While the extra yield investors demand to hold Spanish bonds instead of benchmark German debt has widened to 151 basis points from 85 in March, it’s still well below the 650 basis points seen in 2012, when Greece was last flirting with bankruptcy. To investors, that suggests the chances of contagion to the rest of Europe have diminished.
“Greece might be symbolically important for Europe but it’s no financial Lehman,” said Stephen Jen, managing partner of SLJ Macro Partners LLP in London. “The impact of default or exit will be bad on Greece, but any contagion will be limited. The European Central Bank is printing money, yields are still low, and the economy is experiencing a cyclical rebound.”
Currency markets also signal optimism about the future of the monetary union, with the euro strengthening more than 2 percent against a basket of its developed-market peers over the past month. All this as the latest meeting of regional finance officials broke up without reaching a deal on Greek aid, forcing leaders to call for an emergency summit on Monday.
As the specter of capital controls for Greece loomed, the FRA/OIS spread, a gauge of banks’ reluctance to lend to one other, jumped to 18 basis points on June 15, the highest in two years on an end-of-day basis. It’s since fallen back to 16.5 and even the peak was less than a quarter of the 80 basis points reached at the end of 2011.
“Greece is not important in the long run,” said Jen. “A failure in Greece would effectively be an admission by the Europeans of a past mistake of admitting a country which clearly did not have the requisite strengths and discipline to be a member. It is this reputational risk and the difficulties in admitting past errors that I think are more important to the Europeans.”
In another sign investors see the Greek turmoil as manageable, Spain came close to meeting its maximum target at debt auctions on Thursday. A measure of demand known as the bid-to-cover ratio jumped in offerings of three- and five-year notes. The nation also sold 10-year securities, attracting bids equivalent to 1.85 times the amount allotted.
“It suggested investors do not think that the Greek issue will explode,” said Fabrizio Fiorini, chief investment officer at Aletti Gestielle SGR SpA in Milan. “And in the case of an explosion, the damage to other peripheral bonds will be limited because of the ECB’s bond-buying program. Things may get worse before they get better, but they will get better.”