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Protestors clash with riot police on June 15, 2011 during a demonstration near the parliament in the center of Athens (ARIS MESSINIS)
Protestors clash with riot police on June 15, 2011 during a demonstration near the parliament in the center of Athens (ARIS MESSINIS)

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Surprise Greek referendum risks blowing up euro zone Add to ...

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Papandreou's strategy Don't take this to mean that I think George Papandreou is wrong with his surprise move to put the euro debt accord to a referendum. But it is an extremely risky strategy that threatens an already fragile monetary union.

Greece's Prime Minister said today his government will put the rescue package to a referendum and a confidence vote, saying he trusts in the decision of the Greek people.

But with Greeks so wildly opposed to Mr. Papandreou's austerity plan - strikes and demonstrations have been frequent and widespread - one can't help but wonder about the outcome.

Indeed, a fresh survey published on the weekend showed 60 per cent of Greeks aren't keen on the bailout plan struck last week at an EU summit in Brussels, which followed tense negotiations and inspection of Greece by the so-called troika of the EU, European Central Bank and International Monetary Fund.

The plan would see Greece's debt-to-GDP level fall to 120 per cent by 2020, but that's going to take a lot, given the country's bleak economic outlook. Also in the plan are measures to shore up euro zone banks, push holders of Greek debt to take a huge hit, and boost the region's bailout fund, known as the EFSF.

Is Mr. Papandreou risking the entire bailout process with his referendum plan, the first vote of its kind in Greece in almost four decades?

"Given the terms of the bailout package it is the democratic thing to do, given the loss of fiscal sovereignty to the troika until 2020," said CMC Markets analyst Michael Hewson.

"But if Greece votes no, where does that leave Europe and their place in the euro?" he told me. "It could herald the beginning of the break-up of the euro."

If it's a political ploy, it's a risky one. David Watt, senior fixed income and currency strategist at RBC Dominion Securities in Toronto, agreed there's a threat to all this.

"If holding a referendum was in the cards, the sooner the better might be tactically wise, though it certainly might end up having been a strategic error," Mr. Watt said.

"Rejection of the EU package could set the roller coaster off once again," he added. "Hence, a threat to go over the heads of the opposition (internal and otherwise) and take it to the people, even though polls highlight the risk of such a move."

I agree with Mr. Hewson that it's the democratic thing to do, and with Mr. Papandreou, who told his parliament today that "this is a surpreme act of democracy and of patriotism for the people to make their own decision."

But the decision of the people may well go counter to the wishes of Mr. Papandreou. And how the Greeks see patriotism may not meet the definition of Greece's leaders.

Italy can't dodge markets Italy is now in the crosshairs of the market as well.

Prime Minister Silvio Berlusconi warned in a newspaper interview that only he can lead the government through Italy's crisis, and deliver the reforms necessary. The problem is that few believe him.

Yields on Italy's 10-year bonds climbed again today to stick above 6 per cent as the focus of the euro troubles continued to shift to Rome.

"Italy remains the key pressure point in the European sovereign debt saga and despite the ECB continuing to buy Italian bonds; it appears that they are only doing so grudgingly," said CMC's Mr. Hewson.

"While currency and equity markets surged on last week's deal it would appear that bond markets have been more sanguine and it would appear that Italy’s feet continue to burn while their prime minister becomes more of a liability with each passing day."

Mr. Berlusconi lacks credibility. And, noted Mr. Hewson, the prime minister says all the right things when backed into a corner by his colleagues in the euro zone, only to back off when yields fall and the pressure is relieved.

Italy's debt is at 120 per cent of its gross domestic product. But its interest payments are the main problem, rather than its overall debt burden.

As Scotia Capital currency strategist Eric Theoret put it, Italy would have a budget suplus but for the debt service.

"The rising cost of debt is an ongoing concern for markets, who fear a buyer’s strike on the part of investors in the €1.6-trillion Italian debt market. All three major credit rating agencies have a negative outlook for Italian debt, currently rated at A by S&P and A2 by Moody’s," Mr. Theoret said.

Along with that is the fact that Italy has stagnated for the better part of a decade, raising fears that the debt payments will become unsustainable if growth continues to lag. Not only is there a lack of growth, but also of government will to "streamline the Italian economy and bring it into the 21st Century," Mr. Hewson said.

"I think he's the biggest liability that Italy's got," he said of the scandal-plagued Mr. Berlusconi and his economy, the euro zone's third-largest and most heavily indebted. "Unfortunately, there's no one to replace him."

Mr. Berlusconi is rejecting calls for an election, and told an Italian newspaper he alone is up to the challenge that Italy faces.

"Only I and my government can achieve this reform program for 18 months, which is why there is no way for me to stand aside," he said in an interview published on the weekend by Corriere della Sera.

Provinces under the gun Canada's provinces could be forced to cut program spending even more, and should probably start getting the word out now, CIBC World Markets warns today.

The extreme scenario is one of a moderate global recession, according to CIBC's Warren Lovely. But what's more likely is "structurally slower" growth in the United States that eats into provincial revenue growth to the tune of half a percentage point or more "on a sustained basis," he said.

"Over the course of five years, a slower growth profile could erase nearly $10-billion from planned provincial revenue, derailing fiscal targets," Mr. Lovely said.

"With global fragilities impairing Canadian growth, more and more government programs could ultimately prove unaffordable," Mr. Lovely said in today's report.

"Governments should condition their populace for deeper cuts, now. After all, provinces that are unable or unwilling to tackle budget shortfalls in a strategic and timely manner leave themselves ill prepared for the next recession. They risk inviting credit downgrades, which could jeopardize heretofore hearty foreign demand, weigh on spreads and erode long-term debt affordability. The battle is not yet lost, but a weaker global economy is clearly making it tougher for some provincial governments to return to fiscal health."

What's happening here is that growth is slowing, and the outlook has deteriorated since budget assumptions were made.

"Moving from nearly 3-per-cent real GDP growth to roughly 2 per cent is nothing to cheer about, and by chewing through the fiscal insulation, downward revisions can frustrate finance ministers trying to steer finances onto a sustainable path," Mr. Lovely said. "But if this is as bad as the global economic outlook gets, near-term fiscal ramifications for Canada will be generally manageable."

Mr. Lovely's report follows an outlook by Toronto-Dominion bank last week that suggested federal Finance Minister Jim Flaherty could miss his target to balance the books by two years.

Canada's economy grows Canada's economy continues to climb back from the funk of earlier this year, though recent gains were all the result of a rebound in the energy sector, and the outlook still remains blurred by the troubles of the euro zone and the United States.

Gross domestic product increased by 0.3 per cent in August, Statistics Canada said today. That follows July's 0.4 per cent and June's 0.2 per cent, and means the third quarter of the year was shaping up decently, The Globe and Mail's Tavia Grant writes.

August's gains were driven primarily by the energy sector, though, without which growth would have stalled.

"Over all, this is a stronger-than-expected reading that positions [the third quarter]for a gain of better than 2 per cent, although we would like to see broader based gains as a signal for momentum heading into the final quarter," said chief economist Avery Shenfeld of CIBC World Markets.

Output in the energy sector climbed 2.8 per cent in August, Statistics Canada said, following growth of 0.3 per cent in July and 2.3 per cent in June. That marks a rebound from the decline of 4.5 per cent in May, which was largely the result of poor weather and maintenance at some operations.

"So, effectively, this surprisingly chunky advance is payback for the equally surprising large decline we saw three months ago (due to the steep drop in oil & gas output due to the Alberta fires)," said deputy chief economist Douglas Porter of BMO Nesbitt Burns. "Underlying growth remains much less impressive - annualized growth in the four months since April was just under 2 per cent, which likely is not a bad gauge of the economy’s underlying trend."

Last week, the Bank of Canada projected weak growth for the next several months, at least.

"We still see growth slipping back below 2 per cent in Q4, but odds are increasing that the second half should end up well above the Bank of Canada’s recent projection barring some new, unforeseen shock," CIBC's Mr. Shenfeld said.

Japan intervenes Japan intervened in currency markets today to weaken the yen, but observers say it's not likely to have much of of a lasting effect.

The move followed the yen hitting a record high against the U.S. dollar, and the country's finance minister, Jun Azumi, said authorities would continue to do whatever it takes. Earlier this year, central banks in the G7 countries took a co-ordinated move to push down the yen, but the results proved temporary.

It's not clear just how much Japan sold, but it was said to be massive.

The move was "disappointing" as the currency began moving higher again, and Tokyo's Nikke slipped from the gains it had made on the intervention, actually closing down on the day, noted chief global economist Julian Jessop of Capital Economics in London.

"The experience of this year’s earlier interventions is also discouraging," he said.

"The co-ordinated intervention by the G7 in March did succeed in capping the yen for several months, but the upward pressures then were essentially speculative (market expectations of large repatriation flows following the earthquake)," Mr. Jessop said in a report.

"In contrast, the yen was back above its pre-intervention levels within three days in August. This suggests that today’s intervention will have to be repeated at least once to have any lasting effect. But comments today from [Bank of Japan]Governor Shirakawa suggest little real enthusiasm at the central bank (he observed that the yen is not particularly strong on a trade-weighted basis). What’s more, repeated intervention in the coming days would not go down well at the G20."

G20 leaders meet later this week in Cannes.

TMX backs financial industry deal Executives of TMX Group Inc. didn't manage to get more money out of the banks, insurers and pension funds bidding $3.8-billion for the operator of the Toronto Stock Exchange. But they do get to keep their jobs.

TMX said late yesterday it's now backing the bid by Maple Group, having tried to fend off the financial services company behind the offer as it first tried to arrange a merger with London Stock Exchange Group PLC and then pushed for a better deal from the Canadian group.

“This is a unique opportunity to create an integrated exchange and clearing group that can provide efficiencies and new capabilities for the benefit of all market participants,” said TMX chief executive officer Tom Kloet.

"Further, the investment in our company by leading Canadian pension funds and financial institutions will contribute to the success of our business and will strengthen our ability to compete and grow in the highly competitive global exchange sector.”

Mr. Kloet will remain CEO and have a seat on the board. Four independent members of the TMX board will also be on the new setup.

CP in spotlight Analysts are beginning to look at what William Ackman's interest in Canadian Pacific Railway Ltd. could mean for the railroad. What they envision as the possible next steps are a management shake-up, sale of certain assets and "more aggressive" pricing.

As The Globe and Mail's Brent Jang and Jacquie McNish write in today's Report on Business, Mr. Ackman's Pershing Square Capital Management LP has taken a 12.2-per-cent stake in CPR. The hedge fund manager is now expected to begin talking to the railway to push for a review of operations.

"Given CP's lagging [operating ratio]relative to its peers, Pershing's interest in a more aggressive operational turnaround does not surprise us," said analyst Tasneem Azim of UBS Securities Canada.

"To the extent that Pershing is able to effect change at a pace faster than what we currently assume in our forecasts, we estimate that every 100 basis points improvement to the [operating ratio]translates into 25 cents upside to EPS, which represents $3.25 of value at our target multiple of 13x," she said in a research report.

"That said, this may well be a case of much ado about nothing if it emerges that sufficient marketing and operating initiatives to drive [operating ratio]improvement are already in place. In essence, the question of a structural improvement in CP’s [operating ratio]remains one of 'when' rather than 'if,' in our view."

CIBC World Markets analyst Jacob Bout, though, boosted his price target on CP shares to $65 from $60.

MF files for court protection MF Global Holdings Ltd. , the securities company headed by former New Jersey governor Jon Corzine, filed today for bankruptcy protection after an attempt to sell it fell apart.

MF had been pushing a deal with Interactive Brokers Group, but talks broke down early today, according to reports.

Deal struck for Grande Cache Chinese and Japanese suitors have struck a $1-billion deal for Canada's Grande Cache Coal Corp. , the Alberta miner.

The companies said today that Winsway Coking Coal Holdings Ltd. and Marubeni Corp. are offering $10 a share cash for the Calgary-based company.

Winsway is listed in Hong Kong, and imports coking coal for China's steel users. Marubeni is a trader based in Japan.

AltaGas in deal for Pacific Northern AltaGas Ltd. has struck a $230-million cash deal for Vancouver's Pacific Northern Gas Ltd. , The Globe and Mail's Brenda Bouw reports.

Calgary-based AltaGas, which focuses on natural gas, power and regulated utilities, is offering $36.75 a share, a 20 per cent premium to Pacific Northern’s closing price on the Toronto Stock Exchange Friday. The transaction includes assumed debt of about $85-million and $5-million preferred shares.

AltaGas said the deal has a strong geographic fit and will increase its regulated rate base by 50 per cent to more than $500-million, and increase customers from 75,000 to more than 110,000.

Key this week It's something of an eventful week for the markets.

The Federal Reserve meets amid an uncertain global backdrop and a jobs crisis, but a better performance by the U.S. economy in the third quarter.

"After announcing unconventional easing moves at the last two meetings (low-for-longer pledge and Operation Twist), the Fed could take a breather, comforted by firmer economic data," said Mr. Guatieri of BMO Nesbitt Burns. "Still, given our view that more stimulus will eventually be required to reduce the unemployment rate, and given recent comments from key officials ... that suggest a bias to do more, we can’t rule out another move next week."

The European Central Bank also meets, on Thursday, and it's notable for two reasons. First, Mario Draghi makes his debut as the ECB chief after the retirement of Jean-Claude Trichet, and, second, the central bank has been under fire for raising interest rates in the midst of the euro crisis and flagging growth.

It's not expected to change its benchmark rate from its current 1.5 per cent, but some feel Mr. Draghi could. "The feeling that he may wish to make a statement in support of growth pressures facing Europe is reflected in a minority of calls for a cut of 25 to 50 basis points," said Karen Cordes Woods and Derek Holt of Scotia Capital.

And on Friday, Statistics Canada releases its key October jobs report, and this one's expected to be modest compared to September, when back-to-school employment pumped up the numbers. Economists believe between about 10,000 and 20,000 jobs were created last month, with the jobless rate still holding above 7 per cent.

"Buoyant as September’s count looked, the number was biased by a one-off lift from nearly 40,000 new educational hires, reflecting seasonal-adjustment problems," said Peter Buchanan of CIBC World Markets. "That won’t be repeated this time around. After rising earlier in the recovery, the public sector headcount has stagnated in the last year. October should see more of the same as Ottawa proceeds with plans to cut staffing levels in a number of key departments."

Business ticker

In Economy lab It’s a mistake to conclude that a government that spends less will intervene less, Stephen Gordon writes.

In International Business One of the world’s best-known shipping groups has underlined the grim prospects facing oil tanker owners after it became the first owner to admit having laid up a ship out of service in the face of this year’s slump in vessel charter rates. Robert Wright of The Financial Times reports.

In Globe Careers Scenario planning has become familiar for strategy retreats, but what about succession planning? Harvey Schachter examines the issue.

In today's Report on Business

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