Could Greece be the pin that pops the global bond bubble?

No one seems to be worried about Greece anymore.

Crunch talks last month seemed to result in yet another fudge that would see the country through. Combined with quantitative easing (QE) in the eurozone, it seemed the day was saved.

But the crisis has continued to rumble on quietly in the background. Greece still hasn’t been allowed to get its hands on a batch of bailout money that it desperately needs.

It is now at the point where it has broken every piggy bank in the land in its attempts to raise cash for vital bills. If it doesn’t get another pile of eurozone cash by next week, it could be heading for the exit.

And this time around, no one seems all that bothered.

Greece is broke

The Greek government is broke. And not in the somewhat abstract sense that governments are often broke. You see, Greece isn’t just heavily indebted. It’s genuinely running out of money.

It needs to pay €1.7bn for government salaries and pensions this month. And it has €450m due to the International Monetary Fund (IMF) come next week.

Chances are it hasn’t got the money down the back of the sofa to pay for both. And unlike Britain or the US, it can’t just print it, because it doesn’t control its own currency.

So it’s vital for Greece to unlock a €7.2bn aid instalment from the ‘troika’ (or whatever we’re meant to be calling it these days) – the big eurozone bailout committee.

Trouble is, Greece needs to show the rest of Europe that it can change. And that’s proving tough. In the latest round of talks at the weekend, the Greeks put forward a list of reforms. But so far they’re not convincing its creditors.

Rather than reform its labour market or pension system, Greece would rather focus on ways it’s going to increase the tax take (or ‘make the system work better’ as one exasperated eurozone official told the FT).

It’s not unlike the way that British governments now fund everything with imaginary revenues from cracking down on tax avoidance. But while Britain can get away with this (because it controls its own currency and thus isn’t entirely dependent on the kindness of strangers), Greece can’t.

The real danger posed by a Greek exit

We’ve been here plenty of times before, of course. And maybe we’ll get a last-minute reprieve yet again. But the lack of panic suggests that – just maybe – a Greek exit might be the endgame here.

(You can take a look at how a Grexit might pan out in this piece from Capital Economics from a few months ago – it’s still relevant.)

Now, I don’t think that a Greek exit needs to be a disaster by any means. Greece is a small country in economic terms. The rest of Europe has had more than long enough to make preparations for Greece leaving.

So in a narrow sense, Greece isn’t – or shouldn’t be – ‘systemically’ important. It’s not Lehman Brothers part II.

But it’d be interesting to see how the rest of the world coped with ‘the return of credit risk’ – the idea that some debts simply won’t be bailed out. If Greece leaves because neither side can come to agreement, then it chips away at the idea that eurozone membership is a one-way street.

If a country can get itself into a big enough mess that the other member countries decide it’s better to let it go than to bail it out, then that changes the way investors have to look at risk in the eurozone.

As Barclays’ chief European economist tells the FT, investors would immediately have to worry about other countries leaving or being abandoned to their fate. “The next time growth slows and markets realise how high debt levels are in Europe, investors will ask: which country will leave the eurozone next?”

The likely result would be rising borrowing costs for the most vulnerable eurozone countries, and also for banks and others with exposure to those countries. At a time when everyone has become dangerously accustomed to near-zero interest rates, that could be a nasty awakening.

Could Grexit be a trigger for the global bond bubble bursting? It remains to be seen. But anything that forces investors to re-evaluate their attitude towards risk at a time when markets are priced as though risk has been abolished is hardly going to be good for prices.

Sign our petition!

On a completely different note, just before I go, I’d like to draw your attention to a petition we’re running on the government website. It’s all about the pensions Lifetime Allowance (LTA) – we’d like to see it scrapped. We have no problem with the idea of limiting pensions tax relief to a certain level. But doing it in this way is sneaky, impractical, and riddled with loopholes.

In the space of a few years, the LTA has dropped from £1.8m to £1m, favouring individuals who have already locked in their allowance. It’s also rather unfair to people on defined contribution pensions, who can effectively save far less than those on defined benefit schemes.

The petition closes at midnight tonight (as parliament shuts ahead of the election). So register your protest now – just click here.

• This article is taken from our free daily investment email, Money Morning. Sign up to Money Morning here.

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