Despite the muted optimism seen in financial markets, the Greece situation remains on a knife edge and can turn at any minute it seems

<p>This is making investors extremely sensitive to the news flow out of Athens, making trading choppy. Whilst it seems that Greek PM George Papandreou has […]</p>

This is making investors extremely sensitive to the news flow out of Athens, making trading choppy.

Whilst it seems that Greek PM George Papandreou has backed down on his pledge to hold a referendum on the EU bailout deal, the political situation in Greece remains highly unstable, making fiscal policies unpredictable. It is speculated that he will step down and be replaced by a new and stronger coalition government (or national unity government), if he passes a crucial confidence vote late this evening. It is predicted that should he survive the confidence vote, a coalition government would take control for a transitional period before elections are called.

That said, much relies upon bi-partisan talks between Mr Papandreou and opposition figures today, and given the fact that the situation is changing so quickly, investors are unwilling to bet big on a smooth vote this evening. The dissent from Mr Papandreou’s own party, including the very public outbursts on his leadership from his very own finance minister, is likely to keep investors on their toes.

With the confidence vote set to take place after the European close, there is every chance that we could see investors downsize risk into the close to protect themselves for any shocks out of Athens late tonight.

03/11/2011 (3.30pm) Joshua Raymond, Chief Market Strategist, City Index

Whilst investors await definitive confirmation, it appears that pressure from Angela Merkel and Nicolas Sarkozy in a last minute meeting in Cannes, the venue of today’s G20 Summit, has shown that any referendum on the bailout deal would suspend any aid until the results were confirmed. It would be in effect a referendum on Greece’s adoption of the euro itself and this has forced Mr Papandreou to back down.

It has been a day of high drama, rumour, speculation and uncertainty as investors attempted to second guess what action the Greek PM was likely to take. Equities rallied from early morning weakness after the Greek PM called another emergency cabinet meeting where it was rumoured that he could announce his resignation and allow a new stronger coalition government to take the country forward.

The market rally was triggered on hopes that a coalition government would keep Greece’s euro membership and cancel a referendum vote, easing the uncertainty over whether a Greek bankruptcy could come as early as December. Those rumours now look firmly quashed with the latest speculation suggesting that the Greek PM will stay on, cancel the referendum, keep Greece in the euro and invite greater involvement from the opposition party. Doubts still remain as to whether he will pass a confidence vote in the Greek Parliament tomorrow and considering how quickly things are changing on an hourly basis, the situation could be different by Friday morning.

The markets nevertheless held on to their support going into the close, with investors somewhat enthused by the speculation that the referendum won’t go ahead and optimism that Greece will continue to receive the fiscal support it agreed last week with EU officials in Brussels.

02/11/2011 (12noon) Joshua Raymond, Chief Market Strategist, City Index

Financial markets were in turmoil on Tuesday after Greece Prime Minister George Papandreou surprisingly called a referendum on the latest Greek bailout plans, putting the country’s solvency under immediate threat and triggering wild downside swings in the share prices of key banks across Europe.

The move by the Greek PM was a shock, not just to investors but also it seems to European leaders and members of his own government. This does not bode well for party unity but also the sense that investors can predict how the situation will play out.

The key here is that merely one week after a hugely symbolic EU Summit at Brussels where multiple measures were announced to contain a Greek debt fallout, it seems that we could be back to square one, facing a Greek bankruptcy and potential exit out of the Euro zone.

What’s more, with multiple Greek lawmakers dissenting against their own ruling party today alongside opposition figures and calling for snap general elections, an already weak Greek government has seemingly weakened further to the point where it could soon lose its grip on power in a confidence vote in the country’s parliament on Friday. What’s more, it took a seven-hour long emergency cabinet meeting that lasted long into the night on Tuesday for the Greek PM to win cabinet support for his referendum plans. This further destabilises an already uncertain region, from which much of Europe’s debt woes originate.

The fact that the people of Greece will decide on the previously agreed bailout package means that, considering the public antipathy and anger towards the various austerity measures previously announced, it raises the potential for a ‘no’ vote and as such escalates an incredible amount of market uncertainty.

Investors hate uncertainty and the reaction in the financial markets has been a pure example of this fact, with many moving to downsize investments in risky stocks.

It now seems that the Greek referendum could take centre stage at the week’s G20 meeting in Cannes and can provide a rather unwelcome blind side to the crux of the issues investors were hoping the G20 summit would resolve. Later on Wednesday, Nicolas Sarkozy, Angela Merkel and Christine Lagarde, the IMF head, will chair a meeting with Greek PM George Papandreou in Cannes in preparation for the start of Thursday’s G20 Summit, where they are expected to tell the Greek PM that he must stick to the agreements made last week in Brussels, agreements which currently look fragile considering they now require public ratification.

In addition to this, there are well entrenched concerns regarding Italy, and moves in the bond markets show just how highly investors are worrying over the reliance upon Italy to pay its creditors. Italian 10-year bond yields raced to new highs on Tuesday of 6.366%, whilst in the same breath German 10-year bund yields, rapidly being seen as a safety net by investors, hit their lowest point in 6 weeks at 1.736%.

With the referendum currently aimed to take place in December at the earliest, it seems that the uncertainty over the Euro zone debt situation and its contagion effects will likely continue for some time to come.

 

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