A few weeks ago, after the Greek election on May 6, a consensus developed among many macro investors about the likely path for the eurozone crisis during the summer. This consensus held that Greece would leave the eurozone in a disorderly manner; that this would cause severe contagion problems for the Spanish and perhaps the Italian banking system; and that the ensuing mayhem would finally force the Germans to permit a full resolution of the crisis, probably via a massive further use of the ECB balance sheet. This was held to be an “optimistic” scenario for global risk assets.
This consensus has since frayed at the edges. Investors have realised not only that Greece may remain inside the euro for a further messy period, but that the condition of Spanish banks has spiralled out of control. This needs to addressed, whatever happens to Greece.