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He survived a confidence vote on Friday but he has been ousted as part of a coalition deal with the opposition leader on Sunday. At least Greece has a government  but the political drama continues to play out in Athens as a new PM will be decided tomorrow. This is one hurdle over, as having a unity government in place is vital to pass a vote in Parliament to accept strict terms for the latest batch of bailout funds and Greece is fast running out of money. Tomorrow's Eurozone finance ministers' meeting won't be much fun for Evangelos Venizelos as he is set to become the next Prime Minister.  

That was the big weekend news. The G20 was meant to be an historic event, but ended up a damp squib. The world's most important leaders should have been back-slapping each other for having found THE SOLUTION to the debt crisis. Alas, that wasn't meant to be and the world's most powerful leaders seem stumped as to how to deal with Greece, which means that this uncertainty and ensuing market volatility are set to continue.

Germany's Merkel is sounding less and less like she cares about finding a quick fix to the Eurozone debt crisis. She said rather nonchalantly after the Cannes summit that nothing had been agreed with the IMF to boost the EFSF rescue fund, which needs urgent funding to ensure it can cope with escalating problems in Italy. She also added that the current problems could take a decade to sort out, talk about dampening market expectations for a quick fix.

So that expensive Cannes summit delivered nothing at all. The only thing it did do was reinforce just how focused the market is on one thing: Greece. I would bet that more people in the UK could recognize the name of the Greek Finance Minister than would have heard of Chinese premier Wen Jiabao. China is the world's economic hope, yet a bankrupt, political basket case like Greece dominates our headlines and threatens to throw our economy back into recession.

However, the lack of progress is bad news for Italy.  The country's bond yields shot up to dangerously high levels on Friday and are within touching distance of 6.5% as we start the week. ECB member Mersch said that the Bank may refrain from further purchases of Italian debt if economic reform is not passed by law makers. If this were to happen Italy would surely be sent hurtling towards a bailout.

Worryingly, 2-year Italian yields have been surging. When yields on short-term debt start increasing at a faster pace than long-term debt you have a problem on your hands because it signals that investors have no faith that you can pay back the money you owe. With the IMF now in Rome analysing the public books, it looks like Italy has gone for the bailout-lite option, but will it need to go the whole hog? The bond markets certainly think so, and it could happen sooner than we think.

Next week is set to be a major test for Italy. A vote is due on Tuesday to pass the state accounts. Last month the government lost the vote, which caused the bond vigilantes to up-the ante on Rome. It is vital that this vote passes to ensure that Italy can keep out of the grip of the IMF, ECB and EU troika. Added to this there is a risk that the opposition leader will call a no confidence vote in Berlusconi in the coming days after his support has dwindled threatening his majority in Parliament.

Berlusconi has threatened to call snap elections in January to try and guarantee his party's support (never a good sign) and Greece may hold elections in February or March once the Unity government is fully formed, so  the EU has to put out multiple financial and political fires at once, and it is stretching resources and the market's patience. Add to that French and US presidential elections next year and 2012 could be another political maze for the markets to negotiate.

Interestingly, the euro and risk assets have held up surprisingly well considering the manic media coverage of Greece and the possibly dissolution of the Eurozone. However, elsewhere things are looking ok. The US labour market might be creating jobs in unspectacular fashion but at least it's creating jobs. However, the unemployment rate is falling slowly - 1% in the last 2 years, which is not acceptable to the Fed. This keeps the prospect of QE3 on the table, which risky assets love. Add to that global consensus that monetary policy needs to remain low for some time (even the ECB caved in last week) and you can have the euro continue to hold up versus the dollar even though its very existence is in jeopardy.

Strange times indeed. If there is a break in headlines coming out of Greece then a host of Fed speakers, a Bank of England Policy meeting and Chinese inflation data may get a look in, but I think the bulk of commentary will still be focused on Europe and whether Berlusconi can save his political shirt once again.

Best Regards,

Kathleen Brooks| Research Director UK EMEA |

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