Jens Nordvig from Nomura has a VoxEU post on the subject. Here are his conclusions:
Policymakers cannot claim victory in the Eurozone crisis just yet. The ECB’s outright monetary transactions program has helped to reduce funding risks for sovereigns. Linked to this, the risk of disorderly default – and exit from the Eurozone – has also been reduced. But political risk remains a serious concern, and this risk cannot be addressed through liberal liquidity provisions. Moreover, continued weak growth in the region has the potential to fuel populist sentiment, implying that political risk may be rising.
With respect to Greece, the opinion polls point to a highly unstable political climate. This indicates that early elections, should they be called, could cause a dramatic resurfacing of Eurozone exit fears.
Importantly, political risks are not confined to Greece, as demonstrated by recent developments in Italy. The conclusion is that ‘political events’ are set to increasingly drive Eurozone asset prices. Thus, we are in a different situation to where we were in July 2012, when the ECB had yet to articulate a mechanism to contain sovereign funding risk. Since political risk is hard to quantify for investors, this creates a persistent sense of unease. The implication is that Eurozone financial assets will continue to embed significant risk premiums in 2013 and beyond.
I do think it’s a good idea for Greece to leave (as I’ve written previously). One thing to add now is Greece’s bonds. Joseph Cotterill over at FT AV mentioned this last week, but when thinking about political instability I think it’ll be increasingly important: If all bonds are owned by official institutions (ECB, IMF) and eeevil London hedge funds, the political risk increases (since no constituents really have skin in the game re: bond ownership).