Money markets widely expect the European Central Bank to keep providing unlimited cash to banks for as long as needed, and short-term interest rate traders have largely disregarded its warnings of "catastrophic" effects from any restructuring.
Spreads between Libor euro interbank offered rates and overnight index swaps, a widely-used gauge of interbank stress, have been mostly steady at 20-25 basis points throughout May, much lower than peaks at over 110 bps in late 2008.
Other short-term interest rates have also remained broadly steady, in stark contrast to government bond yields, which for Greek two-year bonds have doubled in just two months to more than 26 percent.
"The liquidity facilities are in place and likely to be extended in the event of a worsening of the sovereign crisis," said Giuseppe Maraffino, rate strategist at Barclays Capital, explaining the lack of Libor/OIS widening.
If Greece were to restructure its debt, "the first immediate reaction could be a widening of Libor/OIS spreads but it should be temporary, as we expect the ECB to introduce more liquidity into the banking system," he said.
But ample ECB liquidity may in fact be hiding stress in money markets rather than washing it away, with concerns over the systemic impact of a restructuring -- although not seen in prices -- very much alive in the minds of market participants.
A recent Reuters poll of money market traders and analysts showed expectations were that a restructuring of Greek sovereign debt would trigger a new round of banking recapitalisations across the euro zone.
STRESS IS THERE
With euro zone money markets still not fully recovered from the Lehman Brothers shock of nearly three years ago, lending volumes may be a better indication of stress than market prices.
Liquidity in the overnight unsecured lending market has fallen after the latest wave of the Greek crisis, with average traded volumes in the first two weeks of May's maintenance period around 10 billion euros lower than at the same point in the previous two maintenance periods, according to Reuters data.
Furthermore, the difference between the average daily reserves banks have held at the ECB and the reserve requirement has averaged around 30 billion euros, compared with around 20 billion euros at the same point in March's period, which was of a similar length.
Although Greek, Irish and Portuguese banks were already shut out from repo markets -- where borrowers offer collateral for cash loans -- ICAP says term lending activity outside Spain and Germany has recently seen a "notable reduction."
Traders also warn that most of the unsecured lending going through since end-2008 is of up to one month in length.
"Nobody really believes it's going to happen in a month and I don't believe it's going to happen over the next six months," one trader said, referring to a potential Greek debt restructuring. "They're going to keep postponing this because they are so afraid people will lose faith in the euro."
The iTraxx index of senior financial credit default swaps has also reflected some concerns of a wider risk to the banking system, widening almost 30 basis points in May.
REASONS TO PANIC? ECB IS KEY
In the event of a Greek debt restructuring, the ECB -- which opposes such a move and has said it will not accept restructured debt as collateral -- could turn from providing a safety net for banks to becoming the trigger of a cash squeeze.
"If the ECB were to suddenly reject Greek government collateral, it would be akin to a cleanup call," said Hank Calenti, head of bank credit research at Societe Generale.
"You could assume that (Greek banks) would not be able to survive ... People would certainly be concerned that there would perhaps be contagion. It's quite possible that it then becomes more of a euro zone systemic event."
But markets are not pricing in that risk. Analysts see it as an empty threat in a negotiating game with other policymakers.
Commerzbank strategist Benjamin Schroeder said in the event of a restructuring the ECB could accept the new Greek debt as collateral, thus allowing banks to secure funding.
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