Greek Crisis 2.0 Leaving Other Bailout Patients Unscathed

Greece is again the word in financial markets.

For now, though, the crisis vocabulary doesn’t include Ireland, Portugal, Spain or Italy.

Greece Crisis 2.0, coming five years after it sent the first shockwaves through Europe, may prove less infectious this time thanks to nations’ improved finances and the backstops provided by euro area politicians and central bankers.

“On the potential of contagion of other countries in the euro area, we believe the situation is very different from the one we had,” Credit Suisse Group AG economist Giovanni Zanni wrote in a report yesterday. “The imbalances in peripheral countries are a lot less extreme.”

That’s underscored by estimates from Capital Economics Ltd., which show Greece’s budget deficit alone has shrunk from almost 16 percent of gross domestic product in 2009 to less than 2 percent this year. The country returned to the debt market this year for the first time since 2010. Deficits in Spain, Portugal and Ireland have been about halved.

As for current accounts, the International Monetary Fund projects Greece’s has shifted to surplus from a deficit of 11 percent of GDP in 2009. Ireland now has a surplus of 3 percent rather than a shortfall of 3 percent, while Spain’s has returned to balance from a deficit of 5 percent.

ECB Backstop

The turnaround -- alongside stronger regional defenses and speculation that the European Central Bank will soon buy government debt -- is a reason why investors held off dumping the bonds of Europe’s peripheries this week.

“Markets have noticed and spreads excluding Greece have generally been well behaved,” said London-based Zanni.

While three-year Greek yields rose this week above 10-year rates -- reflecting investors’ concern over lending for longer periods -- euro-zone debt this week has held its own.

Ten-year bond yields in Spain and Ireland are still below 2 percent and Portugal’s are undershooting 3 percent. That’s a far cry from the peaks of the crisis when Ireland’s 10-year rate exceeded 14 percent and Portugal’s 18 percent.

The greatest threat to Europe next year may be politics rather than economics. Voters across the continent have been hurt by austerity, fuelling the rise of protest parties such as Syriza in Greece and Podemos in Spain. Greece, Italy, Portugal and Spain all hold elections within the next year, providing potential flashpoints for markets.

“So far the markets appear to have viewed the latest escalation of the Greek crisis as an isolated event,” said Jonathan Loynes, chief European economist at Capital in London. “But that may not last and the episode is a reminder that even those economies which have cut their budget deficits dramatically are not immune from political instability and market pressures.”

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