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Thursday, November 3

3rd Nov - Is Papa's time over?

Notice how Italy's rating and CDS prices diverge.
Most of the stuff in here is already old news: BBC reports Greek prime minister is about to hand in his resignation. Of course, there is a real possibility that the situation will renew itself under the new government. Another post coming later today.

FX option vols – Saxo
Markets Live – alphaville FT
Debt crisis: live – The Telegraph
EZ crisis Live blog – The World / FT
Live Blog: Greece and the G-20 SummitThe Source / WSJ

EURO CRISIS
It’s Not Just the ECBKantoos Economics
Yes, if the ECB could and would act unconstrained, it could, in some instances, be more effective. But the underlying problem is that the euro’s founding fathers – i.e., the Helmut Kohls and Francois Mitterands – gave the ECB an impossible mandate: managing a currency union in a quasi-Bundesbank fashion that features a wildly heterogeneous membership, limited labor mobility and labor market flexibility, no crisis resolution mechanisms, and no mechanisms to reign in unsustainable fiscal or private sector behavior at the national level. 

A Gravity Test for the EuroProject Syndicate
Rogoff: So, yes, there are plenty of vaguely plausible reasons why the euro, despite its drawn-out crisis, has remained so firm against the dollar so far. But don’t count on a stable euro-dollar exchange rate – much less an even stronger euro – in the year ahead.

GREECE
€8bn Greek payment on ice until referendumeuobserver.com
"The [IMF] board would not want to give money to Greece and then wonder what will happen ... The board will want comfort that Greece will fulfill its commitments and right now Papandreou is unable to give that," a senior IMF source told Reuters

EU Leaders Threaten Greece With Expulsion From the Eurozonenaked capitalism
From a practical matter, if the Greeks were to turn down the bailout package, it would lead to a banking crisis, making a Eurozone exit a not that much more traumatic incremental move with considerable upside.

Morning BriefingBNY Mellon
Merkel said: “We would rather achieve a stabilisation of the EUR with Greece than without Greece, but this goal of stabilising the EUR is more important.” French President Nicolas Sarkozy also told the joint news conference: “Our Greek friends must decide whether they want to continue the journey with us.” (Angela Merkel also announces that the Eurogroup will meet on Monday to discuss “firewall options”).
 
Is the Eurobankster “We’ll Shrink Our Balance Sheets” Threat Largely Empty? naked capitalism
First, it’s likely that the June 30 timeframe would severely constrain the ability of banks to execute on this threat. Who exactly is going to buy these assets? Other, similarly situated banks won’t, at least not in sufficient size. Banks in most other advanced economies are also subject to “increase equity level” requirements, even if not as severe as those faced by the Eurobanks.

Papandreou shows no regret as he faces a grilling from Sarkozy and MerkelThe Guardian
Just as he dismayed his EU counterparts, revealing the depths of Greece's corruption, inefficiency and public sector dysfunctionality shortly after assuming power, aides say he is now bent on telling them that he is determined to uncover the "vested interests" thwarting reform.

Brilliant Moves by Papandreou; EMU Mentions Eurozone Exit Possibility First Time Ever; Who the Hell is Merkozy to Dictate Terms of a Greek Referendum?Mish’s
The IMF upped the ante saying Greece will not get the next tranche of money until after the referendum. Hmmm. It seems the IMF and EMU should have thought about that before the last release of funds.

The Greek Referendum : How and Why it was decided, background, analysis, Game Theory and scenarios 1/2  – Wired And Ready
Players: Greek government, opposition, the people, EU governments, IMF, European banks

Greece’s referendum: The Great ‘Greek Out’economistmeg.com
I expect Greece will instead default on its debt and leave the eurozone by 2013 in as managed and orderly a way possible. In doing so Greece can reissue the drachma, allow it to depreciate drastically, regain competitiveness almost overnight and find economic growth much more quickly. Ultimately, the endgame for Greece is the same regardless of what happens with the referendum.

Playing poker with the GreeksButtonwood’s / The Economist
However, the real threat of a Greek default is in the example it would set. Citizens of other European nations would see the chaos; they might figure that their savings would be safer in German, rather than Portuguese (or Italian) banks. Bond investors might feel the same; yields would rise further. Official creditors (including the ECB) might take a hit, making it even more difficult for them to participate in other bailouts. For all the bluster, one can't help feeling the tough EU stance is a bit of a bluff. They can't view a Greek exit with anything other than fear.

Greece: Political support for Papandreou is vanishingDanske Bank (pdf)
losing support, new government and passing of austerity package seem the plausible outcome.