Looking at Greece
So all eyes were on Greece yesterday, only this is a June, 2015 blog entry, not a May 2010 one, nor a July 2011 one, nor a May 2012 one, nor a December 2014 one. Google any of those four months along with the search words, “Greece worries markets,” and see what comes up.
As I type the market is up 100 points, but down 450 points from recent all-time high. Is recent market volatility a by-product of Greek drama? It’s as good an explanation as any. And is Greek uncertainty the reason for the back-up in bond yields, pushing Germany back to 1% on their 10-year (from a negative yield) and pushing the U.S. 10-year above around 2.4%? I would say pretty confidently it is the largest reason. So yes there is fear, yes, there is volatility, and yes, there is uncertainty. But if Greece is potentially about to default or even leave the Euro, why are markets not in real freefall? Consider the following:
The threat to the European banking system of a total collapse if Greece hit the fan was severe in 2012. Two years of monetary accommodation, bank recapitalizations, and other such preparatory work, and the bond market seems to be saying this is a low-contagion scenario.
The European economy is fragile and not in the mood for a GREXIT drama, but that is quite different from saying it would create Armageddon. For many market participants, exhausted by this ongoing anti-reform charade, a GREXIT may be a cause for relief. I still doubt an actual GREXIT will happen because I believe the Greek voters would throw out the Marixst party leadership they elected earlier this year before that happens. However, I see no signs from the IMF, the ECB, or the general Eurozone leadership that they are going to capitulate.
My best guess is that Greece will default but not exit the Euro, and that summer 2015 will join the summer of 2010, 2011, and 2012 as a summer of can-kicking on the way to Greece eventually being out of the Euro. By the time it actually happens, I think the market might be begging for it.