Alexis Tsipras’s bargaining tool weakened

Alexis Tsipras’s claim that a financial collapse in Greece would drag down the rest of the eurozone is looking increasingly like a hollow threat.

While the yield gap widened between Spanish and German debt after a weekend that saw little progress in talks between Tsipras’s Greek government and international lenders, the increase was only the biggest since May 28.

The spread is close to the average of the past year, showing limited contagion compared with the blowout in Spain’s borrowing costs when Greece last faced a eurozone exit in 2012.

This time, the ECB’s quantitative easing programme is holding down borrowing costs for the eurozone’s indebted nations.

While BlueBay Asset Management says it has cut its holdings of peripheral bonds, the absence of a sense of panic may be a blow to Tsipras, who has argued since he came to power in January that Greece’s creditorsmust make concessions to avert a systemic crisis.

Without quantitative easing “they would have had more cards up their sleeve there’s no doubt”, said Marc Ostwald, a strategist at ADM Investor Services International in London on May 29. “Contagion risk has been contained by a number of factors but the primary one is the ECB purchases.”

While the ECB said on May 28 that a failure to agree on financial aid to Greece may push up bond yields for its peers, the risk is yet to be borne out in debt markets.

Spain’s 10-year bond yield rose five basis points, or 0.05 percentage point, to 1.89 at 2.35pm London time. While that’s up from as low as 1.048% in March, it is less than a fourth of the eurozonerecord 7.751% reached in July 2012.

The yield spread between 10-year Spanish bonds and similar-maturity German debt increased five basis points to 141 basis points, compared with an average of 122 basis points during the past year. The Italian-German spread widened seven basis points to 143 basis points. That is the biggest move since May 26, and just five basis points higher than the one-year average.

BlueBay, which oversees $59bn (€54bn), has cut its holdings of Italian, Spanish, and Portuguese bonds on concern Greece is heading for the eurozone exit door. The firm sees a 60% probability of Greece defaulting on its public sector debt over the next couple of months, according to Mark Dowding, a London- based partner and money manager.

While falling bond prices in Greece have so far not spilled over to Spanish or Italian spreads in a “meaningful” way, investors are complacent about the risks stemming from a missed payment to the IMF, according to Morgan Stanley analysts.

If Greece failed to pay the IMF, peripheral spreads may widen 10 basis points, Anthony O’Brien and Jesper Rooth wrote in a client note on Friday.

Greece must make four payments totaling almost €1.6bn to the IMF this month, and its bailout package backed by the euro region expires at the end of June.

The government’s self-imposed deadline for securing a deal slipped away over the weekend as disagreements between the two sides on budget targets persisted, a person familiar with the matter said.

Bloomberg

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