It would take a true optimist to expect the Greece’s fiscal difficulties will start to improve once its second bail-out is agreed.  The grim reality is that under the grip of a painful recession Greece may continue to miss its budgets targets. Chancellor Merkel’s exasperation with Greece has become all too obvious and simultaneously speculation that Greece will be allowed to find its own way outside the system has grown. 

For EMU politicians it is not necessary sympathy with Greece’s position that is keeping Greece in EMU but rather the potential for the Greek crisis to deal the rest of EMU an enormous blow through contagion that is underpinning support to maintain the status quo. The pressure on Portuguese yields at the start of this year highlights the threat of contagion and the vulnerability of EMU. 

Ireland, however, is showing that wounds can with time start to heal and further progress in this direction will lessen its exposure to contagion.  EU politicians are also showing signs of getting to grip with contagion risks. The proposal that debt holders would be prioritised in pay outs from Greece’s bail-out funds is aimed at reassuring investors. While politicians’ fear is likely to keep Greece in the system for now, any tangible drop in contagion risk could alter Greece’s position medium-term. For now, Greek uncertainties are set to continue pressuring risk appetite.  


source: Rabobank