Papandreou's gamble

The chase by Marty Cej:

You give and you give and you give… now what's a Troika to do? Greek Prime Minister George Papandreou's Halloween surprise has shaken Europe's debt crisis resolution framework so severely that European leaders, the new ECB boss and the head of the IMF have summoned Papandreou to Cannes for a stern talking to. Given that the framework was constructed of sparrow bones and Silly String, a sense of urgency will attend the meeting as well. In the meantime, investors are having to price in the growing possibility of a messy default by Greece, a shift in focus from Athens to Rome and a European banking crisis.

The analysts at Stratfor, for example, are telling clients that whatever Europe (nee Germany) does, "three things are all but inevitable: an Italian bailout, a European banking crisis, and a Greek default. Any one outcome will likely trigger the other two."

The leaders of the G20 nations, who are en route to Cannes right now for the weekend summit, would disagree with Stratfor's conclusions and will do what they can to prevent those outcomes. Whether they will be able to do it in the absence of support from the Greek government or the Greek people, will be the real challenge.

Just how tough has Papandreou made things? The European Financial Stability Facility is delaying its 3 billion-euro bond sale "due to market conditions," spokesman Christof Roche said today.

Much of the criticism of Papandreou's move to call first a confidence vote and then a referendum on the terms of Europe's bailout package of Greece appears to stem from the assumption that he is motivated by the greater good, which in this case means a more stable, economically-integrated euro-zone, the prevention of the sovereign debt crisis spreading to Italy and a functioning banking industry.

Some might argue, however, that he is motivated by the same desires as any other political leader, that is, to remain a political leader. BMO Capital Markets characterized Papandreou's announcement as one of the "all-time bonehead moves," but it's only a bonehead move if you assume he as erred in a grand ambition for a better Europe.

Can anyone name a populist president, prime minister, senator or governor who would not launch an appeal to the vox populi when in grave political straits? By putting the decision of the bailout package to a referendum, Papandreou shifts responsibility and demonstrates his democratic cred. If the referendum results in a "no" vote, he will send his apologies to Berlin and Brussels and set out about leading his country into a freshly independent future.

If it is "yes," then he will, with the mandate of the people, lead Greece into a freshly integrated and renewed Europe. Bonehead move? The Papandreou family has called the Maximos Mansion in the centre of Athens home for several years now and won't give up the address without a fight.

The U.S. Federal Reserve's policy-setting Open Market Committee will finish a two-day meeting this afternoon and will issue a statement at 12:30 p.m. ET. Too often we see and hear the Fed's recent decisions characterized as "doing nothing" or "staying on the sidelines" or "making no decision."

That is categorically untrue and we need to nip to stop perpetuating that misconception. The past two policy meetings saw three dissentions in each statement, meaning that debate, argument, appeals to logic, emotion, economic theory and anecdotal evidence prompted some members of the meeting to turn one way and some to turn another.

A decision is being made right now whether to invoke another form of quantitative easing to stimulate the U.S. economy; a decision is being made regarding what form another round of quantitative easing might take; decisions are being made as to when and how much, and how to communicate the decision… We do our viewers a disservice by diminishing the actions of the world's most important central bank.

Ummm, hello. My name is Ben (long exhalation), and I'm a central banker… Fed boss Ben Bernanke takes questions from the media at 2:15 p.m. ET.
Howard Wetston, Chairman of the Ontario Securities Commission, will also be taking questions today, from us. He sits down with us at 12:40.

A U.K. shale gas explorer said today that its hydraulic fracturing new Blackpool in northwest England probably caused two small earthquakes in the region. While this story hasn't garnered much attention yet this morning, if I know the British press, it will by the end of the day. The company, Cuadrilla Resources, said it is "highly probable" that its fracking caused the seismic events and says it is willing to put in place an early detection system. We need to get ahead of this story.

There a ton of important earnings reports to follow today including Sun Life, Time Warner, Mastercard, Molson Coors, Talisman, Kraft, Calfrac, Intact, Qualcomm…

Greece plunges global markets into turmoil

The chase by Marty Cej:

Asian and European stocks are tumbling, the cost of insuring against default on European bonds is surging and commodities are slumping after Greek Prime Minister George Papandreou said thanks for the bailout money but I think I’m gonna ask the people of Greece what they think about the deal first. In what BMO Capital Market’s economists are calling one of “your all-time bonehead moves,”

Papandreou shocked global financial markets with his call for a referendum on the most recent austerity measures required by the EU, IMF and ECB for the disbursement of funds necessary for Greece to avoid a disorderly default. Fitch Ratings told clients a few moments ago that a rejection of the measures would “increase the risk of a forced and disorderly sovereign default and - whilst not Fitch's central rating case - potentially a Greek exit from the euro.”

In short, Greece may have collapsed Plan A – a generous description if there ever was one – without the benefit of having a Plan B in place. The announcement has likely thrown the agenda for this weekend’s G20 summit into disarray and will turn the market’s conversation to the question of what happens when Greece defaults and exits the euro-zone. Will it mean the end of the euro currency? Is Italy next? Spain? Credit default swaps on Italian debt have soared 32 basis points this morning and jumped 28 points on Spanish bonds.

The broad Markit iTraxx index of Western European CDS surged 25 basis points. Gavin Nolan, director of credit research at Markit in London will join us at 10:20 am Eastern to walk us through the implications. Silvio Peruzzo, Euro-area economist at RBS will join the conversation a few minutes later.

The Reserve Bank of Australia cut interest rates this morning for the first time since 2009, saying Europe’s debt crisis was undermining Asia’s export-dominated economies. The rate cut came as a purchasing managers’ index for China fell to 50.4, its lowest level since February of 2009. South Korea, meanwhile, reported its smallest gain in exports in two years. It won’t be hard to connect the dots all the way back to the Canadian economy, earnings growth and the outlook for stocks.

I almost forgot! It’s Mario Draghi’s first day on the job as the new president of the ECB! Congratulations, Mario, and good luck.

It is also the first day of a two-day meeting for the U.S. Federal Reserve’s policy-setting Open Market Committee. The conversation is likely to have changed a bit this morning. How will the increased political and financial risk in Europe affect the discussions? Will there be fewer dissenters this time around? How unconventional can unconventional get?

MF Global became a much more compelling story late yesterday after the Commodity Futures Trading Commission and Securities and Exchange Commission revealed that a last-minute sale of some of the assets to avoid a bankruptcy was scuppered after “deficiencies in customer futures segregated accounts held at the firm” were found.

Unnamed sources are telling Bloomberg and The New York Times that hundreds of millions of dollars in customer accounts may have been funneled into MF Global’s proprietary accounts to back up a losing trade. We need to talk more about the kind of trade that MF Global made, the risk the company took on through its proprietary book and what could happen next. Of course, at the middle of it all, is Jon Corzine, one of the best-known names on Wall Street.

Commodities, currencies, bonds and stocks, they’re all reflecting the sudden increase in financial, political and economic risk emanating from Europe but in different ways. Let’s be specific and accurate. “Commodities falling on European woes” does not help anyone understand anything any better.

And still the earnings parade marches on. We have numbers today from Bell Aliant, Pfizer, Anadarko, Valero, CME Group, Archer Daniels Midland, TransCanada, Baker Hughes, Dollar Thrifty, Dunkin Brands and Westport Innovations.