Could Greece be the pin that pops the global bond bubble?

published 30 March 2015

15-3-30-Tsipras-634 — Greek prime minister Alexis Tsipras is running out of time

No one seems to be worried about Greece anymore.

Crunch talks last month seemed to result in yet another fudge that would see the country through. Combined with quantitative easing (QE) in the eurozone, it seemed the day was saved.

But the crisis has continued to rumble on quietly in the background. Greece still hasn't been allowed to get its hands on a batch of bailout money that it desperately needs.

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It is now at the point where it has broken every piggy bank in the land in its attempts to raise cash for vital bills. If it doesn't get another pile of eurozone cash by next week, it could be heading for the exit.

And this time around, no one seems all that bothered.

Greece is broke

It needs to pay €1.7bn for government salaries and pensions this month. And it has €450m due to the International Monetary Fund (IMF) come next week.

Chances are it hasn't got the money down the back of the sofa to pay for both. And unlike Britain or the US, it can't just print it, because it doesn't control its own currency.

So it's vital for Greece to unlock a €7.2bn aid instalment from the troika' (or whatever we're meant to be calling it these days) the big eurozone bailout committee.

Trouble is, Greece needs to show the rest of Europe that it can change. And that's proving tough. In the latest round of talks at the weekend, the Greeks put forward a list of reforms. But so far they're not convincing its creditors.

Rather than reform its labour market or pension system, Greece would rather focus on ways it's going to increase the tax take (or make the system work better' as one exasperated eurozone official told the FT).

It's not unlike the way that British governments now fund everything with imaginary revenues from cracking down on tax avoidance. But while Britain can get away with this (because it controls its own currency and thus isn't entirely dependent on the kindness of strangers), Greece can't.

The real danger posed by a Greek exit

(You can take a look at how a Grexit might pan out in this piece from Capital Economics from a few months ago it's still relevant.)

Now, I don't think that a Greek exit needs to be a disaster by any means. Greece is a small country in economic terms. The rest of Europe has had more than long enough to make preparations for Greece leaving.

So in a narrow sense, Greece isn't or shouldn't be systemically' important. It's not Lehman Brothers part II.

But it'd be interesting to see how the rest of the world coped with the return of credit risk' the idea that some debts simply won't be bailed out. If Greece leaves because neither side can come to agreement, then it chips away at the idea that eurozone membership is a one-way street.

If a country can get itself into a big enough mess that the other member countries decide it's better to let it go than to bail it out, then that changes the way investors have to look at risk in the eurozone.

As Barclays' chief European economist tells the FT, investors would immediately have to worry about other countries leaving or being abandoned to their fate. "The next time growth slows and markets realise how high debt levels are in Europe, investors will ask: which country will leave the eurozone next?"

The likely result would be rising borrowing costs for the most vulnerable eurozone countries, and also for banks and others with exposure to those countries. At a time when everyone has become dangerously accustomed to near-zero interest rates, that could be a nasty awakening.

Could Grexit be a trigger for the global bond bubble bursting? It remains to be seen. But anything that forces investors to re-evaluate their attitude towards risk at a time when markets are priced as though risk has been abolished is hardly going to be good for prices.

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John Stepek is a senior reporter at Bloomberg News and a former editor of MoneyWeek magazine. He graduated from Strathclyde University with a degree in psychology in 1996 and has always been fascinated by the gap between the way the market works in theory and the way it works in practice, and by how our deep-rooted instincts work against our best interests as investors.

He started out in journalism by writing articles about the specific business challenges facing family firms. In 2003, he took a job on the finance desk of Teletext, where he spent two years covering the markets and breaking financial news.

His work has been published in Families in Business, Shares magazine, Spear's Magazine, The Sunday Times, and The Spectator among others. He has also appeared as an expert commentator on BBC Radio 4's Today programme, BBC Radio Scotland, Newsnight, Daily Politics and Bloomberg. His first book, on contrarian investing, The Sceptical Investor, was released in March 2019. You can follow John on Twitter at @john_stepek.