Contagion risk for other countries increases

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After the Brexit shock and the obvious increase end of June the sentix EBI (Euro Break-up Index) calms down by the end of the month July 2016. The decline of 6.8 points to 20.3 points should not hide the fact that the value is still higher than before the Brexit referendum. The obvious calm in the capital markets does not seem to mean, the risk for a break-up of the euro zone has sustainably given away. In the background the risk of contagion rather increases. Several countries like Finland or Italy reach new annual highs in the country-EBI-indices.

 At first glance it appears that relaxation is announced at the EBI. The index, which measures the likelihood of a break-up of the euro zone, falls in July to 20.3 points. One month earlier, the EBI was raised exactly at the weekend when the British voted for or against a stay in EU. The shock-like vote also left its mark on the EBI. But the reaction of inves-tors one month after the quake should also make you listen. At least the British were able to release their political vacuum in a rush and also the markets have entered a sustainable recovery phase. We are still fare away from a "sus-tainable" recovery of EBI indicator, at least the July level marks the second highest value in 2016. Rather than this fact worries the parallel calculated index contagion risk (red line). This increases the second consecutive month very dy-namic to a value of 36.4 percent, marking a level which was observed recently in October, 2014.

20160726 ebi headline index

sentix Euro Break-up Index and Contagion Risk Index

Looking at individual country indices reveals the increasing risk of a spread. Several country indices do not just climb to a new high, some even reach all-time highs. Never in EBI history, the value for Italy was at such level. In both countries investors notice financial and political movements, that increase the likelihood of an effective exit. We can follow-up the ongoing process in Finland since mid of 2015. With the result of the Brexit, nationalistically trends have new breed-ing and add fuel to exit discussions. In the Netherlands a similar process can be observed, even if the EBI was at least slightly declining in the stronghold of the tulips. For Italy the national EBI shows steeply upward. The rescue attempt of Italian banks might be the background, which again challenges the financial solidity of Italy. The fact that the rise of in-dividual country indices is extreme disproportional to yield spread of German government bonds, is due to ECB pur-chases. The real risks, which has to be priced on spreads in fact, do not reflect the bond prices so fare. Without the protective hand of the ECB significantly higher risk premiums on Italian government bonds would be observable.

20160726 ebi fin it

sentix Euro Break-up Index by country Finland and Italy

Background

The sentix Euro Breakup Index is published on a monthly basis and was launched in June 2012. Its poll is running for two days around the fourth Friday of each month. Results are regularly published on the following Tuesday morning. Survey participants may choose up to three euro-zone member states of which they think they will quit the currency union within the next twelve months. Further details on the sentix Euro Breakup Index can be found on http://ebr.sentix.de.

This month’s reading of 20,3% means that currently this percentage of all surveyed investors expect the euro to break up within the next twelve months. The EBI has reached its high at 73% in July 2012 and touched its low at 7.6% in July 2014. The current poll in which 1.003 individual and institutional investors participated was conducted from June 23 to June 25, 2016.

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