By Andrew Rosenbaum
ANKARA
Europe’s peripheral economies are facing the dangerous effects of economic fallout from the Greek crisis, economists said on Friday.
Portugal, Spain and Ireland are at risk of contagion as Greece faces the possibility of leaving the euro.
The most immediate risk is that of a spike in government bond yields - indicating a higher risk associated with the bonds issued by the three governments - although some analysts believe this would only be temporary.
The spread of Portuguese, Spanish and Irish bonds widened against the benchmark German Bund in June but they are still well below levels seen in 2012, when a previous Greek crisis sent them to more than 200 basis points over the Bund.
However, analysts are concerned about investor reaction to a “Grexit” from the euro.
"One of the main threats to these two countries [Spain and Portugal] is that borrowing costs would rise on the back of a Greek exit,” Michael Grogan, an analyst with First Class Analytics, warned in a note on Friday.
“Given that contagion would be associated with a Greek exit in one way or another, bondholders may demand higher yields given a perceived threat that Spain or Portugal might exit the eurozone."
That is the short-term danger, Grogan said. "The longer-term danger would be that Spain and Portugal decide to leave the euro." This would aggravate the currency risk for the euro, which would already be under pressure if Greece leaves, he added.
According to Nick Stamenkovic, a fixed-income strategist at RIA Capital Markets in Edinburgh, bond investors are losing confidence. “Investors remain jittery, pointing to choppy trading conditions in peripherals near- term,” he observed in a note published on the RIA website.
In a study published in April, investment bank Goldman Sachs said a Grexit could see the Italian and Spanish 10-year bond spread over the Bund almost trebling to as much as 400 basis points. This surprising development would still be still some 200 basis points below the peaks hit during the winter of 2011/12.
The lack of a flight from peripheral bonds is, perhaps, a sign of investor faith in the European Central Bank’s firewalls. The bank has its Outright Monetary Transactions program in place to buy up government paper when yields go sky-high.
However, analysts do not expect any other threat to the peripheral economies.
Grogan pointed out that growth has been strong in all the peripherals and structural reforms have made a difference to their economies and they are well protected against most long-term risks.
Just one significant danger remains, namely investor flight from higher-risk economies. As of June 19, emerging market stocks were down for four straight weeks as investors shun risk and move to more developed markets.
Neil Shearing, chief emerging markets economist at Capital Economics, pointed out that the Greek crisis had cast a "dark cloud" over emerging economies as targets for investment.
Global investors have already pulled $9.3 billion from stocks in developing countries in the week to Wednesday, the most since the depths of the 2008 global financial crisis.
Asia has been particularly vulnerable, with $7.9 billion pulled out of the region’s equity markets - the highest level in almost 15 years - according to data provider EPFR Global.
Could a Grexit trigger a new 'tapering' crisis with investors moving money from riskier bonds to the U.S.? Most analysts do not believe so but a No vote in Greece to the creditors’ economic reform program would send the entire financial world into uncharted waters.
