Solving the Market’s Greek Puzzle

by Richard Barley

Wall Street Journal
February 17, 2015

The standoff between Greece and the rest of the eurozone seems no closer to a resolution in the wake of Monday’s aborted Eurogroup meeting. But markets seem nonplused, a puzzling reaction.

So far this year, Greek bond yields have soared and Greek stocks have swung wildly. But the Stoxx Europe 600 is up 10% this year. The gap between yields on 10-year German bonds and those of Portugal, Spain, Italy and Ireland has widened modestly of late, but borrowing costs still are at historic lows for these countries.

The lack of reaction can be read in three main ways. First, investors expect a deal to be done. The history of the eurozone crisis is one of last-minute agreements, but this is a more serious confrontation: The eurozone’s economic orthodoxy is being challenged by Greece. Eurozone officials so far appear to have hardened their line, meaning the Greek government may have to swallow bitter political concessions.

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