Will what happens in Greece, finally stay in Greece?
A host of doubts still surround the second bailout for the country. The economy is in tatters, there is doubt over the bond swap at the heart of the deal, and a spat over collateral for Finnish loans is continuing. But while Greek bond yields have surged to fresh highs, with the yield to maturity on two-year notes at 46%, the rest of the euro-zone government-bond market hasn't taken fright. That marks a step forward in the crisis.
A host of doubts still surround the second bailout for the country. The economy is in tatters, there is doubt over the bond swap at the heart of the deal, and a spat over collateral for Finnish loans is continuing. But while Greek bond yields have surged to fresh highs, with the yield to maturity on two-year notes at 46%, the rest of the euro-zone government-bond market hasn't taken fright. That marks a step forward in the crisis.
The Finnish collateral spat is another example of the euro zone's challenge in sorting out the detail for its crisis response and bringing all 17 member states together. It may yet become another deeply divisive problem, even though officials are working on a solution and Finland has said it can be flexible on the form of collateral.
Meanwhile, the news from Greece itself has been bad. The Finance Ministry now projects the economy will shrink 4.5%-5.3% in 2011, versus a prior forecast of 3.9%. The deficit may fall only to 8%-8.5% of GDP versus a target of 7.6%. And it isn't clear that the latest bailout will stave off an ultimate default, given that it doesn't reduce debt materially.
Previously, this might have sent the market into a tailspin, with fears about Greece extrapolated to other sovereigns. But Portuguese 10-year yields are 2.5 percentage points below their recent peak, while Irish 10-year yields are more than five points lower and are below 9% for the first time since April. Ireland, in particular, has benefited from the reduction in interest rates on its bailout loans and has boosted competitiveness.
The European Central Bank's resumption of bond purchases, albeit reluctant, has disrupted the contagion route to Spain and Italy, where 10-year yields are now locked around 5%. That support is crucial.
Governments elsewhere also haven't been idle: Spain, Italy and France are moving to introduce binding rules on deficits like Germany's debt brake, as well as fresh fiscal measures to hit debt targets. Euro-area economic governance is being tightened up. And banks have started reflecting Greek bond write-downs in their results. Some pain is finally being taken.
The crisis hasn't gone away. With euro-zone growth slowing to a crawl, markets could yet become concerned about debt sustainability in other sovereign countries. Politics remains a threat. The Finnish spat is a reminder of the clear tensions between national and euro-zone interests. An unexpected ratings downgrade could spark new market turmoil.
But for now, at least, Greece may have lost its capacity to shock. That can only be a good thing for the euro zone.
Meanwhile, the news from Greece itself has been bad. The Finance Ministry now projects the economy will shrink 4.5%-5.3% in 2011, versus a prior forecast of 3.9%. The deficit may fall only to 8%-8.5% of GDP versus a target of 7.6%. And it isn't clear that the latest bailout will stave off an ultimate default, given that it doesn't reduce debt materially.
Previously, this might have sent the market into a tailspin, with fears about Greece extrapolated to other sovereigns. But Portuguese 10-year yields are 2.5 percentage points below their recent peak, while Irish 10-year yields are more than five points lower and are below 9% for the first time since April. Ireland, in particular, has benefited from the reduction in interest rates on its bailout loans and has boosted competitiveness.
The European Central Bank's resumption of bond purchases, albeit reluctant, has disrupted the contagion route to Spain and Italy, where 10-year yields are now locked around 5%. That support is crucial.
Governments elsewhere also haven't been idle: Spain, Italy and France are moving to introduce binding rules on deficits like Germany's debt brake, as well as fresh fiscal measures to hit debt targets. Euro-area economic governance is being tightened up. And banks have started reflecting Greek bond write-downs in their results. Some pain is finally being taken.
The crisis hasn't gone away. With euro-zone growth slowing to a crawl, markets could yet become concerned about debt sustainability in other sovereign countries. Politics remains a threat. The Finnish spat is a reminder of the clear tensions between national and euro-zone interests. An unexpected ratings downgrade could spark new market turmoil.
But for now, at least, Greece may have lost its capacity to shock. That can only be a good thing for the euro zone.
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