Grexit considerations

As the threat of Grexit has risen, the ECB and Euro-area countries are found to have sufficient tools to prevent severe contagion and another sovereign debt crisis. 

Widening between German and Italian 10-year spreads is seen to be limited to around 100bp, such widening would be considered a buying opportunity. The curve would probably see a renewed flattening following a Grexit, driven by rallying German bonds.

It has been mostly about Greece lately, and the topic has caused sizable nervousness also in a broader sense and intra-Euro-area spreads have seen sizable moves. The recent deadlock in the negotiations has made the prospect of Grexit look even more real, so it makes sense to estimate the consequences of such a scenario.

Short-term volatility and market concerns during the following few weeks would be unavoidable.

The extent of those moves would very much depend on the rapidity of the political response. This time all sides should have prepared for a collapse in the talks, implying the response could be swift. What the Euro-area governments would lack in response rapidity could easily be compensated by the ECB.