The issue has proven to be a key sticking point (see blog last week ‘The ECB will have to yield on Greece’), but it now appears that the central bank will undertake an exchange with the EFSF (for EFSF bonds), so that the ECB will not make any profit on its holdings.  Greece will then repay the EFSF at the ECB’s original purchase price. Video:

Ilya Spivak of DailyFX discusses China, the effectiveness or ineffective of the QE operations all over the world, the high dependency of the Swiss franc on the developments in Europe and more in the interview below.

The Brazilian economy ground to a halt in the third quarter, whilst China is suffering a growing over-hang in the property market (see below) which risks causing some significant ripples in the banking sector.  On this front, it’s interesting to note the jump in the yuan overnight, to a record high vs. the dollar at 6.3294.

Since the end of October, the dollar index is up by more than 7%, a very significant move for the world’s major reserve currency. Dollar demand over the past couple of months has been very pronounced for a number of different reasons. Video:

Christopher Vecchio of DailyFX analyzes the current situation of the euro, the bright side for the pound in the aftermath of the EU Summit, the low likelihood of more US QE, how the Canadian dollar will react to rising tensions around Iran, and more in the interview below.

Part of this is down to the significant volume of short positions in the market, making it painful for investors to continue to be bearish into the end of the week. However, scratching beneath the surface of Monday’s Merkel/Sarkozy get-together is not that positive in terms of faith that the leaders are pushing ahead along the correct path.

In response, risk appetite tentatively returned, with the Italian 10yr yield falling below 6.8% at one stage, after reaching 7.45% on the previous day. The single currency was in slightly better form, finding buyers below 1.35. In contrast, it was another worrying day for the French, with the 10yr yield up a staggering 30bp at one point, now 3.45%. In turn, the spread to Bunds exploded to 167bp, a euro-area record.

But this puts the troika in a difficult position.  Having just agreed the latest EUR 5.8bn loan instalment, it is now faced with the position of lending further money to a country that could potentially renege on the conditions of all the outstanding lending.  Greece has EUR 8.2bn of maturing debt in December and EUR 15.1bn in Q1 next year. It would be totally irresponsible for the EU and IMF to disburse any more money to Greece whilst the potential for a rejection of the new EU/IMF deal is possible.

Looking at public sector net borrowing (ex. interventions on banks), the Office for Budget Responsibility gauges this at GBP 122bln for the current financial year, some 11% lower than the GBP 136.7bln outturn in the 2010/11 financial year. On current trends, the UK is on course to meet this, with the first six months showing an 11% improvement vs. last year. Sterling has held up comparatively well, no doubt gaining some benefit from Europe’s growing problems, but the government still has its work cut out ensuring that borrowing is kept in check against the backdrop of a stagnant economy.

For no very good reason other than stops going off, we witnessed significant advances in risk assets, high-beta currencies and the euro, and another day of major losses for the previously impregnable greenback. The EUR managed to get above 1.38 at one stage – it started this week below 1.34. Cable threatened 1.58 at one point, up more than two figures – a remarkable achievement given the dreadful employment figures. High-beta currencies fared even better – the Aussie powered through parity reaching 1.0233 overnight, helped by strong buying from sovereign wealth funds and numerous stops. In just over a week, the AUD has jumped 8% from its low.