Debt Deal Stalls On Greek Referendum

Greek leaders have expressed doubt as to whether they and the Greek people are willing to accept the new austerity measures and other terms of the most recent …

Greek leaders have expressed doubt as to whether they and the Greek people are willing to accept the new austerity measures and other terms of the most recent bailout plan crafted by the wider Eurozone community, and Prime Minister George Papandroeou has called for a referendum on the issue. While 60% of the Greek public does not want to accept the terms of the deal, 70% of them do want to remain in the European Union. The news of the stalled plan has shifted the dollar into a strong position against most other major currencies. For more on this continue reading the following article from TheStreet.

The overnight session was dominated by the aftermath of the news that Greek Prime Minister George Papandreou intends to call a referendum on the latest debt agreement, with the dollar advancing against all the majors.

The move by Greece throws an unwelcome spanner in the Eurozone debt deal and has led in part to a plunge is global equities, with the EuroStoox 600 down over 3.2%. Above all, European bank shares are down over 6%, while the European Central Bank is reportedly in the markets supporting Italian bonds, with the 10-year up 10 basis points.

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We have highlighted consistently the political risks in Greece as a key driver for potential weakness in the EUR and from here it is likely that the euro comes under renewed pressure, with the next level of support expected near 1.357. In short, this is a huge gamble by the government and is clearly a vote on whether Greece is prepared to carry out further austerity measures necessary to hold the currency union together in its current form.

Polls over the weekend showed around 60% of the Greek public oppose the recent bailout agreement, but at the same time 70% want to stay in the eurozone. The government may have an uphill fight but needs only 51% to assure confidence. Papandreou will likely submit a confidence vote this week and even if there is a yes vote, a referendum will take time to prepare and conduct, adding to uncertainties about the outlook for the sovereign debt crisis. A no vote is likely to see pressure added on the core countries to soften the terms of the bail-out agreement and might be the lesser of two evils if the alternative is Greece exiting the eurozone. As a result of this renewed uncertainty, risk appetite is likely to sour.

On the data front today, markets are likely to focus on the October Institute for Supply Management manufacturing report. While the downside surprise of Monday’s Chicago PMI is likely to pose potential downside headline risks, the overall improvement in nearly all the regional manufacturing surveys point to a modest rise in the October report.

Trade numbers in Asia continue to call our attention. Korean trade figures surprised on the downside, rising at the slowest pace in two years at 9.3% year-over-year. This comes on the heels of lower-than-expected trade numbers in Hong Kong, Singapore and China. On the positive note, Indonesian also released trade numbers overnight which came in stronger than expected.

This article was republished with permission from TheStreet.

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