Greece remains a risk but periphery offers value outright

The widening in EGB spreads because of concerns regarding Greece has been across the board in the periphery and core/semi-core spaces, with 10y Italian and Spanish spreads versus Germany widening by c.45bp and 10y French and Belgian spreads widening 10-15bp at some stage over the quarter before retracing half of this recently, as near-term deal hopes have increased for Greece. We believe these large movements have occurred in a very thin liquidity environment without much actual cash selling. 

The evolution of negotiations between Greece and creditors at the time of the publication is still fluid. Even if the tone has improved towards a near-term solution lately, a sustainable comprehensive solution is unlikely, assumes Barclays. 

According to Barclays, "Any short-term cash disbursement to Greece is likely to be quickly consumed by upcoming payments and redemptions due to official creditors. Therefore, the risk of continued capital outflows from the banking system and imposition of capital controls is likely to stay alive, especially with political uncertainty remaining high, given the difficulty of Syriza passing necessary reforms in the Greek parliament". 

A full-scale contagion from Greece to other EGB markets similar to 2011-12 is unlikely. Barclays argued that if a short-term adverse scenario materialises in Greece, 10y Italian and Spanish spreads are likely to widen to their fair value levels without any QE premium, which is predicted to be 190-200bp, says Barclays.