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Eurozone yields fell on Friday as investors bet that even if Greeks vote `No' on Sunday in a referendum on their country's bailout terms, Greece would not automatically be forced out of the euro. A poll before Sunday's plebiscite showed a slim lead for opponents of EU reform proposals, 43 percent against 42.5 percent for a `Yes' vote. An earlier poll put the 'Yes' vote at 44.8 percent versus 43.4 percent for `No'.
In a tumultuous week, Greece has closed its banks, introduced capital controls and become the first developed country to default on an International Monetary Fund loan. Talks with its creditors over a reforms-for-cash deal are deadlocked, and some analysts think Sunday's vote will determine Greece's future in the euro zone. http://link.reuters.com/teb25 But others are unsure. Policymakers insist that Athens will stay in the bloc, doubts have arisen over whether the referendum question is legal or accurate, and fears are growing that it could spark fresh elections in an effectively bankrupt country. "We are seeing a bit of closing out of positions and people wanting to be neutral going into the referendum," said Natixis strategist Jean-Francois Robin. "Whatever happens on Sunday is not going to be the end of the day for Greece. Even if we get a `No' vote it doesn't mean a Grexit. The door is still open for talks."
Top-rated German 10-year bond yields - considered a safe haven - were down 6 basis points at 0.79 percent, finishing the week 13 bps lower. So far, the drama of the last few days has had little effect on other low-rated euro zone debt. US holidays on Friday helped keep volumes low. Italian and Spanish yields were down around 7-9 bps on the day, at 2.26 percent and 2.23 percent respectively. They have pulled awa from their German equivalents by around 30 bps this week.
That contrasts with the contagion seen during the euro zone debt crisis in 2011/2012. Analysts say markets have been soothed by European Central Bank firewalls, such as its 1 trillion-euro bond-buying programme. "In the last four to five years, instruments which would massively reduce the systemic risk in a case like Grexit have been developed," said Guido Fuerer, chief investment officer of Swiss Re, which manages $128 billion. Greek bonds have risen, but traders activity was limited with financial platforms across Europe blocking trades amid a broader shutdown across Greek markets.

Copyright Reuters, 2015

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