Greece and their creditors are at an impasse, with the Greek government scheduled to vote to determine whether to accept the creditor demands. The European Central Bank froze their Emergency Liquidity program at the same level as last week, making the Greek banks more or less insolvent. ATMs are out of money and the banks will be closed for the next five days. If they cannot get a deal with creditors, Greece will have to start printing money in order to keep the banks solvent, which would pave the way for their exit from the Euro.
Does it make a difference? Sure it does - especially for our bond market and interest rates. The Greek economy is only about 2% of the Eurozone but in order to support European banks which hold Greek sovereign debt, the ECB will probably announce further measures to support the banking system, and that means more Quantitative Easing. This will cause the Bund to rally, and relative value trading will pull the US 10 year along for the ride.
But as Janet Yellen will tell you, low interest rates are creating issues for retired savers as well as the Fed. How would you like to be managing the Teamster's pension fund, or your own retirement fund that you want 100% safe, and be earning less than 1%? As was pointed out to me last summer at a conference, the added risk pension funds and insurance companies are taking in order get the return they need to meet their actuarial obligations is becoming more and more obvious. Since these funds can't earn the mid / high single digit returns they need in government debt and investment grade corporate debt (or even MBS for that matter), they have two options: either fudge the assumptions regarding expected growth of their assets and liabilities or take more risk. They seem to be doing both.
So we saw the result yesterday. U.S. Treasuries soared after investors scrambled to safety following the breakdown of negotiation between Greece and its creditors over the weekend. A referendum on a bailout extension is to be voted upon on July 5th, but that will be after the June 30th deadline for Greece's 1.55 billion euro payment to the IMF. Prime Minister Alexis Tsipras decided to hold a referendum on July 5th to let Greeks decide if they want to stay in the eurozone at the expense of pension and cuts and no debt forgiveness. If Greece doesn't make its 1.55 bln euro payment to the IMF on June 30th (and they already said today that they wouldn't), IMF Managing Director Christine Lagarde has the option of not reporting the missed payment to the executive board for a month. She has indicated that she will not delay. Greek banks did not open on Monday and ATMs allowed only $60 of withdrawals per depositor per day. The banks are supposed to reopen on Thursday.