In the depths of the euro region’s debt crisis, Italy’s finance minister compared the currency with the Titanic: if one country goes down, they all do.
Less than four years later, with the prospect of a Greek exit at the fore once again, investors are betting the European Central Bank has made the rest of the region unsinkable.
Debt from Europe’s other most-indebted nations this time is supported by the ECB’s 1.1 trillion euro ($1.2 trillion) bond-buying plan. While yields in Italy and Spain have risen from the record-lows touched earlier this year, they are still a small fraction of the euro-era highs reached in the debt crisis, when investors sold on concern a Greek exit could spark a domino effect and splinter the currency bloc.
“I don’t think Greece really threatens the future of the euro-area anymore,” said Jan von Gerich, chief strategist at Nordea Bank AB in Helsinki. “The ECB certainly has the means to prevent another crisis. The widening potential for spreads, even in a ‘Grexit’ scenario, is really not that huge.”
Greece’s bonds are tumbling this month as investors see scant progress on a financial deal to prevent a default.
The yield on notes due in 2017 jumped above 28 percent on Thursday, the highest since March 2012, when the country implemented the biggest debt restructuring in history. Italian bonds maturing the same year yielded 0.19 percent.
Standard & Poor’s downgraded Greek debt to CCC+ from B- on Wednesday, citing the deteriorating economic outlook.
The Greek government that took power in January proposing to end austere budgets has been locked in talks with creditors over measures attached to its bailout loans. It must make payments to the IMF of 200 million euros and almost 800 million euros in the first two weeks of May. Funds may be exhausted by May 12, when the second payment is due, Standard & Poor’s said.
While in 2011 and 2012 rising Greek yields dragged those on its periphery considerably higher in the wake, this time around Greece has surged largely in isolation.
Greek 10-year yields were little changed at 12.73 percent on Friday, after reaching as high as 13.20 percent the previous day, the most since December 2012. Spain’s 10-year yield rose three basis points, or 0.03 percentage point, to 1.38 percent. That’s still less than a fifth 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 dangers to the market are multiple times less than they were a number of years ago,” said Carl Norrey, co-head of rates trading for Europe, Middle East and Africa at JPMorgan Chase & Co. “Each subsequent discontinuity in the Greek market -- new crisis, new event, new worry -- is having a much smaller impact on non-immediately related markets.”
That doesn’t mean its euro partners are immune from harm. Greece owes about 184 billion euros to euro-region governments and the crisis-fighting fund they set up in 2010.
Speaking in the Italian Senate in July 2011, Finance Minister Giulio Tremonti said Italy was vulnerable until European policy makers come up with a solution to the crisis, adding that “like with the Titanic, even the first-class passengers can’t be saved.”
More recently, European Central Bank Governing Council member Klaas Knot said this week the situation in Greece is of concern and a Greek default may have a contagion effect.
Bondholders, though, are counting on Draghi’s QE plan to support bonds from the currency region’s 18 other nations and insulate them from the Greek turmoil.
The ECB reported purchases of 41.68 billion euros of government debt in March. While buying of German securities, at 11.1 billion euros, made up the biggest proportion, Italian bonds comprised 7.6 billion euros of the purchases and Spanish debt 5.4 billion euros, the ECB said.
The ECB’s buying means that, even if the chances of a Greek euro exit increase, any selloff in periphery debt will be limited, according to Allan von Mehren, chief analyst at Danske Bank A/S in Copenhagen.
“If we really start to doubt if Greece will stay in the euro, we could see a 50 basis-point hit in Spain and Italy, but I wouldn’t expect a move of more than that, given the support of the ECB buying,” he said. “I think contagion today is not the way we saw it back in 2012.”