Papandreou down…

Looking retrospectively at the last week in Greece one could wonder what Papandreou wanted to achieve with the referendum proposal which eventually cost him the PM post. While his government got yet another confidence vote last Friday it was conditioned on his promise to step down of that was necessary to form a temporary government. That proved to be the case – main parties in parliament agreed on the temporary government that will have to push the austerity through the parliament, complete debt swaps and make a budget for the next year. The new PM was about to be selected yesterday but there is still no name officially confirmed.

Even without all those complications eventual escape from bankruptcy would be difficult for Greece. Passing austerity and reforms through a parliament is a one thing but implementing them is another. Furthermore, the environment couldn’t be worse as Europe is heading towards a recession and the Southern part is already there. Now, even without a prospect of a referendum, Europeans might fear that this temporary government will do what’s necessary to receive aid but what will happen after elections (that may take place early next year) is a big question mark. However, Europe might have little choice but to pay out the six tranche and hope for the best…

…Berlusconi still fights

While Greece may buy itself time, it will not mean buying time for the whole Europe. That’s because attention is being turned once again to Italy and things are not looking good there. We’ve already learned that Italian government is taking “as little as necessary” approach but now the economic picture has changed and it’s not a positive change. Italian economy, lackluster previously is probably already in a recession. PMIs for October literally collapsed below 44 pts. for both industry and services and that’s a clearly recessionary territory. What is worse, PM Berlusconi is still in a denial phase. He’s statements about a “strength and soundness” of Italian economy are simply disgusting at this point. Meanwhile there are rumors on the market that the ECB is increasingly unwilling to continue purchases of Italian debt.

Even with those purchases the spread on Italian debt continues to soar. We present a IFB spread – a debt weighted 10Y premium to the bunds on Italian, French and Belgian debt and once may notice that the EURUSD has not priced in the risks. In other words, EURUSD and equity markets are much more optimistic that the debt market and one needs to answer the question: is that a downward risk for those markets or an upside one for the debt market. Keeping in mind that the EURUSD has also a downside risk from the interest rate market, we are leaning to the concept of the downside risk from the credit market as well.

Przemysław Kwiecień PhD, Chief Economist

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