The euro is reflecting the small, well-timed, incendiary device Greek officials lobbed into proceedings towards the close of play on Friday.

As we know, it started late Friday with Der Spiegel’s report that Greece was threatening to leave the euro zone. Reports were unsourced, but there were signs the suggestion came from one or more solid and senior individuals.

A stream of official denials followed of course. That’s how the news cycle on this issue works!

Later, it emerged  an unscheduled meeting in Luxembourg was attended by ministers from Germany, France, Italy and Spain.
A degree of further controversy broke out over the issue of some large members of the Bloc not having been invited. Whether or not  it represents a failure of the principle of inclusivity in the euro zone, one positive is that the storm moving on to a different topic illustrates how quickly the notion of Greece leaving the Bloc was dispelled.

The wide opinion forming is that we should believe Greece’s official denials because the idea that Greece could exit the single currency represents a scenario which would create extensive damage to the bloc and Greece itself of a scale far larger than the small grenade deployed Friday.

Even so, what’s become clear to rates strategists of late is that Greece is using the threat of a potential collapse of the euro zone as a means to get concessions from the core euro zone in attempt to quell the rising complaints of the Greek people.

The Greek 2-year bond yield is now well over 20%, and CDS spreads have also increased very quickly in recent weeks. Clearly, this is unsustainable and therefore something must give. What will ‘give’ exactly, is not clear.

As for the euro itself, the nearby 50-day MA at 1.4272 represents a devaluation from 1.4940 a few days ago which looks too dramatic when the events of the weekend are viewed soberly; it’s held so far Monday.

With that said, no one really knows the actual thought processes going on in official circles on both sides, but it seems clear that the political will to stick with austerity is breaking down in Greece and that some kind of drastic action, no matter how unlikely it actually is, is threatened.

A meeting of all euro zone finance ministers on May 16 will discuss whether Greece needs a further economic plan, beyond the  110 billion euro bailout it obtained from the European Union and the International Monetary Fund in May last year.

ThSM