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Sorry Greece, your game of chicken has gone on too long

The reaction from Europe’s capital markets this week is far from what Greece’s government politicians may have been hoping for, after talks broke down this weekend.

One of Greece’s biggest political bargaining chips — that if they walk away, default, and leave the eurozone all hell will break loose — looks a lot less scary after several days of panic-free trading.

One of the big fears about the prospect of a Greek exit from the eurozone is potential contagion to the rest of the periphery, or even investors losing faith in the whole European project.

Periphery sovereign bond yields did shoot up on Monday’s open, but had retraced a lot of those losses by mid-morning. Several investors saw the wider levels as a buying opportunity, not a falling knife.

Italy managed to auction €2.8bn of 10 year debt and €1.5bn of five year debt on Tuesday morning — and the sovereign’s bond yields were tighter on the day by the afternoon. Spain overshot its target of selling €3.5bn of conventional bonds at auction on Thursday.

And syndicated supply was not completely stuffed in the run-up to a Greek referendum this week on the latest bail-out package offered. On Thursday, Asian Development Bank sold a $1bn four year floating rate note. Of course ADB is top rated and far removed from Europe, while a short-dated floater is a conservative format, but the deal shows that investors have cash to put to work and are not afraid to use it.

European SSA names are trading 5bp-7bp wider — not a bad result considering the eurozone is facing the most disruptive event in its history.

The market’s resilience is particularly impressive because these levels were not being supported by banks with the kind of whacking-great dealer inventory that supported the market in, say, 2007.

Several capital markets participants this week said that Greece has left it too late to sort out its problems. 

Across the public sector bond markets was a mood of resignation. It would be better all round if Greece was able to stay in the eurozone and sort out its problems, but many can see the advantage, at least to European capital markets, of cutting Greece off.

Other countries — Ireland, Spain, Italy and Portugal — have submitted to austerity and begun to turn their economies around, but Greece has not played ball.

Judging by the first trading sessions this week a Greek exit will not be completely disastrous for the rest of the eurozone.

But it will be for Greece. 

Syriza has exhausted the fear factor. It should do the right thing to prevent its country from going back to an economic Stone Age. No one wants to see Red Cross tents in front of the Parthenon.

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