Financial fragmentation in the euro area rose slightly at the end of 2014, mainly due to a greater dispersion of government bond yields solely accounted for by a significant rise in Greek government yields, and an increase in deposit outflows from Greek banks in December. However, low contagion risks suggest fragmentation won’t rise significantly in the next few months, according to the latest report by Moody’s Investors Service.
The report, “Without contagion from Greece, euro area financial fragmentation will remain low” is now available on Moody’s subscribers can access this report through the link at the end of this press release.

“The rise in fragmentation has been small and we don’t expect a significant rise in the coming months,” says Antonio Garre, a Moody’s analyst and co-author of the report. “We have seen an increase in deposit outflows from Greek banks in January and February, but we think contagion risks are materially lower than at the peak of the euro area crisis in 2012.”

Fragmentation continued to rise at the start of 2015 in the wake of further deposit outflows from Greek banks and a rise in national central banks’ cross-border liabilities. Uncertainty over the availability of international funding for the Greek government and the possibility of a Greek exit from the euro area also contributed to higher financial fragmentation.

However, Moody’s quarterly report says lower contagion risks than in 2012 have contained the rise in fragmentation risks in the euro area. The start of the European Central Bank’s Quantitative Easing programme will continue to dampen bond yields across the euro area.

“We expect the rise in fragmentation to remain limited and well below the peaks we saw in 2012,” Mr Garre adds.
At the end of last year, bank deposits were broadly stable in Spain and Portugal and rose at robust rate in Ireland, supporting Moody’s view that negative deposit trends won’t be seen in other euro area countries in the absence of contagion.

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.