Italian problems are greater than ever

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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 19th 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

Indicative Rates Sell Buy
GBPEUR 1.1638 1.1664
GBPUSD 1.5995 1.6019
EURUSD 1.3726 1.3749
GBPJPY 125.00 125.27
GBPAUD 1.5488 1.5514
GBPNZD 2.0143 2.0172
GBPCAD 1.6273 1.6307
NZDUSD 0.7930 0.7952
GBPZAR 12.72 12.77
USDZAR 7.9484 7.9927
GBPPLN 5.0834 5.1171
EURJPY 107.19 107.44

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