MBS Week Ahead: Light Domestic Calendar Leaves Focus on Eurozone as Greece Doubles Down

In many ways, the current tussle between Greece and its creditors is reminiscent of past iterations.  There's some bluffing, posturing, lying, feigned ignorance, and outlandish goals that both sides know will never be achieved.  Past iterations have ended with Eurozone creditors being more lenient than they'd like to be and with Greece agreeing to more austerity than it can manage.

If the historical script were to continue repeating itself, we'd slowly see a few concessions by both sides and another re-working of a bailout package sufficient to keep Greece in the Eurozone.  The difference this time around is that Greece isn't in the same sort of position when it comes to making concessions considering its government came to power on the very promise of dismantling the existing Eurozone austerity measures.

Until this weekend, there was some small chance that we were seeing a sort of 'good cop, bad cop' routine with Greece's Finance Minister Varoufakis and Prime Minister Tsipras.  While Varoufakis went on a whirlwind tour of Europe last week attempting (and failing) to drum up support for Greece's cause with tactics that included hyperbole and false claims deceit, Tsipras meanwhile offered the type of vague platitudes we've come to expect from European leaders who are trying to "work things out."  For a moment, it looked as if Tsipras would act as some sort of sober foil to Varoufakis' drunken cowboy.

But as of this weekend, Tsipras is no longer playing 'good cop.'  Here's the full story from Reuters: Defiant Greek PM sets up EU clash with bailout rejection, austerity rollback

If this is as serious an issue for global markets as it was in 2012, we wouldn't know it based on how things are trading.  Even Greece's credit spreads versus Germany are nowhere near where they were during the apex of the previous crisis.  Other Eurozone countries' credit spreads are showing no signs of distress at all.  In the following chart, the top line is Greece's 10yr vs Germany's.  The remaining lines are other Eurozone countries.

To reiterate, markets are certainly showing something going on, but nothing even remotely as serious as it once was.  The notion of SYSTEMIC risk, where Greece would be the first domino that would inevitably bring down the rest of the Eurozone, is missing from current trading levels.  Despite Varoufakis claims in parliament over the weekend that Italy or Portugal had unsustainable debt and that either country would follow if Greece exited the Eurozone, markets simply aren't pricing in this possibility. 

In short, it just looks like Greece and the Eurozone are saying their goodbyes.  That may or may not be what happens this time, but either way, it's very interesting!  It's also very dangerous for the US bond market strength if Greece exits and the rest of the Eurozone remains orderly in the eyes of the market.  Our low rates have more staying power if Europe is "bad and potentially getting worse" as opposed to having the worst behind it.