Greece

Greece sorta defaulted last night. That's what you need to remember when reading of Greek Prime Minister Lucas Papademos's ‘happiness’ at the €130 billion deal reached by eurozone finance ministers in the early hours. Sure, the country will now be able to pay off its creditors when various loans mature on 20 March. But the concurrent ‘voluntary’ haircut of 53.5 per cent for private bondholders will still be seen as a ‘restricted default’ by credit rating agencies. And it could feasibly get worse if those private bondholders decide not to play along and instead trigger a credit event, either manageable or messy.

The political implications of today’s growth numbers are complex. On one level, a contraction in the economy should provide Miliband and Balls with an opportunity to make their economic case against the government. Indeed, Balls is already out with a statement calling the GDP figures a ‘damning indictment of David Cameron and George Osborne’s failed economic plan’. I suspect that Miliband is also looking forward to PMQs rather more than normal.   But on the other hand, as long as Cameron and Osborne enjoy a big lead on the economy — 18 points in the last ICM survey — bad economic news will reinforce voters’ tendency to stick close to nurse for fear of something worse.

Yet another day here in Westminster that's all about the economy. Nick Clegg has just delivered a speech on the subject to Mansion House, focusing on ‘responsible capitalism’, which we'll blog shortly. And two prominent forecasting groups, the Ernst & Young ITEM Club and the Centre for Economic and Business Research, have suggested that we're effectively back in recession. They both reckon that the economy shrank in the final quarter of last year, and is wilting even further in this current quarter. But, like the OECD, they also predict that this ‘double dip’ will be relatively short-lived and relatively mild. Against that backdrop, enter George Osborne.

For all the debate about Theresa May and border security, the big news has not been at Westminster today. Instead, people have been watching what is happening in Italy. For it is far from certain that Europe, or the Western world for that matter, has a bucket bigger enough to bail out a country that owes more than Greece, Ireland, Portugal and Spain do combined. As the New York Times reports, the European Central Bank is reluctant to step in and start buying Italian bonds because it fears that its previous bond buying efforts have simply enabled the Italians to avoid necessary reforms. It feels that only market pressure will make the Italians actually act. But this is a dangerous game to play because if Italy falls, France will be left teetering on the brink. BNP Paribas has 12.

Reports of Silvio Berlusconi's imminent resignation yesterday may have been exaggerated, but it remains to be seen how greatly. He faces a big test today, in the form of a crucial vote on the Italian budget. Berlusconi has proved adept at surviving such confidence votes throughout his time as Prime Minister, but today's opposition may be too much even for him. In the words of Italian academic Roberto D'Alimonte to the Telegraph: "Nobody knows what the result will be, I think even Berlusconi doesn’t know." In the last few minutes, Umberto Bossi – the leader of Berlsuconi's coalition partners Lega Nord – has said that he called on the Prime Minister to step down.

The eyes of Europe, which have been focused on Greece all week, will see a slightly brighter picture today – albeit one still engulfed in heavy fog. The good news: a new coalition government will be formed – the government of "national unity" that EU leaders wanted – to approve the bailout package ahead of new elections. Prime Minister George Papandreou will step down, following his aborted call for a referendum on the bailout terms last week. His future had been a major part of the uncertainty surrounding Greece: reports of his resigntion on both Thursday and Friday turned out to be premature, if only by a matter of days.

The political situation in Greece remains unclear this morning. George Papandreou’s government survived last night’s confidence vote. But the main opposition party has rejected the idea of a national government and Papandreou’s finance minister appears to be maneuvering to replace him. Papandreou’s victory in the no confidence vote means that there probably won’t be elections in Greece this year. But the huge difficulties involved in implementing the austerity plan remain. The measures continue to command little public support and the opposition will continue to criticise them.

Reuters is reporting tonight that the Greek Prime Minister has agreed to resign on Friday. The news agency says that at a meeting Cabinet colleagues told George Papandreou that he had to resign for the good of the Socialist party and he agreed. It quotes one source saying, "He agreed to step down. It was very civilised, with no acrimony." Now, after Thursday’s experience, I suspect we’re all taking reports about what will, or will not, happen in Greece with a pinch of salt. But it does seem that the referendum is off, stymied in part by Merkel and Sarkozy, who have ridden roughshod over the idea of non-interference in another nation’s affairs. That is, I suppose, par for the course for the European project.

Confusion has reigned today in Athens, clouding the first day of the G20 summit in Cannes. Reports at midday that the Greek Prime Minister was to resign turned out to be false. Papandreou's staying put, for now at least. Instead, it seems there will be no referendum on Greece's bailout package. In a sharp reversal, Papandreou reportedly told his Cabinet: "The referendum was never an end in itself. We had a dilemma – either true assent or a referendum. I said yesterday, if the assent were there, we would not need a referendum." It seems he may have gained that assent, in that the opposition New Democracy party will support the deal. But they are still calling for Papandreou's resignation and for elections to be held in six weeks' time.