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Rising Greek government bond yields, increased deposit outflows from the country's banks and wider liabilities in the national central banks' transfer system driven by capital flight from Greece fuelled a rise in fragmentation in the euro area financial markets in the first four months of 2015, according to the latest report by Moody's Investors Service.
However, there has been no significant contagion from Greece in other euro area countries and fragmentation in the rest of the currency union fell in April to its lowest level since 2010.
The report, "Euro Area Financial Fragmentation: With limited contagion from Greece, financial fragmentation has decreased across the rest of euro area so far in 2015" is now available on www.moodys.com. Moody's subscribers can access this report through the link at the end of this press release. The research is an update to the markets and does not constitute a rating action.
"Developments in Greece accounted for all of the increase in fragmentation in the euro area financial markets between January and April," says Antonio Garre, a Moody's Analyst and co-author of the report. "Fragmentation continues to fall across the rest of the euro area and is well below the peaks we saw in 2012 during the euro area sovereign debt crisis."
The report found that bank deposit volatility increased significantly due to private sector deposit outflows in Greece.
Total household and non-financial corporation deposits with Greek banks fell to EUR128 billion in the first four months of the year, the lowest level in 10 years. That represented a 17% decline from December's total.
However, while Greek government bond yields have risen by 150 basis points since December, the small changes in spreads in other euro area periphery countries reflect very limited contagion in government bond markets.
"Despite uncertainty about the outcome of the negotiations in Greece, financial fragmentation in the rest of the euro area has diminished further, a positive sign of resilience of the financial sector." Mr Garre adds.
Moody's Euro Financial Fragmentation Index aims to capture the degree of fragmentation of euro area financial markets based on measures of cross-country dispersion in price-based and quantity-based financial indicators. These indicators comprise yields on government bonds, bank interest rates charged to households and non-financial corporations (NFCs), cross-border banks' exposure, TARGET2 balances and bank deposits.
