C’mon Greece, You’re Making It Tougher for the Fed to Hike Rates

Time for Creditors to Accept Greece Is Bankrupt: Sinn

So evidently we have to care about Greece again.

Debt negotiations are breaking down and perhaps this time the almost-bankrupt nation will actually get kicked out of the euro-area’s shared currency. While global bond markets have mostly been brushing off the threat of a Greek default this year, they’re starting to care quite a bit more.

Why now? Because it’s clear that Greece and its creditors are no closer to resolving the nation’s financial woes, even as it rapidly runs out of cash and approaches deadlines to repay its debt. The potential for default and subsequent market turmoil prompted investors to pour money into the most-creditworthy bond investments on Monday, including U.S. Treasuries, sending yields to the lowest in more than a week.

Here’s the problem with that: The more investors flee to safer U.S. debt investments, the harder it’s going to be for the Federal Reserve to move away from its near-zero rate policies without causing disruptive market volatility, which it doesn’t want to do. So even if the world’s biggest economy seems to be growing steadily enough to handle non-crisis era monetary policies, a Greek exit could throw a wrench in the Fed’s plan to hike rates.

Global View

“People are worried that anything that happens in Greece will feed through to the U.S.,” with U.S. borrowing costs declining due to a global flight to quality, said Drew Matus, deputy chief U.S. economist for UBS Securities LLC in New York. “Certainly this Fed seems more focused on global events than past Feds have been.”

Ah, Greece, why must you torment markets so?

This is a small and troubled country, with a 26 percent unemployment rate and an annual gross domestic product that’s just a little bigger than the amount of cash Apple Inc. has on its balance sheet. So in some ways it’s hard to understand how its failure could upset global markets in a meaningful way.

Yet its leaders’ penchant for engaging in game theory with European finance leaders has made markets jittery, since its exit from the euro area would be unprecedented and traders don’t like uncertainty.

Investors fled to classic haven debt investments on Monday, with yields on 10-year German bonds dropping to as low as 0.78 percent from almost 1 percent on June 10, and those on similarly dated U.S. Treasuries reaching 2.31 percent from 2.5 percent.

Even yields on two-year Treasuries are falling as buyers start caring more about getting their money back rather than avoiding losses when the Fed raises benchmark interest rates for the first time since 2006, possibly later this year.

Matus predicts that the Fed will lay the groundwork for the increase in September at its meeting this week, since there’s a long time between now and then and central bankers don’t want to rule it out as an option.

Of course, if this Greece saga keeps up, it could be an even longer and more painful summer of rate-increase deliberations, regardless of U.S. economic data.

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