QE will stem euro-area contagion from Greece for now

Subject

The likelihood of financial contagion from Greece.

Significance

On February 2, the new anti-austerity coalition Greek government led by the left-wing Syriza party, proposed that its 'troika' of state-level creditors swap Greece's bail-out debt for 'growth bonds', thus avoiding an outright write-off of its 315 billion euros (360 billion dollars) of foreign debt. Germany has taken a hard line against a debt 'haircut' as a condition for any future financial aid to Greece and remains a harsh critic of the ECB's large-scale programme of sovereign quantitative easing (QE) launched on January 22. The open-ended nature of the QE has impressed markets and is keeping Spanish and Italian government bond yields at historic lows, providing a bulwark against investor concerns about Greece spreading across the euro-area's periphery.

Impacts

• The sharp deterioration in sentiment towards Greece is having a muted impact on other Southern European debt markets, thanks to QE.
• Fears of 'Grexit' are much less pronounced now than at the height of the euro-area crisis in 2012.
• Sharp disagreements between the Syriza-led government and its creditors could still rekindle such fears.