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 The merits of ruling socialist party Syriza's demands aside, its
brinkmanship in renegotiating the painful terms of its international
bailout always required one key element - a financial version of the
old Cold War doctrine of 'mutually assured destruction'.
A reprise of 2010/2011 would have seen any threat of Greek default
or euro exit infecting markets everywhere and sending government
borrowing costs across Italy, Spain, Ireland and Portugal soaring,
heaping pressure on the Eurogroup to move closer to Athens' demands
to prevent a systemic euro collapse.
"Whoever gets scared in this game loses," Greek Prime Minister
Alexei Tsipras said this week as a three-month impasse threatens
cash shortages ahead of critical debt repayments.
But the much-feared financial contagion - dubbed 'euro crisis 2.0'
by forecasters at the turn of the year - has not materialized for
euro zone governments sitting across the table.
And few if any investors expect the talks to be electrified by any
sudden market blowout - eye-watering gyrations in local Greek
markets notwithstanding. Borrowing costs across the euro zone hover
near record lows, euro zone equities are within a whisker of 7-year
highs and the euro currency has held in a five-cent range for two
months.
That's all the more remarkable given how negative markets have
turned on the outlook for Greece itself.
Almost half of all investors polled by German research group Sentix
this month expect Greece to leave the single currency within 12
months, while the survey's index measuring the risk of contagion to
other parts of the euro zone fell to a record low.
"Greece is not capable of derailing the euro zone recovery nor is
there a real risk of contagion to the periphery," reckons Wouter
Sturkenboom, strategist at the $272 billion asset manager Russell
Investments.
Most scenarios sketched by banks and fund managers still center on
some progress in talks or some protracted limbo involving some
limited Greek default within the zone.
But even though exit is now a real risk, the gloomiest forecasts
look mild compared to the chaos of three years ago.
Goldman Sachs says 'Grexit' - which they don't expect to happen -
could see Italian and Spanish 10-year bond premia over Germany more
than trebling to as much as 400 basis points.
That's about 200 basis points shy of peaks hit during the winter of
2011/12. And given German 10-year borrowing rates are near zero,
those spreads would imply nominal borrowing costs for Italy or Spain
300 basis points below peaks of three years ago.
QE STABILIZER
Critical is the fact that foreign private exposure to Greek assets
has dwindled since the default of 2012 and the bulk of Greek debts
are now owed to other euro governments, the ECB and International
Monetary Fund.
But regional calm is mainly thanks to several euro-wide emergency
firewalls - such as the European Central Bank's Outright Monetary
Transactions or the European Stability Mechanism - built
painstakingly over the past four years.
Chief among them is the trillion euro bond buying, or 'quantitative
easing' program launched just last month.
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"QE is probably the primary defense against contagion," Deutsche
Bank economist Mark Wall told clients.
By accident or design, the ECB's rationing of QE via its so-called
'capital key' has an in-built stabilizer of its own.
That model means the ECB is set to buy more bunds than anything else
with its 60 billion euro per month splurge to September 2016. But,
partly as a result, three quarters of all bunds now yield less than
zero and a quarter of that universe is illegible for QE purchases
because yields are under the -0.2 percent threshold below which the
ECB refuses to buy.
That has two implications. Any prior euro shock typically herded
euro domestic investors to the perceived safety of bunds. Now they
face blindingly expensive securities that even bond guru Bill Gross
last week called the 'short of a lifetime'.
But more powerfully, the growing inability of the ECB to buy bunds
will likely force it to alter its capital key and skew purchases
more toward the large, higher-yielding peripheral bond markets of
Italy and Spain - further protecting these markets in the event of
any Greek shock in the interim.
Without a spike in borrowing rates, shocks to business confidence
and investment that whacked equity markets last time round are
muffled.
It's possible mutual or hedge funds shift money out of the bloc
altogether. But the main result of that would be pressure on an
already weakened euro exchange rate - a move likely cheered rather
than booed in the rest of Europe as it underpins economic recovery
and wards off deflation.
Some say the bigger risk from Syriza's rise to power was political
rather than financial contagion - emboldening anti-austerity
movements across Europe, such as Podemos in Spain, and stoking euro
scepticism and existential threats to the currency.
But chaos in Greece, no financial shock elsewhere and no concessions
from Brussels could well have the opposite effect.
"There is no other Greece and there isn't quite another Syriza,"
JPMorgan economists told clients, pointing out the only popular
anti-austerity party seeking euro exit was Italy's Northern League.
"The disorder unleashed by Greece's exit would probably dampen
support for these parties and reduce rather than increase the odds
that others follow its lead."
(Graphic by Vincent Flasseur and Marius Zaharia; Editing by Anna
Willard)
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