ECB Warns of Contagion Risk over Greece

A failure to reach an agreement on Greece’s aid program soon may drive yields on bonds issued by other euro-area countries higher, the European Central Bank said.

“In the absence of a quick agreement on structural implementation needs, the risk of an upward adjustment of the risk premia demanded on vulnerable euro-area sovereigns could materialize,” the ECB said in its twice-yearly Financial Stability Review published Thursday in Frankfurt. “The lengthy and uncertain process of negotiations between the newly formed Greek government and its creditors” has already contributed to bouts of extreme volatility in Greek markets, it said.

Three months after taking office, the new Greek government has still failed to reach agreement with its creditors to unlock bailout funds, bringing it ever closer to default. While ECB policy makers have claimed the region is better insulated against a disorderly Greek outcome than previously, a failure to meet payments could still create spillover effects for bond markets in neighboring countries as well as domestic banks.