The EU has finally acknowledged the seriousness of the crisis that has been ploughing through EMU and beyond.  It has pledging EUR 720 bln in a massive effort to stop the contagion that has been emanating from Greece.  Supporting this action the Fed will reopen emergency USD swap arrangements with other major central banks.  In addition, the ECB will play a crucial role in the attempt to restore market stability.  Despite last week's indication from ECB President Trichet that the ECB would not be prepared to stray outside its mandate to preserve price stability, the ECB agreed over the weekend to start buying government bonds; the BBK acknowledged it has commenced that program this morning.  Default risk has been quashed and the market reaction has been euphoric with EUR/USD surging back above the 1.30000 level and stock indices catapulted higher across the board (the IBEX is up over 12%).  The actions taken by the EU officials will buy them time but there are still a lot of questions unanswered.  At the core of the Greek fiscal crisis is the inability of the Greek government to live within its means.  Despite this year's bitter austerity plans, there is no guarantee that Greece will be able to turn around its budget and maintain budgetary prudence going forward.  As a consequence, the issues resulting to Greek restructuring or devaluation out of EMU have not been entirely brushed aside.  EU President Van Rompuy spoke this morning about the need to strengthen EMU's stability pact.  Clearly the current fiscal controls are inadequate.  However, while it seems sensible to tighten fiscal controls to clear the way for an efficient, independent central bank this raises questions related to the sovereignty of the member nations.  The German elections at the weekend can be interpreted as a protest at the extra transfers that will be necessity from German taxpayers to the EU to protect the integrity of EMU.  However, greater fiscal ties and less sovereign autonomy over the destination of domestically raised taxes may be a taste of the EMU that emerges from this crisis.   These issues cannot be thrashed out quickly and probably not without further pockets of disharmony.  For sure EMU has not stopped evolving and the EUR may yet be faced with further hurdles suggesting that investors are likely to remain wary medium-term.  

The UK still has no new government.  Cable has bounced from Friday's lows largely on the back of the softer USD, although the fact that the talks between the Tory and LibDem parties have not fallen apart is also reassuring signal.  Political party spokesmen have indicated that the focus of these talks would be on deficit reduction and this too is buying some calm from the markets.  Gilt yields have edged down just a touch from Friday morning's levels.  The BoE policy announcement is due at 11:00 GMT.  No change in policy is expected.   

Canadian housing starts data are due today.  

 Jane FoleyResearch 207 398 5024