MBS Day Ahead: Volatility Punted as Europe Puts 72 Hours on Greek Death Clock

"Tsipras, and a majority of the Greek population (according to polls), want to stay in the EU, but no longer wish to abide by the austerity measures that indirectly secure their place in the EU.  We're pretty sure more than a few folks have explained that Greece can't have that cake and eat it too, but we're also pretty sure they're not getting the memo."

While these words could have easily been written today, they're from The Day Ahead on May 13, 2012.  Smarter people were talking about the same concept even earlier (like 2010!).  It's nothing short of mind-boggling how little has changed about the conceptual headline during this time, especially since Tsipras rose to power in 2012.  His party line has been and continues to be that Greece wants to remain in the Eurozone, but not with austerity. 

The game of chicken became much more tense this month as Greece missed a payment to the IMF, and currently doesn't have a plan to repay a bigger, more important payment to the ECB in 7 days.  The only plan would be to do that which Tsipras says Greece won't do: sign on for more austerity.

If Tsipras hadn't gotten the memo in 2012, Europe put it in black and white for him over the weekend.  Eurozone creditors doubled down on the last round of reform demands that resulted in the "no" vote on the referendum last weekend.  The creditor's response to the "no" vote?  A list of harsher demands and shorter timeline with a clear ultimatum: vote this stuff into law in 72 hours or leave the Eurozone (meaning, exit the monetary union using the Euro currency).

Depending on your point of view, this is either tragically ironic or poetically just--perhaps some of both.  On the one hand, it's argued that Greece created their own problems and isn't being serious enough about solving them.  On the other hand, some say that austerity--as it's implemented currently--is a no win scenario for Greece, choking the country's growth potential when they need it most. 

I don't know if there's one right answer there.  Life is frequently about finding the middle path that balances seemingly antithetical dogma.  I do know that the Eurogroup is at the end of their rope in a way that we haven't seen thus far.  They're not trying to find a balance between disparate viewpoints.  After this weekend, it's their way or the highway--a fact that keeps US bond markets in limbo, at least until the next shoe drops.

In other words, this is Friday all over again.  We're still waiting to find out if Greece is "in or out."  They have 72 hours to sign reforms into law.  If they do, it will likely be bad for rates in the US.  If they don't, we're in uncharted territory, but the uncertainty should help US rates in the short term.