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The term ‘end-game’ is over-used, but in the context of the eurozone sovereign crisis, and in particular Greece, it does appear that we are approaching it.   Many charts are maxing out or in free-fall, be it Greek CDS, European bank shares, peripheral spreads over Germany or German yields themselves, the 10yr now down to 1.75%.   Germany’s Chancellor Merkel and French President Sarkozy are due to speak to the Greek PM today.  

Right now, it’s far from clear that conditions will be met for the next bailout instalment, whilst progress on the debt swaps and rollovers that were an integral part of the July package have fallen short of expectations.   There inevitably becomes a point where it’s easier to cut Greece loose from the EU/IMF lifeline rather than cut them more slack.   Behind the scenes, there was probably a hope that this could be done in a more orderly fashion, further in the future, when banks were better capitalised, but crises have a habit of escalating faster than politicians can cope with.

Guest post by FxPro


Twist dissent within the Fed.  Some of the regular dissenters on the Fed’s policy-making committee have come out fairly strongly against any extra action at this stage. For instance, Dallas Fed President Fisher on Monday claimed that the US central bank is already running a very stimulatory monetary policy and that “the bar is very high” in terms of gaining his acquiescence to more monetary stimulus. In Fisher’s view, there is not a lot more that monetary policy-makers can realistically do, and that the problems now being faced by the US economy require fiscal and regulatory authorities to step up. Separately, fellow dissenter Kocherlakota, Minneapolis Fed President, also stated last week he was not convinced that additional monetary easing was necessary this month, just as he was unconvinced back in August when the Fed decided to commit to an unchanged funds rate through until mid 2013. Charles Plosser, the last member of the FOMC’s hawkish troika, is also against more stimulus. In his view, the US economy will still register respectable growth next year.   It promises to be another lively debate when the FOMC meets next week. As the last set of FOMC Minutes noted, a few members favoured “a more substantial move” in monetary policy beyond the commitment to keep the funds rate unchanged until mid 2013. Unless the FOMC neutrals can be convinced, it is not a done deal that the Fed will decide on extra stimulus such as a twist operation in a week’s time. Failure to agree on more monetary stimulus might just further unsettle financial markets at this extremely sensitive time.


China’s ‘support’ for Italy may be a red herring.   Financial markets have drawn some comfort Monday night from a story in the Financial Times claiming that China is talking to Italy about increasing its investment in the country. Detail on the nature of the discussions are scant, other than speculation that China may consider additional investment in Italian government bonds and the acquisition of strategic stakes in some of Italy’s largest companies. Last week, the chairman of China Investment Corp. (China’s sovereign wealth fund), met with both Giulio Tremonti, Italy’s finance minister, and the head of a fund established to enable foreign investors to invest directly into Italian companies.   Although this apparent dialogue between Italy and China has created some excitement, it may well be something of a red herring. Chinese officials have been holding regular trade and investment delegations throughout Europe this year, and after each meeting always say the right thing, namely that they are considering substantial investment in that country. Should China decide to purchase either bonds or equity in Italy, we can rest assured that it will only be undertaken if Beijing considers it’s in its longer term commercial interest.