Greek bond yields act as eurozone 'fear gauge'

Greek government bonds - which frequently flag trouble ahead in Europe - are twitching again. Yields on 10-year Greek debt, which move inversely with prices, jumped sharply on Wednesday, back above 8 per cent.

The market's latest worry appeared to be the stalled talks between Athens and its international creditors on winding up its bailout programme. But a bigger concern is that a political fight in Athens over choosing Greece's next president leads to snap elections early next year - which could bring the anti-reform Syriza leftwing opposition into power.

So it is time for global investors to think again about the eurozone's problem member? Greek bond yields are still lower than the level they reached during October's financial market turmoil - and nowhere near the peaks reached during the eurozone crisis.

Strikingly, Greek bond yields have also diverged from other eurozone countries' borrowing costs. Across the region, sovereign bond yields have been driven lower by expectations of large scale buying by the European Central Bank under a full-blown "quantitative easing" programme. Greek yields heading in the opposite direction suggest an idiosyncratic, country-specific risk.

But expectations of QE by the ECB may be preventing bond markets from signalling political risks elsewhere. Other indicators suggest that Europe is re-emerging as a source of financial instability. While the Vix index of expected US stock market volatility - known as Wall Street's "fear gauge" - has fallen sharply since October, the comparable index for the eurozone has not fallen nearly as much. This divergence - currently the widest since mid-2013 - is unusual.

October's financial turmoil was also about weak growth across the eurozone and the risks to managing high levels of debt presented by worryingly low inflation.

But eurozone policy makers are rightly worried about Greece, which remains a danger for the whole region. The country came close to being thrown out of the eurozone in 2012 - and its long-term membership is not yet secure. Greek government bond yields are again acting as a eurozone "fear gauge".

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