Silent and treacherous, the contagion snakes its way through the financial markets, ready to strike. The Eurozone crisis has brought it into the homes of Italian savers, who have learned to fear it.
But what is the risk of contagion? This is the danger that the difficulties encountered by one element of the financial system, for example a nation or a bank, will spread quickly and with adverse impact on other elements of the system, with an overall catastrophic effect.
For there to be contagion you need a virus (the default in this case), a hotbed (a body or bodies affected, i.e. countries, companies and people) and transmission vehicles. There are two main means of spreading the infection:
- il psychological mechanism, that is, the escape from any potentially virulent subject and situation (the motivation behind the massive sale of government bonds of peripheral Euro countries by international investors…);
- the existence of strong financial connections within the system: for example, A is a creditor of B, B is a creditor of C, if C defaults B suffers losses and may not be able to repay A.
Both means of contagion are present in the Eurozone crisis: we do not miss anything. As for the outbreak, it is evident how it is located in Greece. The virus took root easily in a system with a frail structure like the Eurozone: a monetary union, but not a fiscal and political one, a giant with legs of clay.
The risk of contagion is a so-called latent variable, that is, it is not directly observable, which "hides" in the visible data. It would be interesting to unearth it in the Eurozone and see what it looks like the spread spectrum… well, we tried. Let's see how (dea after you).
Using the spread surveyed daily of the government bonds of the countries of the Monetary Union compared to Germany, we have tried to "flush out" the risk of contagion from the financial data, using a statistical methodologyknown as "Main Component Analysis”, which allows you to separate the systemic component, i.e. the substance, from the background noise.
You notice the peak in the last months of 2011, the subsequent descent and then again the upswing this year, in the run-up to the first elections in Greece. Since then, slight improvements have been noted, corresponding to the steps forward in the political and institutional fora to resolve the European crisis. But the risk remains very high.
At this point it is also interesting to understand with what timing and intensity the various countries are involved. Let's focus on the last year and on a small group of countries that seem particularly significant to us: Italy, Spain,Ireland e Portugal.
What does the graph tell us? First that the tensions deriving from Ireland and Portugal, object of "bail-out", have lost importance in the eyes of the operators dealing with government bonds. If I may, this could be it a serious mistake in my opinion, because Portugal's problems are largely still there…
Then the graph shows how, at the end of 2011, the problems of the Italian Government were the most important risk factor. Variable that has been decreasing since then.
Finally, it emerges how recently Spain and Italy contribute more and more to the system risk: to intimidate the market is in fact the dual transmission mechanism between banking risk e sovereign risk (the main threat to Spain), and the next link between Spain and Italy. Evidently Spain could, in the worst case scenario, drag Italy into the abyss.
All 'Eurogroup on Friday, therefore, had the crucial task of defining the details on how to disburse aid to Spain to recapitalize the banks,thus weakening the mechanism of transmission of the risk of contagion. Progress has been made but not everything is clear in the perception of the markets.
Will “our heroes” – European politicians – be able to extinguish the contagion? Will there be a chance to recover for the most affected countries and, above all, will it be possible to find the vaccine to prevent such a situation from happening again?
