On a day of high drama in Athens, George Papandreou called off the referendum. His own party revolted, led by finance minister Evangelos Venizelos, who called on him to go for the sake of his party. Papandreou admitted that he made a mistake calling for a referendum. The main opposition party also came out in favour of the implementation of the EU bailout deal, which opened the way for Papandreou’s U-turn. According to Reuters, Papandreou made a deal with his cabinet that he would step down after negotiating an interim coalition with the conservative opposition, but on the condition that he will win a confidence vote tonight. But the chances are slim as Papandreou could count at most on the support of 151 deputies.  Only one more defection would strip the government of its majority and probably trigger an early election.

 

Samaras and Papandreou at odds over interim government

 

 

The negotiations to form a unity government did not start well, Kathimerini reports.  New Democracy leader Antonio Samaras asked his MPs to leave Parliament when the debate ahead of the confidence vote began. Sources said the ND leader was angry that Papandreou had suggested that Samaras switched his stance on the new bailout only after being offered the chance to have a say in the makeup of the transition government. Samaras also insisted that Papandreou makes it clear that he would step down, which he failed to do so before Parliament.

 

 

The ND leader said he told the prime minister on the phone that the conservatives were willing to discuss the formation of an emergency short-term government to sign off on the new bailout agreement and to secure the disbursement of the next tranche of loans worth €8bn, (but also) to discuss with the eurozone the terms of the latest support package. Samaras set as a firm condition for any deal that Papandreou would step down as prime minister.

 

October revenues fall short of target

 

 

As if there are not enough political risks, there is also some bad economic news. Greece will most probably fail to meet the revised budget target of €51.5bn by the end of the year, according to Kathimerini. State revenues in October were down to €4.2bn (6.9% less than last year). The inadequate revenues mean that in order to meet the budget, the Finance Ministry would need to bring in €12.4bn for the remainder of 2011, or €6.2bn per month. In the last five years, the state has not once managed to receive more than €5.5bn in net revenues per month.  This is one reason why the government has decided to curtail tax returns to taxpayers and enterprises. In October, tax returns paid amounted to just €293m, against €629m in September.

 

Merkel remains sceptical

 

 

Despite George Papandreou’s U-turn on a Greek referendum Angela Merkel does not want to unblock the €8bn from the EU and the IMF to Greece for the moment. “For us deeds count, nothing else”, she said yesterday at the G20 summit, according to Spiegel Online.

 

Bild on “Angela Merkules”

 

 

According to Bild, it was Angela Merkel’s Herkulean pressure on George Papandreou in Cannes that made the Greek prime minister bow to the eurozone’s demand to back off from a referendum. “What a crazy power act – just like Herkules”, the mass circulation daily reports from Cannes. “Now the chancellor is really Angela Merkules!”

 

Talk about a Greek exit from the Eurozone marks a fundamental shift, Werner Mussler argues

 

 

Frankfurter Allgemeine Zeitung’s Werner Mussler argues that Angela Merkel’s and Nicolas Sarkozy’s reaction to George Papandreou’s referendum announcement marks a fundamental shift for the eurozone. For the first time both leaders said the consequence of a Greek vote might be the country’s exit from the eurozone. “This overthrows the current business rules for the currency union and therefore marks a historic shift in the history of the euro”, Mussler writes. Up until now all leaders considered the eurozone a community of destiny were exit was not an option.

 

Berlusconi faces potential rebellion in his own party

 

 

While all eyes are on Greece, a much more important political crisis is playing out in Italy, where the government is currently imploding. As he returns to Italy today, Silvio Berlusconi faces increasing pressure from inside his coalition to step down. So far, all attempts to get rid of him failed, but as Reuters reports, there may be a rebellion next week on a budgetary vote, which could become a de facto vote of no-confidence in the prime minister. Berlusconi presented what was widely considered to be another insufficient reform programme to the G20 summit, bypassing the important issues, and focusing on measures such as tax breaks for infrastructure investments. Despite the turn-around in market sentiment yesterday, following the cancelation of the Greek referendum and the ECB interest rate cut, Italian 10-year spreads remain close to the eurozone-era record. They were 4.312% this morning.

 

G20 want to create a protective wall against Italian risk

 

 

According to Frankfurter Allgemeine Zeitung and Le Figaro, the G20 are about to build a financial protection wall against risks coming from Italy and Spain. Le Figaro reports from Cannes that the main topic among the European G20 leaders was not Greece, but Italy. Angela Merkel, Nicolas Sarkozy and the others were upset because Silvio Berlusconi arrived without any concrete reform proposals, prompting Sarkozy to openly put into doubt Berlusconi’s “political credibility”. The Europeans are now thinking about a troika style approach were they are sending Commission officials to Rome for the moment to verify the Italian books but this could become much more intrusive soon. “The G20 are studying the erection of a firewall for Italy and Spain”, Le Figaro quotes an Indian negotiator. This would involve the EFSF but also the IMF who could very rapidly come to the assistance of those countries. According to FAZ, the G20 are about to decide on short term liquidity facilities that the IMF could grant up to 500% of the countries’ capital share which would make €45bn in the case of Italy and €23bn in the case of Spain. Eligible countries would have to have a solid economic policy and sound fundamentals.

 

ECB cuts rates

 

 

Mario Draghi delivered a rate cut at his first meeting – something ECB watchers said he could never do in order to maintain his credibility. (It does not seem to occur to them that credibility may come from doing what needs to be done, rather than by second-guessing others.) He cited a weakening economic outlook as the main reason, together with an expectation that inflation will fall to below 2% next year. Yves Mersch, the Luxembourg central banker, was even more explicit yesterday when he said the recession probability was greater than 50%. Here is Mario Draghi’s statement.

 

Most German papers welcome Draghi’s rate cut

 

 

In comments from the German press the majority view is that Mario Draghi was right to announce a rate cut after the ECB’s first governing council meeting under his chairmanship. “Bad mouths could be tempted to characterize the rate cut as a gift to the home country of the Italian, but is nonsense”, Stefan Ruhrkamp of Frankfurter Allgemeine Zeitung writes. “Since the last council meeting in October the economic data have markedly worsened. In the face of a ‘mild recession’ the rate cut is justified.”  Wolfgang Proissl of Financial Times Deutschland endorses Draghi’s decision not to act tactically by maintaining the interest rate status quo in his first council meeting in order to give the impression of an inflation hawk. “Draghi refused to be guided by such superficial tactical consideration and that was totally right”, Proissl argues. Given the looming recession and the eurozone chaos, Draghi “has demonstrated that at least the central bank is remaining a force capable of action in the crisis”. Stephan  Balling of Börsenzeitung however takes a markedly different view. The rate cut is a sign “of a dangerous conception of the tasks and possibilities of a central bank”, Balling argues in his comment under the title of “European Federal Reserve”. According to the author the ECB has undertaken a fundamental shift in strategy. “The policy of stability was yesterday, today it does growth promotion”, he concludes.

 

Spreads, Forex, and ZC Swaps

 

 

The cancelled referendum brings some relief, but not much.

10-year spreads
	Previous day	Yesterday	This Morning
France	1.267	1.218	1.217
Italy	4.379	4.341	4.312
Spain	3.653	3.612	3.662
Portugal	11.608	11.657	11.596
Greece	25.010	27.517	29.76
Ireland	6.490	6.388	6.580
Belgium	2.562	2.475	2.492
Bund Yield	1.838	1.903	1.932
Euro Bilateral Exchange Rate
	Previous	This morning
Dollar	1.366	1.3815
Yen	106.620	107.79
Pound	0.860	0.8624
Swiss Franc	1.213	1.2147
ZC Inflation Swaps
	previous	last close
1 yr	1.8	1.75
2 yr	1.78	1.76
5 yr	1.87	1.86
10 yr	1.8	2.09
Source: Reuters