Grexit More Likely than Contagion
From the international investment professionals at Euclid Advisors
For a country so tiny at less than 1.5% of European GDP, Greece has been a major distraction since the beginning of the year, with the power to potentially disrupt growth, bond markets, and overall stability of the euro. In the aftermath of Sunday’s ‘no’ referendum, the question isn’t whether or not Greece stays in the euro, but what contagion spillover there will be for other European markets and economic growth.
Contagion risk appears to be in check at the moment, an opinion based on a gauge we’ve found to be reliable over the years. The financial contagion index developed by Strategas Research, which measures European bank credit default swaps, European sovereign spreads, U.S. high yield spreads, U.S. Treasuries, and gold, provides a good indication of how much contagion risk there is in the markets and how much may spread to the real euro economy.
During the tumultuous chapter in the Greek debt saga from late 2011 into 2012, this index based on the same factors was more than double current levels. Our current view is that even though odds are increasing for a Greek exit from the euro, the chance of significant contagion like we saw in 2011-12 appears to be much lower.