If no agreement is reached at the emergency Eurogroup meeting, focus will shift to the European Central Bank will do with its Emergency Liquidity Assistance (ELA) to the Greek Central Bank. If that is removed, then the country faces the prospect of capital controls in Greece and possible curbs on deposit withdrawals.
All this spells bad news for bond markets, which have already seen “hardship” in recent weeks.
“We have seen a significant widening of various (credit) spreads, particularly since Monday after the breakdown and abandonment in talks over the weekend,” said Peter Schaffrik, head of European economics and interest rate strategy at Royal Bank of Canada.
“I am pretty sure that as we go into Thursday’s talks and into the weekends, the story is not over, so the European bond market is going to stay volatile. I think what we are seeing is the market is making room for the deal not to happen and that is why these markets have been so volatile,” he said.
Spanish, Portuguese bond yields fluctuated on Wednesday ahead of the meeting having sold off sharply earlier in the week to hit multi-month highs as Greek debt contagion fears spread.