Contagion from Greece limited for now

Greece’s crisis escalated further in June, culminating in a default to the IMF, the imposition of capital controls and the expiry of the second bailout programme. In response, Greek 10 year government bond yields have shot up to almost 15%. But outside of Greece, financial markets have remained relatively sanguine. Granted, other peripheral government bond yields have nudged up while those of Germany have fallen, perhaps reflecting some safehaven flows. So far, though, there has been relatively little contagion, at least not when compared to 2012. (See Chart.) And the euro has been surprisingly resilient, holding steady at around €1.10 to the dollar. However, given that the risks of a Greek exit from the euro-zone remain very high, we think the markets may be being too relaxed.