The main news influencing currency markets as we begin another New York trading session is conflicting news around the fate of George Papandreou as Greek Prime Minister. There were reports that he may resign today as his government has lost the majority. However Reuters has reported that he will not be resigning today. Still, the market latched onto this news to mean that if Papandreou may loss in a vote of confidence tomorrow, likely forcing his exit.
If the government loses its vote of confidence and was to fall, that lessens the chance of the proposed referendum taking place which was a euro positive overnight. We will have to continue to watch headlines in regards to how the ruling party aims to vote in the coming days and whether Papandreou survives this week.
Yesterday evening, led by Germany and France, Europe cut off its aid for Greece saying that it will not get further bailout funds unless the country votes yes on its referendum. The specter of Greece leaving the euro zone was first raised by Merkel and Sarkzoy and the sentiment by those heads of state seems to be that if Greece wants to leave the euro, that it should leave now and that the rest of the euro zone will survive without it.
From Bloomberg: While leaving the euro would allow Greece to regain control of exchange and interest rates, a September report by economists at UBS AG said its new currency would drop 60 percent, and local borrowing costs would jump at least 7 percentage points, imperiling the balance sheets of banks and companies. The cost would be as much as 11,500 euros a person in the first year outside the euro and 4,000 euros in following years, according to UBS.
We would like Greece to remain a member but we're not saying Greece has to stay a member at all costs, Luxembourg Prime Minister Jean-Claude Juncker, who chairs meetings of euro finance ministers, said today on ZDF German television.
The indications for a withdrawal of Greece from the euro zone and returning to its own currency could mean that the valuation of that new currency by around 60% according to Bloomberg. Local borrowing costs would also rise 7% as a result of any exit from the euro.
Italian Yields Continue to Push to New Euro-Era Records
In addition to the events in Greece were also continuing to monitor Italian yields which climbed to fresh euro area highs today. The Italian 10 year was yielding 6.399% or a full 459 basis points over Germany. the 6.5% level is considered unsustainable for Italy to complete service its debt and could also trigger extra margin payments for use of Italy's bonds as collateral. For instance clear net considers 450 basis points over a basket of AAA countries appoint which extra fees may have to be charged - extra margin payments that were levied on both Ireland and Portugal.
From FT: Silvio Berlusconi failed on Wednesday night to overcome internal government divisions and push through immediate legislation on structural reforms ahead of Thursday's summit of the Group of 20 leading economies.
Italy's prime minister had hoped to have a decree agreed by the cabinet in his hands to take to Cannes and to calm markets that have pushed Italian bond yields close to euro-era highs. But government sources said disagreements between Giulio Tremonti, the finance minister, who is insisting on fiscal discipline, and Mr Berlusconi, who was backed by other ministers, prevented a deal from being reached.
As you can see in the above intraday look at the 10 year yield following a push to that euroera high we see the hallmarks of ECB stepping in to buy up Italian bonds and thereby bringing the yield actually back below where we started for the day.
While Italy's yields continue to pose a worrying sign we also see French borrowing costs climbing with its spread over Germany posting fresh euro-era record of 135 basis points as traders and investors fret that the country may lose its AAA rating.
We now await both the ECB interest-rate decision as well as the press conference with our new ECB president Mariano Draghi.