Steadfast hopes for a reconciliation of Greece's European Union membership and debt refinancing impasse have buoyed global equity markets these past two weeks. Greek five-year sovereign credit default swap (CDS) spreads have been elevated this year, averaging 2,375 basis points (bps) since 2015 began, and they surged to as high as 4,339 bps on June 17 before settling below 3,000 bps after June 19 (2,663 as of 6/24). Despite this latest episode of extreme volatility in Greek spreads, global financial market volatility remains quite suppressed largely because there has been little evidence of financial market contagion risks elsewhere in sovereign CDS spreads.
To illustrate Europe's subdued sovereign credit conditions, S&P Capital IQ Global Markets Intelligence (GMI) Research investigated CDS spread history for Italy, Spain, and Portugal as barometers of potential credit contagion risks across the region. Italy and Spain CDS spreads have been predominantly locked in a fairly narrow 75 bp-150 bp trading range for the past 12 months and remain at 115 bps and 93 bps, respectively, as of June 24. Likewise, Portugal's spreads have traded between 140 bps-225 bps this past year and settled just below the mid-point of this range, at 171 bps as of June 24 (see chart).
Although the fate of the short- and long-term Greek relationship with the European Union will likely be a major source of investor uncertainty for the foreseeable future, as long as the aforementioned sovereign CDS spreads stay well-behaved, overall financial market volatility should remain restrained. Nonetheless, investors should monitor selected risk spreads for evidence of brewing contagion risks. The relatively volatile Portugal spreads in particular could be an early canary in the coalmine should spread premium begin to rise above the referenced ceiling of 225 bps.