Out of the ashes….

Governments tumbling and sovereign yields blowing out to alarming levels – another quiet week on the European front! It was time for the Italians to put their hard hats on and again, take the full force of the markets’ wrath.

The week started off with a damp squib from the G20/’troika’ meeting – the market wanted a substantial increase in the EFSF extension, but instead got further objections from the Bundesbank as they stood in the way of plans to grant the ECB similar powers to those of the BOE and the FED (i.e the ability to print money). You feel that one day we will reach such a point of pain that this objection will finally be dropped. Certainly, we feel that this objection will be dropped ahead of any true contemplation of a split up of the Eurozone. We are already seeing signs that the edges are beginning to blur as the ECB allowed a €6.4bn Greek bond issue by Greek banks to be used as loan collateral.

The Greek PM, George Papandreou, survived a vote of confidence, but eventually was forced to resign. Talks to find a successor to lead a “government of national unity” broke up in complete disunity. Italy also lost their ageless and much respected (!) Prime Minister Silvio Berlusconi, who looks set to be replaced by ex-EU Commissioner Mario Monti (who was on Thursday named Senator for Life by president Napolitano). As leader of a new technocrat government charged with implementing reforms, he certainly has his work cut out, but markets rallied on the prospect of the departure of the controversial incumbent. France also found itself under pressure as it rushed through an austerity plan in order to protect its AAA status. It appears that so many governments are tumbling that we are undergoing our very own ‘European Spring’.

Economic releases further suggested the crisis has caught up with European Industry, as output slumped by 4.85% in Italy and 1.7% in France. Amidst all this it would seem more difficult than ever to produce sensible economic forecasts, but the ECB felt it had the duty to do so, jolting politicians as it cut its forecast for Eurozone growth in 2012 from 1.8% to 0.5%. As broadly expected, the UK MPC left interest rates unchanged at 0.5%.

Market update