ECB Says Contagion Risk Exists If Greek Deal Not Reached Quickly

by Jeff BlackAlessandro Speciale

11:55 AM EEST

May 28, 2015

Bloomberg

Yields on sovereign debt issued by other euro-area countries could rise if an agreement on Greece’s bailout isn’t reached soon, the European Central Bank said.

“In the absence of a quick agreement on structural implementation needs, the risk of an upward adjustment of the risk premia demanded on vulnerable euro-area sovereigns could materialize,” the ECB said in its twice-yearly Financial Stability Review published in Frankfurt on Thursday. “The lengthy and uncertain process of negotiations between the newly formed Greek government and its creditors contributed to bouts of extreme volatility in Greek markets.”

The report also warned that global investors could face an “abrupt reversal” of currently low yields, a development potentially worsened by low liquidity in secondary markets. While banks face weak profitability, the non-bank sector contains “manifold” risk-triggers from high indebtedness.

Financial-market reactions to the developments in Greece have been muted to date,” the report said. “Developments in Greece contrasted with broader euro-area trends as yields increased and spreads vis-a-vis Germany widened.”