A pedestrian passes campaign placards for the ‘No’ campaign showing the photographs of Denis Verdini, member of the Italian Senate, left, and Matteo Renzi, Italy’s prime minister (Photographer: Chris Ratcliffe/Bloomberg)

Here's a Greek Twist on Italy's Referendum Trouble

(Bloomberg Gadfly) -- If the fallout for Sunday's Italian referendum is bad for Italian bonds, it could well be worse for one of Europe's star performers this year: Greece.

Greek debt has tightened massively to German bonds in the past three months, while all other main European government securities have been widening. Growing confidence in Greek Prime Minister Alexis Tsipras's willingness to conform to the Troika (International Monetary Fund, European Central Bank, European Union Commission) requirements on the latest bailout package, is behind this.

Here's a Greek Twist on Italy's Referendum Trouble

The pot of gold at the end of the rainbow would be inclusion into the ECB's bond purchase program -- Greece has long been excluded since it's not rated investment grade. A shift in the rules would be a reward for budget discipline.

This has looked until recently like a long shot, but a tectonic shift in attitude is underway. A recent piece of evidence for this is a remark from ECB policy maker Benoit Couere on Tuesday. According to Reuters, he said that Greece can maintain a 3.5 percent primary budget surplus to GDP for years after the current bailout ends in 2018 -- that is a major vote of confidence.

Here's a Greek Twist on Italy's Referendum Trouble

Such recent Greek outperformance could easily unwind on a "no" vote on Italian constitutional reform. As Gadfly has argued, that could create serious problems not just for Italy, the world's third-largest debtor, but also for other borrowers in the region. 

Here's a Greek Twist on Italy's Referendum Trouble

The ECB can no doubt put temporary emergency measures in place to contain debt-market turmoil following from the vote. But Greece is still in a fragile situation, and a prolonged selloff could jeopardize all its hard work back to stability.

So while the strong performance in Greek debt makes sense, the debt looks to be expensive, given the big risk that lies ahead.

It would require serious determination by Greece to separate itself from the inevitable peripheral collateral damage -- and prove it can chart its own course. Strap on your seatbelts.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story: Marcus Ashworth in London at mashworth4@bloomberg.net.