Markets may misjudge risk of Greek exit from euro-area

Significance

While the scope for widespread contagion across Southern Europe is much more limited this time around because of the new ownership structure of Greece's public debt -- more than 80% of the stock is held by the official sector, in stark contrast to end-2011 when private investors held the bulk of Greek bonds -- a loss of confidence in the ECB's ability to implement a credible and effective programme of quantitative easing (QE) could increase investors' sensitivity to Greece's political woes.

Impacts

• Despite Greece's re-emergence as a focal point for market anxiety, the bond yields of Portugal, Spain and Italy remain at near-record lows.
• This is partly due to market expectations of full-blown QE by the ECB.
• Yet Draghi must come up with a QE programme that is both credible and has the backing of a German government wary of further credit risk.