High-Stakes Brinkmanship in Europe

Talk about high stakes brinkmanship: Reuters (citing EU and IMF Board sources) saying that the next tranche of Greek aid (8 billion euros) is unlikely to be paid out until after a Greek referendum is held.

Germany's Merkel and France's Sarkozy are going into a meeting with Greek Prime Minister Papandreou in a matter of minutes (as of this writing). They're saying: "You want the money? Tell us when there's going to be a referendum. Oh, and by the way, if the referendum fails...no more money."

Do the Greeks have enough money to last until the referendum?

Any wonder that it's Europe, not the Fed, that is continuing to move markets.

The Fed statement was a non-event for the markets, even though the Fed modestly upgraded some of its economic commentary (economic growth "strengthened somewhat" in the third quarter; the previous statement said economic growth "remains slow") and it was interesting that Charles Evans dissented, arguing for a more aggressive stance on easing.

Back to Europe: The German DAXX ended the day up over 2 percent on hopes that the G20 would find some way to put a positive spin on the meeting tomorrow. Sarkozy and Merkel will be straining to put a positive spin on the outcome of the Papandreou meeting:

1. "I want to wring his neck, but I'll put my arm around him instead." Big pressure now to announce a speeded-up timetable for the Greek referendum, likely early December, not January, providing Papandreou survives the confidence vote.

2. The Papandreou earthquake: the VIX volatility index is likely to stay elevated. Now, anything is possible, and that means higher implied volatility, and that means a higher VIX. Notice that even though stocks are strong today, the VIX — after going from 24 to 37 in two days, to close at 34.77 yesterday — is down only a point today, to 33 and change. You can thank Papandreou for that.

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