MBS Day Ahead: Bond Markets Filter Through Actual Significance of Yesterday’s ECB News

If you’re just getting caught up, here’s the long and the short of yesterday’s news from the ECB in relation to Greece-inspired Euro-drama. 

The recently elected (Jan 26th) ruling party in Greece has been mostly holding true to their platform of attempting to do away with austerity measures imposed by their Eurozone creditors.  These creditors include the ECB and IMF in small part and the rest of the Eurozone nations in large part.  Greece’s strategy seems to have been to get their intellectually respectable finance minister sauced up on ouzo (figuratively, of course) before making claims and comments that may or may not have any foundation in reality. 

Greece has played these shell games with Europe before, and from Greece’s point of view, they’re a justified battle tactic against an oppressive overlord.  Everyone likes rooting for an underdog, but some of the tactics are over the top.  Either that or they’re not actual tactics and Greek leaders really are as crazy as they’re acting.

With shell games in mind, just yesterday morning, Greek FinMin Varoufakis said in an Italian newspaper interview that he had discussed a debt renegotiation with the IMF during a meeting that both sides agreed existed.  The IMF promptly released a statement saying no such discussion took place.  As sympathetic as underdogs can be, based on the way the previous iterations of Greek drama have played out, I have little doubt who’s telling the truth here. 

Greece is pulling out all the stops, and understandably so.  For them, this is the same high stakes game of brinksmanship that it has been since the initial crisis.  Their most ideal result is to remain in the Eurozone while doing away with enough austerity that they can sell the idea to the Greek people.  That’s a “having cake and eating it too” scenario that simply won’t happen in a way that will work this time around.  Ultimately, that’s one of the main reasons that US debt is at such low yields right now. 

Come again?

Yes, the Greek impasse is different this time, and it’s at the heart of the major European bond market rally (which spills over to bond market demand in the US).  Without the systemic stability considerations implied by a Greek Eurozone exit, economic and monetary confidence would arguably be sufficient to forgo the recently announced QE.  If you care about this underlying cause stuff, read those last 2 sentences over and over until they sink in (unless they sunk in right away, in which case, kudos to you, because I had to start writing all this crap before I figured that out!). 

Despite the impasse being different this time, the ECB is reading from the same script where they stand their ground and Greece folds.  Whether or not Greece folds this time remains to be seen, but the ECB is certainly already reading from their script.  An sneak peak at the script was made available by the ECB’s Constancio this past Friday when he said in regards to Greece’s austerity program granting the country a special waiver from normal credit rating requirements to borrow from the ECB: “There will be no surprises if we find out that a country is below that rating and there’s no longer a program that that waiver disappears.”

So that’s what yesterday’s news was.  ECB pulled that trigger and it sounded like a big, bad thing.  But how bad is it?  For background on why this is a fair question, read THIS (hat tip to calculatedrisk for pointing it out), or just trust me when I tell you that the ECB wire yesterday was more of a symbolic gesture that suggests to Greece that the Eurozone isn’t amused by it’s ouzo-induced parlor tricks and untucked-shirt cuteness.

Today, European markets will have a chance to sort this all out.  Even though savvy market participants are well aware that the ECB’s restriction does little material damage to Greece’s short term borrowing ability, they remain cognizant that the mere rhetorical value of the statement may be enough to spur a run on Greek banks from depositors and creditors alike.  Those are the possibilities that domestic markets began accounting for as they rallied sharply into the close yesterday.  Let’s see if European markets are as concerned.

Article source: http://www.mortgagenewsdaily.com/mortgage_rates/blog/432455.aspx

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