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How much worse can life get for Greece and the Euro-Zone?

How much worse can life get for Greece and the Euro-Zone?

George Papandreou arrived in Cannes yesterday, with a warning from the French Prime Minister ringing in his ears that Greece had to abide by the rules, or leave the Euro Zone. Mr Papandreou has also been told that the next tranche of bailout funds due on the 11th December will not be released until the referendum result has been announced.

How much worse can life get for Greece? This is the question on the public’s lips – is the possibility of a default and leaving the Euro Zone more painful than adopting the austerity measures outlined in Brussels a week ago. Yesterday’s manufacturing PMI for Greece showed a 31 month low of 40.5, which implies a very rapid contraction in activity. This suggests that all the last two years of measures has done is push Greece closer to the edge of collapse. My own hope is that Greece stays in the Euro and that the single currency works, but would I feel the same way if I lived in Greece?

The strong rhetoric from Mr Sarkozy towards Greece could have had something to do with yesterday’s rumours that France could lose its triple AAA credit rating if the Euro Zone enters into recession. French PMI manufacturing yesterday came in at 48.5, with any figure below 50 suggesting contraction.

Meanwhile, the UK had its 2012 growth forecast slashed by 1.2% to 0.8% by that National Institute of Economic and Social Research. The US Federal Reserve also cut its economic forecasts for 2012 to between 2.5% and 2.9%, down from 3.3% to 3.7%. The continuing uncertainty around the Euro Zone was given as the reason for the slashing of both forecasts.

ECB president Draghi holds his first press conference this afternoon amid calls for the ECB to unwind its earlier tightening measures to offer relief to the periphery. Markets are currently pricing in a 36% chance of a 25bps cut in rates today. However, the more likely result will be that Draghi will position the ECB for a cut in rates by December. The other issue which will interest markets will be around ECB bond purchases – will the ECB continue to intervene to lower bond yields or will Mr Draghi see this as the responsibility for stabilising bond yields resting with Euro Zone governments?

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