Turmoil in Greece seem better contained this time thanks to eurozone safeguards

MarketsAssociated Press

Greek stocks and bonds have been hammered this week, a reminder of the bad old days of Europe's debt crisis when the very future of the euro currency was called into question.

Analysts say a repeat is unlikely though there's an outside chance that political turmoil will disrupt Greece's bailout lifeline and keep Greek markets, at the very least, on edge for weeks.

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So far Greece's turmoil hasn't spread to other countries in the 18-country currency union, the way it did back in the crisis' most acute phase between 2010 and 2012.

A key sign: Prices for government bonds of other heavily indebted eurozone countries — such as Spain and Italy — are not suffering in sync with Greek bonds, as they did before.

A fast read on the situation in Greece:

Q: What's changed?

A: The eurozone has installed new safeguards. Those include a shared bailout fund that can lend to troubled countries, and an offer by the European Central Bank to purchase the government bonds of countries that come under financial pressure. Those measures would support the other eurozone countries and help keep markets from losing confidence in them even if something disruptive happens in Greece.

Q: What happened in Greece to trigger all this?

A: It was the announcement of a speeded-up presidential election. This raised the possibility of new national elections shortly after the New Year — elections that could, according to opinion polls, bring to power the left-wing Syriza party.

Syriza's charismatic 40-year-old leader, Alexis Tsipras, has openly backed the idea that Greece should not repay some of its debts. He has also rejected the politically unpopular conditions on Greece that were attached to the financial lifelines from its partners in the eurozone and the International Monetary Fund. That credit is keeping the country afloat as the government has enacted harsh austerity measures to get the public finances turned around. The bailout conditions have included onerous tax increases and spending and pension cuts that dealt a blow to living standards across the country.

New elections are triggered if parliament rejects Stavros Dimas, the presidential candidate nominated by conservative Prime Minister Antonis Samaras' government. That takes a parliamentary supermajority of 200 in the first two rounds Dec. 17 and 23, or 180 votes in a final round Dec. 29

Samaras' coalition has only 155 votes so it will need support from independents and other parties.

Observers say Samaras will struggle to get the votes.

Q: Why are markets selling off Greek bonds?

A: Fears have risen that a Syriza-led government will reject the bailout conditions, lose access to the credit lifeline, run out of money and, in the extreme scenario, default on Greece's debts.

Greece has billions in bond obligations to pay next year, much of it to the European Central Bank. Syriza has said private creditors would be spared any debt reductions. Markets aren't so sure. The yield on Greece's 10-year bonds — one measure of risk — has risen from around 5.6 percent in September to around 9 percent. At levels like that, the government could not fend for itself in the bond market. Greek shares lost 20 percent in three days this week.

Analyst Christian Schulz at Berenberg Bank says that if Syriza carries through on its most radical demands, "a Greek euro exit could become a distinct possibility again."

However, he said there are "a lot of ifs" and that makes the doomsday scenario "unlikely."

For Greeks, the consequences could be severe, such as a long-term loss of credit.

But the eurozone's "well-oiled rescue machinery" is "limiting any meaningful contagion" to other countries, said Schulz.

Q: Why do people seem to think the doomsday scenario isn't likely?

A: Syriza leader Alexis Tsipras has moderated some of his statements recently. He has said any nonpayment of debts would first be discussed with creditors, and that private-sector creditors would be spared.

That has people breathing easier that he'll eventually strike some sort of deal with international lenders.

Q: Can you remind me again what happened at the height of the Greek crisis?

Greece ran up unsustainable debts over years, borrowing from investors reassured that the country was a member of the euro. Its financial troubles got so bad it could no longer borrow money by issuing bonds. The International Monetary Fund and the other eurozone governments gave 240 billion in bailout loans against promises to restrain spending and reform the economy.

The country got some debt relief by defaulting on its bonds in 2012 and giving investors less than they were originally owed.

Q: Could markets be overly complacent about Greece?

A: Can't be ruled out. Before the crisis bond investors for years treated Greek bonds as pretty much as safe as German ones — an attitude that turned out to be profoundly misguided.

Analyst Tom Rogers, adviser to the EY eurozone forecast, says that Greece's debt level — 170 percent of economic output — is so high that it's "not implausible" that a further restructuring would take place.

That would mainly hit government creditors such as the IMF, ECB and eurozone governments. Yet the effects on the rest of the eurozone might not be so severe: "The eurozone is far better placed to withstand volatility in Greece."

Still, "if it got to a more extreme scenario where Greece potentially exited the eurozone, that would be a different ballgame. But I don't think people are talking about that yet."