In my eyes there are 2 layers of contagion: restructuring and bailout. Both have been examples in Greece’s case, restructuring contagion as it was putting its bailout peers under pressure and at the same time pushing up other peripheral yields as speculation over their potential bailouts increased.
To be fair, the ECB’s forceful liquidity provision has created a cushion between the 2 contagion types. As Italian and Spanish yields fell even as worries increased in Portugal. Without a doubt, Portugal will come under more fire from pesky bond vigilantes in the near future. Everyone will be looking at the LTROs to provide some extra padding but the question everyone should be asking themselves is how much pressure the cushion will be able to take.
Guru’s thoughts: I think Greek contagion will continue to build, Portugal will continue to surrender, Italy and Spain will continue to take pleasure in all this liquidity cushioning, BUT only on a temporary basis. Nothing is 100% certain but I still remain biased towards a long crisis. Be aware of France as well, they have elections on 22nd April, and this is always going to cause controversy when the government is trying to tighten its belt!
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