Have you heard? Greece is the word!
At least, that's my takeaway from the past 24 hours of market action, where the latest news about Greece decidedly trumped the breakdown of the debt-ceiling talks in Washington.
"We've reached the point where the dynamic needs to change," House Majority Leader Eric Cantor (R-Va.) told The Wall Street Journal after walking out of the talks. "It is up to the president to come in and talk to the speaker. We've reached the end of this phase."
Thursday's breakdown marked an abrupt reversal from the progress that had reportedly been made last week and over the weekend, when momentum toward a deal seemed to be growing. (See: Driving for a Debt-Ceiling Deal: Good Vibes Follow Obama-Boehner Golf Outing)
As has been widely reported, the primary impasse is over taxes: Cantor and other Republicans refuse to agree to any tax hikes or so-called revenue raisers, such as allowing existing tax breaks to expire.
The talks broke down about six weeks before the Aug. 2 deadline established by Tim Geithner. Among others, the Treasury Secretary has repeatedly warned that failure to raise the debt ceiling by Aug. 2 would result in an economic "catastrophe."
Yet, financial markets remain blasé about the political debate over the debt ceiling. On Thursday, stocks rallied sharply from the morning lows amid hopes for a deal on Greece, but were weak again Friday morning as EU officials try to strong-arm Greek politicians into voting for austerity measures the Greek people vehemently oppose. Although the Greek Parliament won't vote on austerity measures until next week, Prime Minister George Papandreou says Greece has secured a second bailout, The WSJ reports.
(Meanwhile, yields on Italian government bonds are rising after Moody's put 13 Italian banks on watch for possible downgrade and "worries are building again in whether the EU can contain the debt crisis around Greece, Ireland and Portugal," writes Miller Tabak's Peter Boockvar.)
At this juncture, what's bad for Europe seems to be good for Treasuries and Henry Blodget thinks the markets are simply betting that a debt-ceiling deal will be reached prior to Aug. 2; or that failure to reach a deal might actually be bullish for bonds, as Dan Gross argues here.
My concern has been and remains that Wall Street is betting on Washington to do the "rationale" thing and raise the debt ceiling. To be sure, there's no good reason for the U.S. to intentionally default and there seems to be strong demand for Treasuries even at today's very low rates.
But politics are inherently irrational -- especially these days. Who's to say President Obama won't call the GOP's bluff? The Democratic strategy could be to hope Republicans either cave on tax hikes, or bet that voters will blame the GOP for whatever economic ails result from a technical, such as the loss of America's triple-A rating.
Since nobody really knows what'll happen if Aug. 2 comes and goes without a debt-ceiling deal, I hope cooler heads prevail and we don't have to find out.
For additional coverage of the debt-ceiling debate, see: