18 May 2012

IPE: The great Greek euro exit - ready when you are

As coalition talks failed following the 6 May election in Greece, and speculation grew that a fresh vote on 17 June would return a decisive mandate for the anti-euro, anti-austerity Syriza bloc led by Alexis Tsipras, European institutions let out statements that appeared to suggest a new resignation to Greece's exit from the euro. Headlines screamed of bank runs and market panic.

In equity markets, it is no surprise to see stocks like National Bank of Greece taking a dive – but that has seen a steady decline since late 2009. But more broadly, while Europe's banking stocks have given up much of the post-LTRO rally they enjoyed over the winter, they have yet to test the post-2008 lows they set in Q3 and Q4 2011. It is beginning to look as though the worst was priced-into equity markets last autumn.

The fingerprints of LTRO are evident in peripheral eurozone bond markets, too. Spain's auction on 17 May went fairly well, with three- and four-year bonds clearing at 4.4 per cent and 5.1 per cent, respectively. Its two and 10-year yields are testing their 2012 highs but remain well below their November 2011 limits. Moreover, a small blip in the bid/ask spread on the two-year cannot disguise the recent trend for that spread to narrow – suggesting that liquidity in Spanish paper remains healthy. Of most concern to pension funds that have all but universally dumped peripheral eurozone bonds in favour of domestic or Bund positions is the inexorable plumbing of new depths by Germany's two- and 10-year yields, and the 30-year EURIBOR interest rate swap. The long-dated Bund tested 1.4 per cent, and the two-year is now flirting with a negative yield, à la Suisse.

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