httpvh://www.youtube.com/watch?v=1c_DFqmsHtA

So
after winning a confidence vote from the Greek parliament it seems that the
only incentive that politicians had to vote for George Papandreou is that he
would stand down soon enough. Elections will now be held in Greece on February
19^th with former ECB Vice President Papademos mooted as the chap to
take over in the interim. His experience in central bank policy may give markets
just a little bit of comfort in these times of outright fear. Despite the
slight feeling of resolution in Greece, I think we have to forget about Greece, it is merely a very
expensive sideshow. Italy is where the real problems lie and fundamentals will
be pushed to the side this week as the markets become more and more binary
towards risk on or risk off. Once again it is bad politics that is leading good
economics.

On Friday it became clear that
Italy had agreed to IMF monitoring of its finances, a precursor to taking a
credit line/bailout. Unfortunately this has not taken the fear away from the Italian
situation as once again politics will get in the way. Berlusconi is a lame duck
and must know that a sizeable proportion of the increase of Italian borrowing
costs will have been down to the political farce that his government has
become. Granted a lot will be coming from the size of their debt markets and their
poor growth record since Euro integration but a sprinkling of Berlusconi
bungling has proved to be the icing on this foul-tasting cake. Case in point,
look at Spain; also too big to fail by debt standards, very high levels of
unemployment and poor growth characteristics however they are in possession of
a political class who are happy to impose austerity and knuckle down to make
things right; a similar desire is sadly lacking in Italy. A confidence vote in
Silvio Berlusconi is scheduled for tomorrow.

As a result we expect peripheral
bond yields to continue to increase over the course of the week from political
issues in both Greece and Italy with Thursday’s big bond auction from Italy
clearly in focus. If bond markets start to move towards 7% on 10 year money
(currently trading above 6.4%) then the IMF may be forced to step in and offer
some cash.

Although we have said that the
fundamentals will remain out of favour we expect that the market will be
keeping an eye on Eurozone retail sales that are due at 10am. While they are
expected to moderate a little higher compared to last month the fact that they
are negative will only increase the possibility that ECB Governor Draghi’s call
for a Eurozone recession by the end of the year all the more prescient.

We also have a huge budget
announcement from the French today in what has been called the “toughest budget
since 1945” as they look to find around EUR8bn as a result of a lack of growth.
Most of this is expected to come from revenue enhancements, or tax rises, such
as a VAT increase on cafes and restaurants.

Sorry to start your week in such
a negative mood but this is the world at the moment. Hope you had a good
weekend.

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