Faith-based currency

Greek exit talk leaves euro investors unperturbed

One of the euro's founding myths was that it was irreversible. But politicians have managed to broach the idea of a Greek exit from the single currency without immediately opening a Pandora's box of problems.

During last weekend's difficult negotiations about a third bailout, Germany suggested that Greece could take a five-year "time out" from the single currency. That breaks the unity taboo. In theory, if Greece can leave, albeit temporarily, so could other financially strained members, such as Portugal and Italy.

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The debate demonstrated that there are limits to how far European politicians and policymakers will go to keep countries inside the euro zone. German Chancellor Angela Merkel was not willing to strike a deal at any price. And while European Central Bank President Mario Draghi may be willing to do whatever it takes to preserve the euro, this is not the same as doing whatever is necessary to keep Athens in the club.

The time-out talk, though, does not seem to have made investors more fearful of redenomination, the reintroduction of a national currency by a euro zone member. The yield on 10-year Portuguese government bonds has fallen by 15 basis points since the suggestion of exit leaked to the press. The yield on comparable Italian paper was at a six-week low on July 15. The Euro STOXX 50 share price index is also doing fine.

There are good reasons for asset managers to keep faith. While the currency union may have looked fragile a few hours before the talks ended, the final agreement was a vote of confidence. Greek Prime Minister Alexis Tspiras was willing to countenance unprecedented austerity and foreign oversight for the sake of keeping the euro. For the sake of keeping Greece, fellow euro countries offered a significant new bailout.

Also, every defused crisis leads to hope that euro zone countries could forge even stronger ties. And no other euro zone country is saddled with the unsustainable Greek levels of debt. Investors are willing to treat Greece as an exception, rather than as a precedent.