Greek contagion on the way

January 28, 2015 09:28 AM


Lukanyo Mnyanda is an author for Bloomberg News

With Greece’s government and its creditors in no mood to compromise, investors are growing skeptical on how long the European Central Bank can insulate the rest of the region’s debt markets from the turmoil.

Italian bonds fell with Spain’s as Greek Prime Minister Alexis Tsipras’s government pledged to raise the minimum wage, a day after Dutch Finance Minister Jeroen Dijsselbloem said the European Union won’t renegotiate Greece’s bailout. So far, contagion from a selloff that pushed Greek three-year yields up almost 7 percentage points since the Jan. 25 elections has been contained after the ECB said it would start a sovereign-bond buying program from March.

“Greece will definitely come and hit people in the face,” said Marc Ostwald, a strategist at ADM Investor Services International Ltd. in London. “Financial markets took the view that Tsipras would be brought to heel and would have to understand that he needs to play the game. His first act has clearly signaled something completely different.”

Italy’s 10-year yield rose eight basis points, or 0.08 percentage point, to 1.61% as of 1:57 p.m. London time, set for the biggest increase since Jan. 5. The 2.5% bond due in December 2024 fell 0.725, or 7.25 euros per 1,000-euro ($1,135) face amount, to 108.14. Spanish 10-year yields increased seven basis points to 1.46%.

‘Catastrophic Clash’

While saying he wanted to avoid a “catastrophic clash” with creditors and European governments, Tsipras told ministers in Athens at the inaugural meeting of his cabinet that they “will not be forgiven” if they betray pre-election pledges to renegotiate the terms of Greece’s bailout.

The new government will “imminently” deliver on a promise to raise the minimum wage and reinstate collective bargaining rules, Labor Minister Panos Skourletis told reporters before a cabinet meeting. The government also added a foreign-policy angle to its challenge to the status quo in Europe, questioning moves to impose more sanctions on Russia.

“If you listen to recent actions they have taken, with stopping the privatization and getting into a more open dispute with the EU regarding Russia, that doesn’t help boost confidence,” said Michael Markovich, head of quantitative analysis at Credit Suisse Group AG in Zurich. “The tone hasn’t changed” after the election “and the market is selling off” as a result, he said.

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