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Keeping up with the latest twists and turns in Greece is like trying to nail jelly to a wall.   At present, even though the Greek government faces a confidence vote this evening, it’s not a simple binary outcome in terms of the consequences.   There is much horse-trading going on and even if the government wins, there is no guarantee that the current PM Papandreou will stay on as Prime Minister.  

For the moment, the referendum appears to be off, but Greece is not out of the woods by any means.   There were suggestions yesterday from Greece that it had enough cash to last until mid-December.   The bottom line is that unless the next tranche of EU/IMF aid is paid out (EUR 8 bn), then Greece will most likely default and no-one in their right mind would lend to Greece against the current backdrop. The perversity of yesterday was illustrated by the fact that risk assets rallied when it became apparent that the government had lost its majority.   With Asian stocks firmer, today looks set to start off on a calmer footing, but it’s going to be a long day.   The euro, for its part, still remains remarkably well behaved.

Guest post by FxPro

Commentary

G20 upstaged and outmanoeuvred by Greece. Most of the agenda for the G20 meeting in Cannes has gone out of the window.   Meetings continue today, but don’t expect anything substantial to emerge.   The interesting point is China.   Whereas before, China has been pressured on its exchange rate, more implicitly rather than explicitly, there is likely to be less this time around.   Europe needs China, which has previously been a confident and open investor in the EFSF, but now is rightly wary.   It’s a notable change of dynamic and it will be interesting to see if the statement reflects this, in a direct or probably more indirect way.

The ECB does the right thing.  If this crisis should have taught central bankers one thing, it is that there’s nothing to be gained by waiting, not least until the next month and a bunch of forecasts to tell us what we already know. Indeed, yesterday’s cut in interest rates reverses the July increase that should never have happened, so whilst it should be welcomed, it should also be seen as merely reversing what was a misguided move. We wrote extensively about this at the time, but in summary the ECB took the view that the real economy was immune to the sovereign crisis that was all too apparent back then. Events have shown this not to be the case and, despite the further liquidity injections, the money markets remain fractured. But interest rates are only one element of what is a very difficult and multi-faceted role that the ECB has. What we are most interested in from here is Draghi’s stance on bond-buying and the ECB’s position on the latest turn of events surrounding Greece. Furthermore, there is also scope for the ECB to expand its liquidity provisions, although there were fairly extensive measures on that last month so it looks like a slimmer possibility. Overall though, if this move marks the start of a new approach from the ECB, it should be welcomed. One of the key issues of Trichet’s presidency during recent years was his inability to learn and to stick rigidly to the dogma of the pre-credit crisis approaches that had been proven to be flawed. This underpinned his push for rate increases this year, despite the huge downside risks that were prevalent at that time. In a week of doom, this move could potentially be the best thing to come out of it.

Swissie squeeze. One of the strong moves we’ve seen this week is on European safe-havens, but this is causing renewed upwards pressure on the Swissie. It’s not the only one, with sterling also firmer vs. the euro over the course of the week and UK government bonds flying as well. But for the Swiss authorities, who in September set a minimum value for EUR/CHF at 1.20, this creates a fresh headache. The possibility of a disorderly Greek default is now firmly on the table, even if the referendum is cancelled in favour of an election.