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Markets may misjudge risk of Greek exit from euro-area

Monday, January 5, 2015

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.
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