Marcus Ashworth is a Bloomberg Gadfly columnist covering European markets. He spent three decades in the banking industry, most recently as chief markets strategist at Haitong Securities in London.

If the fallout for Sunday's Italian referendum is bad for Italian bonds, it could well be worse for one of Europe's star performers this year: Greece.

Greek debt has tightened massively to German bonds in the past three months, while all other main European government securities have been widening. Growing confidence in Greek Prime Minister Alexis Tsipras's willingness to conform to the Troika (International Monetary Fund, European Central Bank, European Union Commission) requirements on the latest bailout package, is behind this.

Greece: Europe's Bond Market Superstar
Progress on its debt burden has fueled massive tightening in yields versus German debt
Source: Bloomberg

The pot of gold at the end of the rainbow would be inclusion into the ECB's bond purchase program -- Greece has long been excluded since it's not rated investment grade. A shift in the rules would be a reward for budget discipline.

This has looked until recently like a long shot, but a tectonic shift in attitude is underway. A recent piece of evidence for this is a remark from ECB policy maker Benoit Couere on Tuesday. According to Reuters, he said that Greece can maintain a 3.5 percent primary budget surplus to GDP for years after the current bailout ends in 2018 -- that is a major vote of confidence.

The Return of Greece
Greece can now issue at the short end of the yield curve, and yields further out have fallen
Source: Bloomberg

Such recent Greek outperformance could easily unwind on a "no" vote on Italian constitutional reform. As Gadfly has argued, that could create serious problems not just for Italy, the world's third-largest debtor, but also for other borrowers in the region. 

Greece vs Italy
The Greek 10-year bond yields have narrowed substantially to Italy, whose debt is under pressure from concerns on the outcome of Sunday's referendum
Source: Bloomberg

The ECB can no doubt put temporary emergency measures in place to contain debt-market turmoil following from the vote. But Greece is still in a fragile situation, and a prolonged selloff could jeopardize all its hard work back to stability.

So while the strong performance in Greek debt makes sense, the debt looks to be expensive, given the big risk that lies ahead.

It would require serious determination by Greece to separate itself from the inevitable peripheral collateral damage -- and prove it can chart its own course. Strap on your seatbelts.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

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Marcus Ashworth in London at

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