
“This will be on the radar of markets until we get a resolution – or not. We expect to see spill-over to the real economy from higher credit spreads in government bond yields and increased volatility in foreign exchange markets.”
Irish borrowing
This has a bearing on Irish borrowing costs, which reached record lows this spring after the
European Central Bank
embarked on a massive bond-buying campaign. The “spread” or premium the market demands to buy Irish nine-year debt instead of comparable German debt was around 0.82 percentage points on Monday, up from a low of some 0.45 percentage points in March and May.
These are exceptionally low spreads by historical standards, but upward movement means it costs more for the Government to borrow. The National Treasury Management Agency raised €750 million in 15-year debt at a yield of 2.216 per cent last Thursday. The same 2030 bond sold at 1.56 per cent in February.
Just as the public finances take the benefit when borrowing costs drop, any increases must also be shouldered by the State. At a time of high national indebtedness in Ireland, a smooth settlement of the Greek situation is greatly in the Government's interest.
Deposit flight
For all that, the present turmoil is heavily concentrated on Greece. As deposit flights from Greek banks makes them ever more reliant on special aid from the European Central Bank, the country’s stock market has taken a pummelling. Since January, the Athens exchange has lost 11.5 per cent.
This smacks of acute nervousness among investors in Greek assets, although disruption in other markets shows they are not immune. With volatility on the rise since the negotiation between Greece and its creditors took a turn for the worse last week, the focus now is on other "peripherals" such as Italy and Spain.
As their stock markets fell on Monday, their borrowing costs rose. Spanish 10-year yields climbed 0.15 percentage points on Monday to 2.38 per cent and comparable Italian yields rose 0.14 percentage points to trade around 2.35 per cent.
Compared with a springtime low a little above 0.89 percentage points, the Italian spread over German bunds was around 1.52 percentage points.
That such increases can be seen even as the ECB sweeps up bonds shows how Greek uncertainty is rippling out.
No matter what is said about the euro zone’s anti-crisis firewalls, this is enough to demonstrate that an eventual “Grexit” would bring turmoil in its wake.
