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Last week’s obsession with Greece is destined to switch to Italy this week, with Prime Minister Berlusconi’s coalition in serious danger of fracturing. In recent days, three members of his party have left, while another six have written an open letter to one of the major Italian newspapers calling on his resignation.

Repubblica claims that at least ten party members want to leave Berlusconi’s coalition, As a result, the embattled leader is facing a significant revolt tomorrow when the lower house votes on a budget report. Berlusconi squeaked through a confidence motion last month by the slimmest of margins but if he loses the vote tomorrow, he will be obliged to call another confidence vote and this time he may well be out of luck.

Guest post by FxPro

Time is running out for Italy – the 10yr yield jumped to almost 6.4% at one stage on Friday despite continued buying support from the ECB, up from near 5% two months back. Italy may well be headed the way of Greece, namely the formation of a unity government.


Athens steps back from the brink. Lengthy negotiations in Athens over the weekend have resulted in the departure of Greek Prime Minister Papandreou and the formation of a unity government which has vowed to implement the agreement reached with Greece’s creditors at the EU Summit on October 26th. On the face of it, this new political consensus sounds encouraging and certainly much less frightening than the situation last week when the Greek population seemed set to get to vote on a referendum regarding membership of the single currency. At the very least, politicians from both sides now appear to understand that unless they are seen to be playing by the rules, then the next   tranche of bailout cash will not be forthcoming and it will be ‘game over’. At present, the EU/IMF EUR 8bn loan tranche has been frozen. This is needed to repay the maturing EUR 8.2bn of debt due in December, with t-bills also maturing during the month. Nothing is ever so simple, however, especially in Greece as the new unity government has not yet decided on a leader or what their specific mandate will be. For instance, the leader of the main opposition party (Samaras) has hinted recently that he will seek a renegotiation of some elements of the EU plan. Also, assuming the new government has implemented the conditions of the EU agreement, then fresh elections will be called, probably sometime in February. Athens may have stepped back from the brink over the weekend, but it can still see catastrophe just on the horizon.


Some more good news out of the US. With a stroke of a pen, things aren’t as bad as were thought for the US economy and in particular, the labour market. The initial reading for August non-farm payrolls was zero. Two months later, it’s been revised to an increase of 104k. Furthermore, there’s a welcome nudge lower in the unemployment rate, from 9.1% to 9.0%. The participation rate also rose a touch so that’s a greater proportion of those in the labour force either working or actively seeking work. The ongoing decline of this figure has been a worrying trend for most of the past ten years, so Friday’s data should also be taken as a mild positive. However, in the wider view, the US labour market remains weak. Overall employment is still only at levels prevailing in 2004 and on current trends, it will take until 2017 for employment to reach the pre-crisis peak. However, achieving this target would take even longer, given the increase in the labour force over this time. Overall, these numbers are cause for comfort, rather than outright celebration.


The sensitive Swiss franc. We highlighted on Thursday the risks to the Swissie from the latest Greek developments, not least some gentle verbal reminders from the Swiss National Bank (SNB). SNB board member Danthine remarked late in the week that “further measures will be taken” should the economic outlook and deflationary risks so require. In reality, these comments were not significant for their content but more for their timing, coming as EUR/CHF touched a 1-month low around the 1.2130 level, not that far short of the SNB’s 1.20 floor.  The CHF was weakening ahead of the publication of reserves data Friday morning, which showed a decline in holdings from CHF 288bn to CHF 250bn. Right now, it’s difficult to split out the impact of intervention and revaluation effects, the Swissie having been modestly higher over the month on a trade-weighted basis. The initial move on the Swiss franc appeared to stem from rumours that the SNB may move the floor from 1.20. There is certainly the will, not least because the SNB believes that even at EUR/CHF 1.20, the franc “remains high”, to quote Danthine from late last week. The question is whether the SNB wants to take the market on for the second time in two months. Last time it won. This time, and given current levels and positioning, it may be that little bit harder.