Eurozone sovereign bonds displayed all the hallmarks of investor hunger for risk on Monday morning just as news of Greece’s deal broke — especially as an agreement had appeared to be off the table, even as the sun was already high in many European capitals. Spreads between the periphery and core narrowed, Greece’s yields screamed lower, and all was rosy again in euro land.
At least, for a very, very short spell.
As soon as it became clear that there were many hurdles left just this week — the Greek government needed to pass reforms via its parliament on Wednesday, which it did, while several governments elsewhere in Europe have to go to their own legislatures to approve a third bail out package — much of that initial exuberance was wiped out.
That trend lasted into Tuesday, with Bund yields slightly lower, Greek yields higher, and the rest of the periphery more or less unchanged by mid-afternoon.
While a Greek exit from the eurozone would have thrown up all kinds of unforeseeable consequences, this Greek deal is hardly cause for much celebration for public sector borrowers, as conditions such as Monday and Tuesday’s trading will be the way of things for the foreseeable future.
As the Greek saga progresses, the possibilities for severe market swings are almost endless.
There will be volatility every time an inspection on Greek reforms nears, as any sense that sufficient progress has not been made — meaning bail-out funds would be withheld — would easily spook investors.
Greek prime minister Alexis Tsipras has lost much of his support from members of parliament on the left of his party Syriza — so we can expect several motions of no confidence or leadership challenges which could result in someone even more combative towards Brussels taking the reins.
Any time the Greek government makes the slightest fluttering of eyelashes towards Russia — as it has done plenty of times this year — be prepared for a market swing.
Greek GDP figures disappoint, leaving its ability to service its debt further diminished? Yup, the market could shut up shop.
The Greek crisis is a long way from being resolved.
While contagion to the rest of the eurozone periphery looks far less likely than a few years ago, thanks to the work done to shore up the currency bloc’s defences over that time, Greece’s ability to shut markets has never seemed so present.