It's been a strange day. There has been little reaction in Europe or the U.S. on word the Eurogroup failed to reach an agreement with Greece. At the same time, there was only a modest reaction midday following a Dow Jones headline, citing an unnamed "official" reporting Greece intends to ask for a bailout extension on Wednesday. Italian and Spanish bond yields are also barely moving.
Why such muted reactions? Because there is an assumption that a deal will be struck and that the politicians will figure a way out.
Alternatively, a surprisingly large proportion of the trading community does not care and do not think it will make a difference if Greece leaves or stays in the euro.
Why assume a deal will be struck? Because the outlines of a deal are so obvious. What the Greeks want most is some kind of relief from austerity. What the Germans want most is not to write off any of the debt, because they can't sell that to the German taxpayers.
The deal is to offer some austerity, lower the coupons and extend the maturities of the debt—to infinity and beyond. A permanent, or at least continuously rolling, bailout.
Simple, right? It's either that or leave the euro.
And that's what worries me: everyone has convinced themselves that a Greece exit is no big deal.
Partly, it's just because the idea of Greece leaving has lost its shock value. he whole world has had four years to think about this, and the shock of an extreme move is a lot more tolerable when we have had four or five years to get used to it. The violent, knock on effects have been fixed, to a certain extent. By that, I mean the banks that owned the debt originally have successfully transferred much of the risk...to governments and taxpayers.
More troublesome is the idea that a lot of people have discounted the domino theory: that Greece leaving will not create a systemic crisis in the eurozone because Greece is not the same as Portugal, Ireland, or Spain.
The other countries are different, traders say. Ireland is a banking problem. Italy is about inflation and bureaucracy.
And the analogy between Greece and Lehman, that was so potent a few years ago? It all sounds a bit, well, stale. Stop worrying, traders argue: there's a counterparty. The ECB is willing to supply almost infinite liquidity should there be any shocks to the system.
Never mind we heard these same arguments in 2008. And the one thing all of us learned then is that stuff is connected in ways none of us ever thought about.
Look, I get it. The argument is that when countries grow at dramatically unequal rates, as Greece and Germany have done, something needs to be done to relieve that pressure. The Greeks are demonstrating that one method—austerity—is not going to work much longer, and the Germans are trying to keep a straightjacket on them.
So the best option, the thinking goes, may be an exit.
Finally, an additional factor working in favor of a Greek exit may be the twisted world of European politics.
Over the weekend, some traders noted media reports that Span's Prime Minister, Mariano Rajoy, was opposed to having Greece get cuts in its debt obligations. The thinking is that if Syriza wins concessions, that will strengthen the opposition parties in Spain, and weaken Rajoy's grip on power. The failure of Syriza in Greece would help Rajoy's conservative party.
And you thought it was hard to understand U.S. politics.