June 2012

In the broadcast today: EUR and USD Outlook ahead of ECB and NFP. With the European Central Bank and the U.S. Non-Farm Payrolls scheduled for release in the week ahead, we focus on the EUR and the USD and explore the outlook for the two currency majors, we list the Top 10 spotlight events that will move the markets next week, we examine the consensus forecasts for the upcoming economic data, we analyze the bullish breakout in the EUR/USD currency pair, we continue to monitor the latest trend developments in the USD/JPY pair, we keep an eye on the GBP/USD currency pair as it breaks above an important resistance level, we highlight the market’s reaction to the EU Summit, the German parliamentary vote on ESM, the Euro-zone HICP, the Japanese CPI, the Canadian GDP, and the U.S. Personal Income and Outlays, we discuss new forecasts from Bank of New York-Mellon and FX Concepts, and prepare for the trading week ahead.

Live Broadcast from 9:00 am to 10:00 am, Eastern Time, Monday – Friday.

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EU summit agrees restructuring of Spain’s bank bailout, lifeline also extended to Italy, German Chancellor confirm that the vote on the ESM in the German parliament will take place today as planned…

Powered by Guardian.co.ukThis article titled “Eurozone crisis live: Bank bailout throws lifeline to Spain and Italy” was written by Josephine Moulds, for guardian.co.uk on Friday 29th June 2012 12.12 UTC

1.16pm: More from French president Francois Hollande, who is speaking after the eurozone summit in Brussels.

He says that France will submit the growth and fiscal pact to French parliament for ratification when everything else is agreed (such as the financial transaction tax, the banking union, growth). So that will be next year at the earliest.

He says Germany strongly backs the financial transaction tax, but says the rate has yet to be decided on.

He’s defended Spain and Italy for their hardball stance last night pushing for stability measures, saying they were aimed at benefiting the whole eurozone.

1.11pm: French president Francois Hollande is giving his version of events, saying no one should say they had won or lost. The eurozone as a whole had been strengthened by the agreement.

He said the financial transaction tax would be defined and in place (for the countries involved) by the end of 2012.

12.59pm: More from Merkel. She says she is working well with French president Francois Hollande. And she maintains the vote on the ESM in the German parliament will take place today as planned.

12.46pm: The deal announced early this morning – and more importantly the concessions the Germans are seen to have made – could make this afternoon’s vote in the Bundestag on ratifying the ESM permanent bailout fund interesting.

A bit of noise about the vote is hitting the wires, with the opposition SPD party saying it is an open question whether it can actually go ahead.

Meanwhile Angela Merkel is giving a press conference, and is repeating the line that the ESM’s exemption from seniority only applies to Spain. She said many countries did not want the preferred creditor status removed as a general measure.

And – probably to no one’s surprise – she says her stance against eurobonds remained unchanged and she repeated that to the summit.

12.16pm: There’s some analyst reaction out about the financial policy committee’s recommendation that banks use their liquidity buffers to support lending to households and companies (see 11.48am and earlier). Simon Hayes of Barclays Capital says the lack of specifics in the announcement means the Bank of England is still likely to increase its quantitative easing programme next month:

The committee’s policy action has amounted only to asking the FSA to examine whether the specific liquidity requirements on banks are appropriate, in light of the fact that the Bank of England stands willing to supply emergency liquidity (as the activation of the Extended Collateral Term Repo Facility demonstrates).

It is therefore left to the FSA to translate this guidance into specifics, and the FPC was unable to give an indication of the effects of the guidance beyond Lord Turner’s comment that the ECTR meant there was “a somewhat reduced need” for banks to self-insure against a liquidity crisis, and Andrew Haldane’s observation that the stock of liquid assets held by banks exceeds £500bn, implying that the effect could be substantial.

This policy announcement was of particular interest because the minutes of the June MPC meeting showed that some members wanted to wait and see what the FPC’s decisions might mean for the economic outlook before considering the case for more QE. The possibility was that if the FPC had announced measures that were likely to provide a substantial boost to aggregate demand, the case for more QE would be reduced.

However, the absence of any detail in today’s announcement means the MPC is probably none the wiser as it prepares for the July MPC meeting next Thursday. As a result, we do not think this guidance will stand in the way of a QE expansion, and continue to forecast an additional £50bn in asset purchases next week.

12.08pm: Eurozone summits have more than a little in common with Samuel Beckett’s Waiting for Godot. Thanks to reader APG123 for a brilliant comment. Here’s an excerpt:

I was reading Samuel Beckett’s Waiting for Godot last night and I had to laugh about its ironic relevance. I’ve changed the names to expose the guilty.

MERKEL: Well? What do we do?
HOLLANDE: Don’t let’s do anything. It’s safer.
MERKEL: Let’s wait and see what he says.
MERKEL: Godot.
HOLLANDE: Good idea.
MERKEL: Let’s wait till we know exactly how we stand.
HOLLANDE: On the other hand it might be better to strike the iron before it freezes.
MERKEL: I’m curious to hear what he has to offer. Then we take it or leave it.
HOLLANDE: What exactly did we ask him for?
MERKEL: Were you not there?
HOLLANDE: I can’t have been listening.

11.48am: And finally, for those who haven’t had enough of the Bank of England’s financial policy committee, the Financial Stability Report is up on their website. Some key recommendations from the committee:

• The FSA should make it clear to banks that they can use the cushions of liquidity they are required to hold in the event of a crisis. He said the ability to do so would be enhanced by liquidity made available to banks by the Bank of England.

The FSA should work with banks, taking into account each institution’s risk profile, to ensure they build a sufficient cushion of loss-absorbing capital in order to help to protect against the currently heightened risk of losses. That cushion may temporarily be above that implied by the Basel III standards.

• The FSA should encourage banks to improve the resilience of their balance sheets, including through prudent valuations, without exacerbating market fragility or reducing lending to the real economy.

• Banks should work to assess, manage and mitigate specific risks to their balance sheets stemming from current and future potential stress in the euro area.

11.43am: Spain loses most foreign portfolio investment since the introduction of the euro, as investors sell bonds and stocks. Non-residents withdrew €24.6bn from the country, up from just €4.54bn last year. Thanks to Bloomberg economics editor @lindayueh.

11.39am: Goldman Sachs is apparently recommending buying Spanish, Irish, Italian bonds, prompting cynicism from trader website @zerohedge.

Goldman recommends buying Spanish, Irish, Italian bonds. Which means Goldman is selling

11.29am: Adair Turner, chairman of the FSA, says on interest rate swaps:

Many were correctly sold, they can be good products…but sadly our investigations show significant minority were missold.

Andrew Bailey of the Bank of England says the biggest headwind for bank’s building up capital buffers is PPI, “having to pay redress for the misdeeds of the past”.

And finishing off the press conference, Mervyn King raises more questions about the Libor scandal:

It goes to the heart of how a rate that is used in many transactions should not depend on the answer to a question, because they have many motives for changing their answer.

He reiterated his preference for using actual quotes, and said there was a deeper question over why they used that particular metric for so many transactions, when the market is sometimes too thin to actual come up with a meaningful figure from transactions alone.

11.25am: King called for a “real change in the culture of the banking industry” in the UK.

He ruled out a Leveson-style inquiry into a series of scandals in the industry, including the Libor scandal – which he described as the “deceitful manipulation of one of the most important interest rates”.

He said the situation required “leadership of an unusually high order and changes to the structure of the industry”.

11.15am: On the new liquidity rules, FSA chairman Adair Turner said:

The new liquidity facilities and policy of the Bank of England provides additional contingent liquidity available to banks to use when they need it. That means that from a regulatory point of view, there is a somewhat reduced need to have self-insurance on the liquidity side, and we can take that into account.

So we will be issuing a press release, which will say that we will adjust our liquidity guidance in the light of these improved BOE facilities. In particular, we will be stressing the point that we’ve made before… that liquid asset buffers can be drawn down in the event of liquidity stress and used for the duration of that period of stress.

We’ll also announce that in current conditions, and in light of the improved liquidity insurance provided by the bank, we’ll look at the specific guidance that we give to individual banks. And for those banks that have preposition collateral at the BOE, we will take account of that potential access to liquidity when formulating our guidance on appropriate liquidity buffers.

11.09am: Mervyn King says the eurozone banking supervisor is not going to fix the eurozone crisis:

I don’t think creating a single banking supervisor is a solution to the euro crisis. They might see it as a broader move towards fiscal union, but it is not germane to the problems they have.

Adair Turner is bit more upbeat, calling it a “major step forward to a banking union for that unit”.

11.07am: Mervyn King reiterates the need to split investment banking from retail banking activity. He says the Bank of England wants to underpin lending to individuals and SMEs, not risky bets on markets.

The two should not be on the same balance sheet.

11.06am: Andy Haldane, the Bank of England’s executive director for financial stability, who sits on the FPC, said he expects the Financial Services Authority to translate relaxed liquidity rules into bank-specific guidelines within the next few weeks.

He believes relaxing the rules on liquidity buffers banks have to hold could make a “big impact” on new lending to Britain’s businesses.

10.58am: On Libor, King says:

We will make sure that this system which was rigged in the favour of at least one or several institutions will be changed. I hope that … we will end up with a new regime based on actual transactions.

Looking ahead its very important that people don’t expect too much from regulation. Regulation doesn’t stop bad behaviour. We have to change the structure of the industry to make sure they have the right incentives.

Adair Turner adds that the Libor emails showed “a degree of cynicism and greed that is shocking”.

That does suggest there are some very wide cultural issues that need to be very strongly addressed in trading and investment banking activities of major banks. I think we would be fooling ourselves if we thought some of the behaviours are not found in other areas of trading activity as well.

10.43am: Mervyn King, Bank of England governor, says the risks facing banks haven’t diminished, and increases in bank aggregate capital have been small. He also said manipulating Libor was deceitful.

“There’s something very wrong with UK banking industry and we need to put it right,” he said.

10.39am: Bank of England governor Mervyn King is speaking at the press conference of the financial policy committee.

He says the committee recommends that “taking into account the risk profile” of the specific bank, the FSA works with banks on what level of capital they need to hold. He said it may temporarily be above the standards set by Basel III.

Importantly the committee is not recommending that banks hold permanently higher cushions of capital. If risks materialise, the cushion will be used to absorb losses. At that point capital ratios could fall back to Basel III standards.

10.29am: German publication Der Spiegel’s certainly clear on who lost at the euro summit, with the headline:

How Italy and Spain Defeated Merkel at EU Summit

Carsten Vokery writes:

Angela Merkel took a tough stance ahead of the EU summit, insisting she would not make concessions. But Italy and Spain broke the will of the iron chancellor by out-negotiating her in the early hours of Friday morning. Germany caved in to demands for less stringent bailouts and direct aid to banks.

10.18am: Back to Brussels where a German official is talking about the change to the terms of the bank bailouts, which means bailout funds will not have seniority over other creditors. This alteration will apparently be limited to Spain’s banking bailout.

Traders are sceptical about that clause anyway. One analyst writes:

Loans to Spanish banks will not be senior to other bondholders.
- sure, in the legal documents perhaps. BUT like ECB/IMF interventions, subordination will remain assumed

He lists some other flaws he sees in the headline results from the summit…

Direct re-cap of banks.
- this can only happen once a move to a pan-euro supervisory regime has happened. It doesnt look to us that the initial EFSF/ESM assistance to Spain will be direct. Of all the bank/sovereign loops, the most significant is in Spain, so the headline is not as good in reality.

EFSF/ESM secondary bond purchases.
- no available funds until the EFSF issues bonds or the ESM is paid into. yes, the ECB will act as the buying agent, but its unlikely they will be too active before a funding programme is in place for the EFSF. Also – for any such purchases an MoU would be needed. We expect Italy to resist such a move (hence Monti’s comment about hoping the threat of bond purchases will be enough in itself).

10.10am: In the Eurozone annual consumer price inflation held steady in June at 2.4%, in line with expectations.

Inflation is now is at a 16-month low, leaving the door open for the European Central Bank to cut interest rates.

10.06am: Data coming out of Greece shows that retail sales dropped 13.5% in April, compared with the same month last year. That is actually an improvement from March, when retail sales dropped 16.2%.

Inflation has also eased very slightly with producer price index inflation at 5% in May, compared with 5.1% in April.

9.51am: Gary Jenkins of Swordfish Research is cautiously optimistic about the agreement out of the eurozone summit.

These steps are the obvious ones to take to try and restore some confidence in the market in the short term. Alone they do not solve the underlying problems but they might buy a bit of time which is probably about the best they can do right now. Obviously the bailout funds as they exist are not large enough to fund the likes of Italy over the medium term and the challenge remains to encourage the private sector to invest alongside them and on that point they have at least removed some key obstacles.

It will be interesting to see if they can make any progress towards a proper fiscal union on day 2. The problem might be that if you give politicians much needed access to liquidity that their incentive to give up sovereignty recedes somewhat. Or maybe I am just a cynic.

9.40am: UK services sector stagnated in April, weighed down by a slump in retail sales. Output of the services sector was flat, compared with a 0.6% increase in March. The main drag was a 2.4% slump in retail sales.

The Office for National Statistics also put out data on productivity, which fell 1.3% in the first quarter, on a per hour basis.

9.31am: And just to bring everyone down a bit, Japan’s industrial output fell the most in May since the March 2011 earthquake, partially hit by weak demand in Europe for Japanese cars.

Production declined 3.1% in May from April, the Trade Ministry said in Tokyo today.

The data showed clear signs of the risk to Asia from the eurozone crisis. Production of transportation equipment, including automobiles, slumped 11.1% in May, the biggest drag on output overall.

9.24am: There’s a good headline from Nicolas Doisy, an analyst at Cheveureux Credit Agricole, on the eurozone agreement…

The EU summit that finally did not fail

He argues that this summit is the first concrete step towards closer political and economic union in the region.

Contrary to expectations, the EU summit has eventually delivered a strong political signal last night: the eurozone federalisation has started for real with the direct mutualisation of Spain’s banks. Although seemingly a technical and legal measure, this means the eurozone is really kick-starting its banking union by addressing Spain’s legacy.

This first serious step toward a crisis resolution will help contain Spain’s deflationary pressure by reducing the country’s overhang of private debt. It is also an implicit mutualisation of Spain’s sovereign debt right now via the eurozone’s funds, which allows to postpone the issue of eurobonds. So, this is also a first step toward a fiscal union.

Meanwhile, Monti intimated once again that the eurozone fund would take over bond purchases: this will clearly help better contain market pressure. This is yet a second (more obvious) sign that the eurozone has really started its federalisation, while preserving the ECB’s independence.

9.17am: And my colleague John Hooper is gauging the reaction to news of the successful summit and, of course, the football over in Rome.

Radio 24, Italy’s business talk radio, hailed it this morning as the night of the two “Super Marios”: after Mario Balotelli had humbled Germany in Warsaw, Mario Monti forced a reluctant Angela Merkel to give him what he wanted to bring down Italian interest rates. Well, that was how it was being told here. Mariano Rajoy may also have played a part, of course.

In an interesting comment on Italian priorities (and not one that will particularly amuse the Germans), the websites of both the country’s biggest newspapers, Corriere della Sera and La Repubblica, felt Italy’s semi-final victory in Euro 2012 was the more important story and put it at the top of their home pages.

Vittorio Da Rold, writing for the financial daily Il Sole 24 Ore (which did at least think the EU deal was the more significant), said Monti’s refusal to sign up to a growth pact until he had a deal marked the first time that an Italian leader had used a veto since Italy joined the original EEC.

“It is also a historic step [because], even though we still don’t have eurobonds, for the first time the principle has been approved that … interest rates are a common problem,” he wrote.

9.10am: Our European editor Ian Traynor reports from Brussels, where eurozone leaders have come to an agreement after apparent deadlock last night, sending markets soaring (see 8.34am).

European leaders pulled back from the brink of disastrous failure in their attempts to rescue the euro early this morning, throwing a lifeline to the weakest links in the eurozone by agreeing to shore up struggling banks directly, remove disadvantages for private creditors, and move quickly towards a new eurozone supervisory regime for banks.

Amid bad-tempered drama that continued through the night, Italy and Spain stunned the Germans by blocking progress on an overall deal at a two-day EU summit in Brussels until they obtained guarantees that the eurozone would act to cut the soaring costs of their borrowing.

The tough negotiations were deadlocked for hours, prompting the departure from the summit after midnight of the 10 non-euro countries, including Britain and leaving the eurozone leaders to fight it out. After 14 hours of wrangling, they emerged with a three-point statement rewriting the rules for the eurozone’s new bailout regime in a way likely to soften the draconian terms that have accompanied the rescue programmes for Greece, Portugal, and Ireland over the past two years.

The leaders said a new eurozone banking supervisory system should be established as a matter of urgency, by the end of the year and that once it is operational, the eurozone new permanent bailout fund, the European Stability Mechanism, would be able to recapitalise failing banks directly, without the loans going via governments as at present and adding to national debt burdens. The shift had been demanded particularly by Mariano Rajoy, the prime minister of Spain.

The new supervisory system is likely to come under the authority of the European Central Bank. Under plans being mooted, the new banking regime is to entail pooling eurozone liability for guaranteeing savers’ deposits and a common resolution fund for winding up bad banks. But the statement mentioned neither of these two points which are controversial especially in Germany which is reluctant to accept responsibility for the conduct of other countries.

The statement added that in drawing up the terms for up €100billion for Spanish banks, private creditors would enjoy the same status as the bailout fund in the event of a debt rescheduling. Previously the fund enjoyed “seniority” over private investors.

9.01am: Already the contradictory statements are emerging from the summit. Financial reporter Fabrizio Goria (@FGoria) writes:

Monti says no troika for EFSF/ESM, now Merkel and Holland say access to bailout funds to be reviewed by troika… Who is the liar?

8.47am: And just a reminder of the man who booted Germany out of the euro…. championships last night.

As the FT markets editor Chris Adams (@chrisadamsmkts) put it:

This week’s double winners: Spain and Italy. Stitch up Merkel at EU summit and boot out Germany to make final of #Euro2012

After Italy beat Germany 2-1 in Warsaw, Italian prime minister Mario Monti was asked whether he expected they would go on to beat Spain in Sunday’s final. He deadpanned:

I never speculate about financial markets or football.

8.43am: German retail sales edged down for a second consecutive month in May, falling by 0.3% . The declines come after the strong increase in March (+2.1%), so that monthly average sales in Q2 so far were 0.8% higher than in Q1. Sales of cars and related service, which are not part of headline retail sales, increased by 1.4% in May.

Christian Schulz of Berenberg writes:

Indicators of consumer confidence in Germany have held up despite the latest wave of the euro crisis. The fundamental situation of German households remains benign. Disposable income rises as wages increase and fuel prices fall. The labour market may have slowed but employment keeps rising and mass unemployment is becoming a distant memory. Despite stable private consumption, Germany’s economy is likely to take a hit to growth over the summer. Uncertainty over the outcome of the eurozone crisis will hurt business investment and exports suffer from austerity in important markets.

8.34am: The stock markets are also rallying on the back of the agreement out of the most recent eurozone summit. We’ll wait and see how long this lasts.

UK FTSE 100: up 1.5%, or 80 points, at 5573
France CAC 40: up 2.5%
Germany Dax: up 2.5%
Italy FTSE MIB: up 3.5%
Spain IBEX: up 4.2%
Greece ASE: up 3.99%

8.26am: For now though, the bond markets appear to be impressed.

The yield on Spain’s 10-year bonds (effectively the interest rate) dropped 44 basis points to 6.47%. The yield on Italian 10-year bonds is down 30bps at 5.89%.

The impact on shorter-dated debt is even more dramatic, with the yield on Spain’s two-year bonds down 86bps at 4.64%. And on Italy’s 2-year debt, down 63bps at 3.96%.

8.23am: And the BBC’s Robert Peston suggests the Germans might have something to say about their taxes being channeled directly to Spanish and Irish banks (see 7.45am).

8.08am: Let’s have a look at what the analysts are saying about the eurozone agreement. The focus seems to be on whether the bailout funds are big enough to keep down borrowing costs. Marc Ostwald of Monument Securities, for one, is highly sceptical:

While there may be some temporary sense of relief that the summit has not descended in to acrimonious discord, what has been thus far agreed is nothing more than sticking plaster. One presumes that the agreement to allow the ESM to buy government debt effectively puts the ECB’s SMP programme to bed, though what happens with its existing holdings may be a point for some debate. There will of course be plenty who point out that the EFSF/ESM simply does not have enough capacity to buy Italian and Spanish debt indefinitely, let alone directly recapitalise eurozone banks.

The dissent within Merkel’s CDU has already been voiced by one arch critic of the ESM, Wolfgang Bosbach, who has said: “If the ESM is approved today” in Germany’s two chambers of parliament (as has been agreed), “the currency union widens to become a liability union.” Bosbach also said: “The liability union will become a transfer union” because euro members will continue to violate deficit rules, he said.

Michael Hewson at CMC markets writes:

The EFSF is soon to be wound down and needs to raise its funds on the open market, while the ESM doesn’t exist yet, though its biggest contributor Germany should ratify it today in the German parliament. The problem with that is the fund has a maximum capacity of €500bn and that includes Spain and Italy’s contribution, so it could well run out of money quite quickly.

Nothing has been agreed on a roadmap to a fiscal compact, a banking union and further fiscal integration meaning that while this may have given a short term pop to markets there still remain a lot of unanswered questions and the fear is that Monti’s intransigent tone may well have damaged relations irreparably in the longer term, especially with Germany.

Holger Schmieding of Berenberg bank highlights the role the European Central Bank must play to provide some stimulus to the region following the summit.

Whether or not it will calm markets for long will likely depend on the ECB, in our view. Last October, when the ECB merely reacted to an EU summit with a 25bp rate cut, turmoil intensified shortly thereafter. But last December, when the ECB rewarded a new summit agreement on a strict fiscal pact with a major liquidity infusion on top of a rate cut, markets calmed down for some four months.

As discussed before, letting the EFSF or ESM buy Spanish or Italian bonds could backfire badly. These funds have very limited resources. Official market interventions work if and when they impress markets. Stepping in with limited resources is an invitation to markets to speculate against them. The fear that the EFSF/ESM funds could soon be depleted could further spook markets. But if the ECB were to massively support EFSF/ESM interventions (or an EFSF/IMF credit line, they could be very successful. Over to you, Mr. Draghi.

8.07am: Back in the UK, the Bank of England’s financial policy committee will publish its quarterly recommendations for regulatory action today. Markets are hoping it will allow banks to release billions of pounds from their cash buffers to help kick-start the economy.

There’s undoubtedly more to come out of Brussels, and plenty of economic data to keep us busy. Here’s today’s agenda.

• France GDP for Q1: 6.30am
• Germany retail sales for May: 7am
• France consumer spending for May: 7.45am
• France PPI for May: 7.45am
• Swiss KoF business survey for June: 8am
• UK services index for April: 9.30am
• Eurozone CPI for June: 10am
• UK Financial Policy Committee minutes released: 10.30am
• Canadian GDP for April: 1.30pm
• US personal income/spending for May: 1.30pm
• US Chicago PMI for June: 2.45pm
• Angela Merkel speaks at parliamentary vote on fiscal pact: 4pm
• Francois Hollande speaks: 5pm

In the debt markets, the UK is selling £3.5bn of one, three and six-month treasury bills.

7.45am: Good morning and welcome back to our rolling coverage of the eurozone debt crisis. After Italy’s shock win over Germany in the football last night, has it also won some concessions with the summit agreement reached this morning after 13 hours of talks?

Italian prime minister Mario Monti is certainly hailing it as a triumph and couldn’t resist slipping in a dig about the football when he spoke to journalists this morning, saying: “It is a double satisfaction for Italy.”

Here’s a quick take on the agreement. The basic points are:

• EU leaders have agreed to use the eurozone’s bailout fund to support struggling banks directly. This will initially be used for Spain’s banking bailout but could also be used for Ireland.
A eurozone-wide supervisory body for banks will be created.
• ESM loans to Spanish banks will not have seniority and so will not push other bondholders down the pecking order.
• Countries that want the bailout fund to buy their debt (therefore lowering their borrowing costs) will not be subject to Greek-style monitoring programmes. (That’s the second win Monti was referring to).

More from the FT here (behind the paywall). And there’s a good story on the BBC.

The leaders also agreed to the jobs and growth pact, including €120bn for growth measures, which my colleague Ian Traynor describes as:

More of a symbolic exercise in shifting the emphasis from austerity, involving little new money.

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In the broadcast today: Will the EU Summit Let Down EUR Hopes? With the two-day EU Summit already underway, we examine the latest headlines from the meeting of EU leaders and look for clues to the next big moves for the euro and other currency majors, we analyze the bearish breakout in the EUR/USD currency pair, we note the weakness in the GBP/USD and the USD/JPY currency pairs, we highlight the market’s reaction to the Italian debt auction, the U.K. GDP,  and the U.S. Jobless Claims and GDP, we discuss new forecasts from Deutsche Bank and Royal Bank of Scotland, and prepare for the trading session ahead.

Live Broadcast from 9:00 am to 10:00 am, Eastern Time, Monday – Friday.

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Monti warns of disaster if leaders don’t tackle rising debt costs, German official warns against “exaggerated panic mongering”, Italian borrowing costs hit six-month high, Spanish yields back above 7%, markets turn negative as summit gets underway…

Powered by Guardian.co.ukThis article titled “Eurozone crisis live: Italy debt warning ahead of summit” was written by Julia Kollewe and Nick Fletcher, for guardian.co.uk on Thursday 28th June 2012 14.11 UTC

3.11pm: Another voice has been added to those warning of the break-up of the euro, and it belongs to the president of the Spanish banking association.

As the EU summit meets to decide – among other things – what measures it can agree to help struggling Spain and Italy, Miguel Martin said a break up “is not only possible but also even probable.” Stephen Burgen in Barcelona writes:

Speaking at a conference in Santander, he said: “There are those who want a division of Europe between the good and the bad at a time when unity is not only desirable but essential and those with a surplus are just as guilty of errors in how Europe is organized as those with a deficit. Some want the ugly ones to leave, but we uglies want to stay in Europe.”

He said that Spain would not be given a cent because “none of the money we get will be free because they don’t give gifts,” adding that Spaniards should be grateful if the money was loaned with advantageous conditions. “We have to use it well,” he said, insisting that the government clarify its objectives otherwise it was impossible to know if they were attainable or not.

Martin said the financial system is worse than it was a year ago because “we still have unviable entities that prejudice the rest, the sovereign debt rating and the solvency of the state.” However, he said Spain’s real problem wasn’t its banks but the fact that it had ceased to be able to compete with Germany.

“In future we will have to do better than them, as I imagine we will in the final of the Euro 2012,” he said.

So no matter how apocalyptic you get about the current financial crisis, it seems you have to end with a football reference…

3.02pm: With David Cameron arriving in Brussels for the EU summit, the UK prime minister has said he was determined to safeguard Britain’s place in Europe.

But while he said eurozone members were right to press ahead with closer fiscal integration, Britain’s priorities were different:

Of course we are saying to the eurozone countries they do need to do more things together to strengthen the currency and make sense of their currency, but Britain is going to stay out of that.

We want Europe to work for us, as a single market, as a place where we trade, as a place where we co-operate, and I’m going in there so that we get the safeguards to make sure that can keep happening.

Meanwhile the UK’s Triple A rating looks in danger, according to M&G Investment’s bond experts in their latest blog. But in good news for Cameron and chancellor George Osborne, they say it may not matter much for UK bonds:

2.50pm: With European markets under pressure as the much anticipated EU summit gets under way, it’s no surprise that Wall Street has followed suit.

The Dow Jones Industrial Average is down around 100 points in early trading, despite the latest economic data coming in pretty much as expected. US first quarter GDP growth was confirmed at 1.9% quarter on quarter, in line with initial estimates. Annalisa Piazza Newedge Strategy said:

Looking ahead, we expect GDP to run at around 1.5% in the second quarter as the economy seems to have lost some momentum due to uncertainties surrounding markets and the debt crisis in the euro area.

Initial jobless claims fell by 6,000 to 386,000 last week, with the previous week revised upwards by 5,000 to 392,000. The forecast was for 385,000, so a little higher than anticipated.

But its the eurozone fears which are unsettling US investors, as official posturing continued ahead of the meeting.

2.29pm: Time for me to hand over to my colleague Nick Fletcher. Thanks for all your great comments.

1.49pm: A Greek banker fell to his death from the Acropolis this morning, the latest in a growing number of suicides in the debt-crippled country that has spiralled into a deep recession.

The man was in his 40s and worked at Greece’s troubled state-owned agricultural lender, ATEbank. Police said he took a break shortly after arriving for work in the morning but never returned.

A police official told Reuters:

Guards and tourists saw him at the spot before the jump. Others heard a loud scream and saw him lying on the ground. It could be suicide, but there’s no note.

1.15pm: Looks like we got it right [see post 12.26pm]. Germany’s finance ministry has denied a report in the Wall Street Journal that suggested it had softened its opposition to euro bonds.

A spokesman for the ministry, Martin Kotthaus, said:

This is not true. We’ve always said that we can talk about shared debt management only at the end of a process toward a genuine fiscal union.

The Journal article was headlined ‘Berlin Blinks on Shared Debt’. In fact, Schäuble said Germany could agree to some form of debt mutualisation once Berlin is convinced the path toward establishing central European controls over national budgets is “irreversible.” “There will be no jointly guaranteed bonds without a common fiscal policy,” he told the Journal. This has been the German position all along.

1.11pm: Meanwhile, the French president François Hollande said Paris and Berlin were in broad agreement on measures to stimulate growth, but admitted that they still needed to hammer out a deal on short-term steps to stabilise the eurozone, by helping Spain and Italy whose borrowing costs have soared to unsustainable levels.

He told France 2 television before getting on the train to Brussesls for the two-day EU leaders summit:

There are points in common on growth luckily, Merkel has moved in the direction I wanted. There is also an agreement on the financial transaction tax, but we still need one on stability. There are ongoing discussions; it’s normal. We need to act in support of the countries which need it: Spain and Italy.

12.26pm: There is some excitement about comments from the German finance minister Wolfgang Schäuble, who indicated that Germany is willing to negotiate on euro bonds. But at the same time, he is insisting on a European budget czar – which is something Germany has been pushing for all along. Fiscal union needs to precede jointly guaranteed eurozone debt, Merkel’s government has always argued – so it doesn’t look like Germany’s position has shifted.

12.00pm: The Irish finance minister just said that one of the main issues at the Brussels summit will be how to get Italian government bond yields to 4% or below – which seems rather specific. They are currently at 6.2%.

11.45am: Greek police have raided a warehouse churning out fake euro coins. Maybe they’d be better off making drachmas anyway.

Police in Thessaloniki said on Thursday that they had raided a workshop counterfeiting euro coins in the southeastern outskirts of the northern port.

The workshop, which appears to have been chiefly producing fake two-euro coins, is the first of its kind discovered in Greece to date.

Officers arrested two brothers who are believed to have been running the counterfeiting operation as well as a 59-year-old suspected accomplice who is said to have both Greek and Bulgarian citizenship.

Full story on eKathimerini

11.39am: There are renewed rumours that Monti is about to resign as Italy’s PM.

But these rumours have been around for a while.

11.01am: In case you’re still hoping that something substantial might actually happen at today’s summit, it won’t. Barclays said today:

We expect these discussions to draw a roadmap for fiscal, financial and political union but we do not anticipate any major decisions on concrete short-term measures to reduce market stress beyond what has already been agreed.

10.32am: Earlier today, German unemployment dropped by a non-seasonally adjusted 46,200 in June, bringing the number of unemployed people to the lowest since December last year. However, this is the weakest June improvement since 2002. In seasonally-adjusted terms, unemployment increased slightly, leaving the jobless rate at 6.8%.

ING economist Carsten Brzeski said:

Over the last two years, the strong performance of the German labour market has had some positive impact on the often-mentioned rebalancing of the eurozone. According to Eurostat data, German labour costs have increased slightly faster than in the entire Eurozone, outpacing countries like Spain, Portugal or Italy but staying behind France. As differences, however, have remained rather small, this development should rather be called correction than rebalancing. Much more would be needed. Obviously, an end of the German job miracle and weaker external demand for German products would make recent wage increases one-offs and consequently Eurozone rebalancing even more difficult.

At first glance, today’s numbers illustrate the strength of domestic demand, at least partly cushioning the German economy against the negative impact from the debt crisis. At second glance, however, signs are increasing that the resilience of the German labour market is slowly cracking up. The German labour market is losing momentum. This might not be a cause for concern for the German economy, yet, but definitely for the rest of the eurozone.

10.20am: Italy’s borrowing costs have jumped to the highest levels since December at a €5.4bn auction of 5- and 10-year government bonds. Its Treasury got the bond sales away, but the 10-year yield leapt to 6.19% from 6.03% at the previous auction at the end of May. The 5-year yield rose to 5.84% from 5.66%.

10.02am: The debt crisis continued to sap business confidence in the eurozone this month. The European commission’s economic sentiment index slipped by 0.6 percentage points to 89.9, leaving sentiment at its lowest level since October 2009.

Martin van Vliet at ING says:

June’s decline in eurozone economic sentiment adds to growing evidence that the eurozone economy contracted pretty sharply in the second quarter.

On past form, the index is now consistent with quarterly falls in eurozone GDP of around 0.3%. The weakness in overall sentiment was driven by a sharp drop in both industrial and services confidence (which have the largest weights). Consumer confidence saw a smaller decline, and retail and construction confidence actually registered an improvement.

9.55am: Our man in Brussels, Ian Traynor, says the real story will be the eurozone lunch summit tomorrow after the main summit ends, when we get the Monti-Merkel clash over short-term market relief action. Monti wants some kind of automatic trigger on secondary market bond purchases when spreads go too wide, provided said country is not behaving badly. Doubt he’ll get it, but…

Ian adds from Brussels:

Berlin stuck to a hard line on the euro this morning hours before chancellor Angela Merkel arrives in Brussels to fend off pleas for help from much of Europe. “All eyes are on Germany,” she said yesterday.

Briefing from Berlin, senior government officials dismissed concerns about the rising costs of borrowing for Spain and Italy as “exaggerated panic-mongering.” They criticised a 10-year eurozone federation blueprint being discussed this evening as imbalanced, too much emphasis on pooling liability in the eurozone and not enough attention paid to fiscal discipline and democratic legitimacy.

There was scant sign of any concessions to Mario Monti, the Italian prime minister who is pleading for help in the bond markets to cut the cost of borrowing.

The eurozone could only use the instruments already established, the bailout funds – European Stability Mechanism and European Financial Stability Facility – according to the rules and with the usual very tight strings attached – conditionality. You can’t change the rules for each possible bailout every time something new happens, the Germans stressed.

There was little sign of any breakthrough last night in Paris where Merkel had dinner with President Francois Hollande. One thing that was certainly discussed was when Hollande would get Merkel’s fiscal pact ratified (the Germans do it tomorrow). Asked about this, a senior German said you will have to ask the French. Playing with a ratification delay may give Hollande a little leverage as Merkel is keen to get the pact up and running. Otherwise Hollande’s armoury looks rather bare in the contest with Berlin.

All the signs are that the Germans are absolutely in no mood for turning, but Brussels is awash with rumour that Merkel might turn a blind eye to a move by Mario Draghi (Italian) at the European Central Bank to intervene on the secondary markets to buy up Italian bonds. If this is to happen, it will be at lunch tomorrow following the end of the EU summit when Draghi joins eurozone leaders for a separate session. Tomorrow’s lunch looks like being the crunch bit of the two-day summit.

9.53am: Belatedly, here is today’s agenda. All times are BST.

• Eurozone business confidence for June at 10am
• Italian debt auctions between 10am and 10.30am
• US GDP figures for the first quarter at 1.30pm
• EU leaders summit in Brussels begins at 2pm

9.50am: Italy’s employers lobby group Confindustria has slashed its growth forecasts for this year and next, and once again warned that the economy – the eurozone’s third largest – had fallen into an “abyss”.

The group now estimates the Italian economy will shrink by 2.4% this year, rather than the 1.6% decline forecast in December. Next year, it is set to contract by 0.3%, compared with a previous prediction of 0.6% growth.

Luca Paolazzi, head of Confindustria’s research unit, said:

It seems to me we’re in the abyss. We’re not in a war, but the economic damage caused so far is equivalent to a conflict and the most vital and valuable parts of the Italian system have been hit: manufacturing industry and the young generations.

9.36am: The detail of the UK GDP figures reveals how much pressure most people are under: they are dipping into their savings to pay for food and utility bills. The household saving ratio has tumbled to the lowest level in a year, at 6.4%. Take-home pay, adjusted for inflation, is down by 0.9%.

Some economists say the UK is probably still in recession.

9.30am: Britain’s economy shrank by 0.3% between January and March, leaving the nation in its second recession in four years, the Office for National Statistics has just confirmed. But the contraction in the fourth quarter was worse than previously estimated, at 0.4% rather than 0.3%. This means the double dip recession is deeper than people thought.

9.26am: Spanish 10-year government bond yields are back above 7%. And the Italian equivalent is also up, at 6.28%. Italy will be holding bond auctions again today, with the €3bn 10-year auction expected to receive special scrutiny.

9.04am: Stock markets have turned negative: the FTSE is down 40 points at 5483, a 0.7% drop. Germany’s Dax has lost 20 points, or 0.3%, to 6208, while France’s CAC has shed more than 14 points, or 0.5%, to 3048. Spain’s Ibex is off nearly 50 points, or 0.7%, at 6617 and Italy’s FTSE MiB has tumbled 145 points to 13158, a 1% fall.

8.38am: In a jab at the Italian and Spanish leaders who have warned their countries’ rising borrowing costs are unsustainable, the German government source warns against “exaggerated panic mongering” over the surge in interest rates on Spanish and Italian government debt.

8.28am: More from the German government source, who expresses scepticism that a new instrument can be developed to tackle Italy’s problems. The source reiterates that it’s up to the governments themselves to decide whether, when and how to use the available instruments.

Seeking to dampen pre-summit expectations, the source also says that “the question of progress towards a fiscal union cannot be resolved in one day”. He reiterates Germany’s opposition to using bailout funds to recapitalise banks while supervisory controls remain at the national level.

8.19am: A German government source is briefing journalists. Reuters reports him as saying that with the EFSF and ESM bailout funds, the EU already has all the necessary instruments at its disposal to deal with the crisis. The source also highlights the need to come up with precise, quick, appropriate help and a reform programme for Spain.

8.13am: Stock markets are more or less flat now. The consensus view seems to be that because expectations for the EU summit are so low, we could easily get a positive surprise if anything gets done.

Markus Huber at ETX Capital says:

European equities are trading slightly higher this morning receiving a modest boost from growing expectations that the ECB might be lowering interest rates next week in light of an ongoing worsening economic situation across Europe especially with also Germany, Europe’s biggest economy starting to show pronounced weakness in economic activity as some of their main trading partners outside Europe, like China and USA are struggling themselves with the fallout of the European financial crisis.

Besides the approval of some growth measures already indirectly agreed on last week during a meeting in Rome between Merkel, Hollande, Monti and Rajoy it seems to be the case that barely anybody is expecting the EU summit to yield any substantial progress in regard to issuing Eurobonds and bringing down periphery interest rates to more sustainable levels. Therefore with expectations are already very low and a disappointing outcome likely similar to how it has been most times during countless meetings during the past couple of years, some speculate that there is plenty of room for a positive surprise.

8.11am: Over here in the UK, the row over Barclays’ bid to manipulate interest rates is gathering pace. The bank’s boss, Bob Diamond, finds himself under mounting pressure to resign in the wake of the Libor scandal. The bank was fined £290m for its “serious, widespread” role in trying to manipulate the price of key interest rates that affect the cost of borrowing for millions of customers around the world. More here.

8.03am: European shares are tentatively edging higher, as expected, but it ain’t much of a rally. The FTSE in London is about 7 points ahead at 5531, a 0.1% gain. Germany’s Dax and France’s CAC are also up 0.1% while Spain’s Ibex is flat and Italy’s FTSE MiB has added 0.3% in the first few minutes of trading.

7.52am: On the corporate front, National Express’s Spanish bus division is doing well despite the eurozone crisis. The company also said this morning that it’s getting back money owed by Spanish municipal authorities. Transport revenues at the Spanish bus business, Alsa, climbed 5% in the last six months on a year ago, with intercity coach revenues up 3% while urban bus revenues were 6% ahead.

National Express said:

Alsa’s performance has continued to be resilient… we continue to manage outstanding receivable balances from Spanish state bodies effectively, whilst also benefiting from the central government scheme to clear the backlog of municipal debts. By the end of May, state receivables had reduced by €12m since the end of 2011 to less than €45m.

7.48am: Stock markets are expected to open slightly higher. GFT Markets sees the FTSE up 12 points to 5535; the DAX up 2pts to 6230 and the CAC up 10pts to 3073 on yesterday’s close.

Andrew Taylor at GFT says:

The European session should kick off the day on a positive note albeit with many participants willing to remain on the sidelines waiting for a clear outcome to this much anticipated risk event. There will be a raft of high end data being released from Europe and US today which will add to its edginess, and with the current low liquidity levels, moves will be swift and exaggerated.

7.40am: Here’s a link to the EU summit agenda (click on Provisional agenda on the European Council page). Gary Jenkins of Swordfish Research says:

So we come to yet another summit where the whole world waits on anxiously to see if Europe can make any progress to resolve its crisis. We face the mother of all binary outcomes. The good news is that this time around expectations are very low; the bad news is that the main players seem to be diametrically opposed when it comes to a strategy for ending the crisis.

In a statement to Germany’s lower house of parliament Ms Merkel repeated many of the comments that she made earlier in the week regarding the fact that Eurobonds etc. are unconstitutional in Germany and are also economically wrong and counterproductive. She added that “There can only be joint liability when adequate oversight is ensured…our work must convince those who have lost confidence in the eurozone, not by self-deception and sham solutions but by fighting the causes of the crisis.”

Comments from other senior German officials repeated this mantra and it is clear that if the rest of the Eurozone does want mutualisation of debt then they must pay for it via a loss of sovereignty. Germany wants a fiscal union to be organised properly with controls and checks in place before they accept responsibility for everyone else’s debts. Of course the obvious problem with this approach is that there may not be time to organise a fiscal union and perhaps more pertinently they do not have a mandate to do so.

The uncertainty that would be caused by referendums across Europe would probably lead to a withdrawal of funding from the likes of Spain at the first sight of any opinion poll suggesting that a country was going to veto the plan. Thus just to give themselves the opportunity to put such a scheme to the test they would have to be some form of further financial co-operation in the interim period. One problem is that politicians are only prepared to accede sovereignty when all other options have been exhausted, and then it’s too late.

7.14am: Good morning and welcome back to our rolling coverage of the eurozone debt crisis and world economy. In Brussels, the long-awaited two-day summit of European leaders begins at 2pm BST today. It will be preceded by a German chancellery background briefing at 8am, and pre-summit meetings by the EU socialist, conservative and liberal leaders, according to news service RAN Squawk.

Italy’s prime minister, Mario Monti, has warned of potential disaster if Europe’s leaders don’t club together and find a way to keep interest rates on Italy’s debt down.

If Italians lose hope, this could unleash “political forces which say ‘let European integration, let the euro, let this or that large country go to hell’, which would be a disaster for the whole of the European Union,” Monti said.

In another stark warning, his Spanish counterpart, Mariano Rajoy, reiterated yesterday that the EU must use all available instruments as “we can’t fund ourselves at the prices we are paying for very long”.

Italian borrowing costs surged yesterday after German chancellor Angela Merkel once again ruled out jointly guaranteed eurozone debt. The yield on the 10-year government bond rose to 6.226% this morning, while the Spanish equivalent is once again approaching 7%, climbing to 6.961% this morning.

guardian.co.uk © Guardian News & Media Limited 2010

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In the broadcast today: All Eyes on the EUR ahead of the EU Summit. As traders anxiously await tomorrow’s beginning of the two-day EU Summit, we continue to focus on the EUR and prepare for the possible scenarios that could trigger the next big moves for the single currency based on the outcome of the meeting of EU leaders, we analyze the range-bound price fluctuations of the EUR/USD exchange rate, we keep an eye on the USD/JPY currency pair as it lingers near an important support level, we monitor the higher-yielding commodity currencies: AUD, NZD and CAD, we highlight the market’s reaction to the pre-summit meeting of the French President and the German Chancellor, the New Zealand Trade Balance, the German CPI, and the U.S. Durable Goods Orders, we discuss new forecasts from Bank of New York-Mellon and Barclays, and prepare for the trading session ahead.

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The German Chancellor Merkel maps out position ahead of summit, statement to be issued later today, Germany to ask EU for financial transaction tax, Italy’s borrowing costs rise at €9bn auction, and anti-austerity protests sweep across Europe…

Powered by Guardian.co.ukThis article titled “Eurozone crisis live: Merkel reiterates opposition to euro bonds” was written by Julia Kollewe, for guardian.co.uk on Wednesday 27th June 2012 10.58 UTC

1.16pm: Merkel and Hollande are making a statement at 7.15pm tonight so we might get some idea of how their pre-summit summit is panning out.

12.45pm: Germany is going to ask the EU commission to introduce a financial transaction tax.

Such a levy has long been championed by Merkel who will be supported by Hollande. But it’s strongly opposed by the British government who think that it will harm the competitiveness of the City. The argument is that you can’t introduce a tax on transcation in Europe because the business would just go to the US or Asia.

12.28pm: Merkel also praised Spain and Italy for making important reforms and as she was speaking Italian prime minister Mario Monti won a confidence vote on labour reform.

The law aims to make it easier to sack workers, broaden unemployment benefits from 2017 and crackdown on employers who avoided taking on full-time workers.

Monti hopes the approval of the measure will strengthen his bargaining position at the EU summit starting tomorrow in Brussels.

12.18pm: Merkel reminded everyone that eurobonds are in any case constitutionally impossible in Germany and was also very clear on the linkage Germany expects if there is to be any movement on this in future.

“Supervision and liability must go hand in hand,” she said, and could only be considered if and when “sufficient supervision is ensured”. That means, of course, countries ceding control of fiscal policy to Germany/Brussels/ECB.

12.08pm: Merkel says there are no “quick and easy solutions” to the euro crisis and that leaders should beware of making rash promises they could not keep.

Addressing members of the lower house of parliament, the Bundestag, Merkel repeated her opposition to eurobonds and said that Germany, Europe’s biggest economy, had finite resources. She said:

It is imperative that we don’t promise things that we cannot deliver and that we implement what we have agreed. Joint liability can only happen when sufficient controls are in place.

11.57am: Merkel says that if Germany is overburdened, it would have unforeseeabale consequences for Europe.

11.52am: The German chancellor reiterates her position that euro bonds are economically wrong and counterproductive.

11.46am: Merkel is pleased that at least nine EU countries are ready to go ahead with the financial transactions tax. She has also called for new incentives to tackle youth unemployment in Europe.

11.42am: Chris Williamson, chief economist at Markit, has crunched the CBI retail sales data and the UK mortgage lending figures.

The survey suggests that official retail sales data will show a further rise following the solid gain seen in May. The message from the official and survey data combined is that retail sales may have risen by at least 1% in the second quarter, which should have provided a welcome boost to the flagging economy and may even help the country lift out of its double-dip recession.

While the May rise was attributable to a rebound in clothing and footwear sales from April, when bad weather had hit sales of seasonal items, the CBI linked the June increase to higher spending around the Queen’s Diamond Jubilee celebrations. The suggestion is, therefore, that the recent improvements in sales are due to temporary factors and that sales will weaken again in the third quarter. However, retailers reporting to the CBI survey grew increasingly optimistic in June, with the net balance relating to expected sales in the coming month rising to the highest since January 2011, up from +25% in June to +32% in July. It is possible, therefore, that we are seeing some upturn in consumer spending due to higher employment and lower inflation, which has reduced the squeeze on incomes that dampened spending so severely last year.

It has not been all good news today, though, with new data showing net mortgage lending dropping in May for the first time since records began in 1987. Lending fell by £73 million as people paid off mortgages.Mortgage lending has failed to show any real signs of gaining momentum over the five years since the financial crisis struck, highlighting an important missing element from the UK’s economic recovery.

11.34am: Speaking to the Bundestag, Angela Merkel reiterates that there are no quick or easy fixes for the eurozone crisis. Structural reforms must be at the centre of growth initiatives for Europe.

She praised Italy’s Mario Monti and Spain’s Mariano Rajoy for taking important reform steps.

11.17am: Just to remind people, late yesterday a small US ratings agency downgraded Germany due to its exposure to the European debt crisis. However, the three major assessors of creditworthiness – Moody’s, Standard & Poor’s and Fitch – maintain their faith in the country, rating it at AAA.

New York-based Egan-Jones cut its rating from A+ to AA-, arguing that Germany’s direct and indirect exposure to the financial problems in other parts of the eurozone would affect the country’s finances.

Our major fear is Germany will be expected to provide indirect financial support to weaker EU banks over the next couple of years to ameliorate asset quality problems and replace fleeing deposits.

Merkel continues to create tension with EU member states by resisting calls for EU bonds.

11.06am: Retail sales in Britain were really strong this month, according to the Confederation of British Industry’s latest monthly snapshot. Retail sales rose at the fastest pace in 1 1/2 years as Britons splashed out for the Queen’s Diamond Jubilee celebrations. The CBI’s sales balance doubled to 42 from 21 in May, the highest since December 2010.

Grocers enjoyed their strongest sales growth since February 2010, while shoe and leather retailers reported the strongest growth on record.

Judith McKenna, chair of the CBI’s survey panel, said:

The Jubilee provided a much needed boost to our high streets with many families and communities making the most of the bank holiday.

Howeer it is notable that sales were still considered below par for the time of year. Weak consumer confidence and uncertainty over the economic outlook are still putting a break on consumer spending across the whole retail sector.

10.23am: Back to the Italian €9bn bill auction, where the country’s six-month borrowing costs climbed to nearly 3%, the highest since December. Another test will come tomorrow when Italy sells five- and ten-year bonds for up to €5.5bn. Nicholas Spiro, of Spiro Sovereign Strategy, has provided this quick take:

1. It’s always a bad sign when the short end of the curve is being hammered. This is pure risk aversion. While demand from local banks continues to prop up Italy’s debt market, the concessions are becoming heftier and heftier with each passing week. While yields are not as high as they were in November, psychologically speaking things are almost just as dire.

2. The deterioration in sentiment towards Italy is externally driven. While Italy has serious domestic problems, what concerns the markets is Germany’s reluctance to do what is necessary in the short-term to shore up Spanish and Italian debt. This is not about the absence of a fiscal and banking union. Those are long-term solutions. Rather, this is about the lack of credible interim measures to bring down Spanish and Italian spreads.

3. The main worry in Italy right now is the position of Mr Monti. His premiership is being undermined by both the actions of Germany and the political gamesmanship of former premier Silvio Berlusconi. The ramifications of the fall of Mr Monti’s government don’t bear thinking about, frankly.

10.22am: Protests galore across the eurozone: Greek restaurant workers have called a 24-hour strike for today to protest against wage cuts and other austerity measures imposed by the government. The strike comes in one of the key months for tourism, the country’s biggest industry.

“Employers are blatantly using the avalanche of measures, which are crushing the human and social rights of workers, to violently demand submission to their demands,” the Panhellenic Federation of Catering and Tourist Industry Employees said on its website.

10.06am: At an Italian auction of six-month Treasury bills the yield has risen to 2.957%, from 2.104% at the last such bond sale at the end of May. It is the highest interest rate since December.

9.53am: Nicosia ‘the dog in charge of the sausages’?

Cyprus taking over the rotating EU presidency on Sunday after it sought an emergency bailout has been likened to putting a dog in charge of the sausages.

Kurt Lauk, president of the economic advisory board linked to Merkel’s center-right Christian Democrats, said:

This is the paradox of the European Union, that the dog should be put in charge of the supply of sausages!

Cyprus, which is due to take over the six-month presidency from Denmark, has a banking sector heavily exposed to debt-crippled Greece and said on Monday it was formally applying for help from the EU’s rescue funds.

Lauk called for all countries which have received bailouts – which also include Spain, Portugal, Ireland and Greece – to be barred from holding the EU presidency, which helps to set the agenda of the 27-nation bloc.

9.46am: Back to Spain, where the recession is deepening. The Bank of Spain warned in its monthly bulletin that the eurozone’s fourth-largest economy would contract at a faster rate between April and June than in the first three months of this year, when it shrunk by 0.3%. Spain has slid back into recession for the first time in three years.

9.44am: Another one bites the dust. The head of Greece’s privatisation fund, Yiannis Koukiadis, has resigned, citing personal reasons, according to Greek daily Kathimerini.

It was revealed on Wednesday that Koukiadis tendered his resignation to caretaker Finance Minister Giorgos Zannias. In his letter, Koukiadis said his decision to leave the post, which he has held since July last year, were purely personal.

Greece’s coalition government has backed the privatisation process, although some reservations have been expressed about selling off so-called strategic assets.

TAIPED suspend the implementation of its sell-off program due to the political uncertainty caused by the two recent general elections.

Executive director Costas Mitropoulos told Kathimerini in a recent interview that the decision has harmed the credibility of the fund, which according to the law is independent from the government, while it also renders the target of 3 billion euros in revenues nonfeasible for this year.

Sources suggest that other members of TAIPED are also prepared to step down.

9.38am: The Italian business confidence figures, which were delayed by a staff protest, are out. Morale unexpectedly improved in June, with the index rising to 88.9 from 86.6 in May.

9.34am: Even emerging markets bank Standard Chartered isn’t immune to Europe’s woes. Its finance director Richard Meddings said this morning:

My numbers show we can hit double digit income growth, the issue is in a world like this with the eurozone pressures and exchange rates, there’s more risk to the downside.

The bank is still expecting to hit its target of growing income by 10% or more this year. In its first half, profit growth slowed to less than 10% as Standard Chartered earnes less from wealth management and Asian currencies weakened against the dollar.

8.55am: Meanwhile in Greece, Microsoft’s head office in Athens has been seriously damaged after armed arsonists drove a stolen truck through the entrance overnight and set fire to it. The office, where more than 100 people work, will be shut today. The fire brigade estimated the damage at about €60,000.

“It was very lucky that no personnel were in the building at the time,” said a police source. “We’ve had drive-by attacks but nothing like this. In style it is unprecedented.”

Arson attacks against banks, foreign firms and local politicians have become more frequent in Greece in recent years amid public anger against the government’s harsh austerity policies. Police said it was too early to say who was behind the latest attack. In February, a small bomb was left on an empty subway train in Athens which a far-left group fighting the austerity measures claimed responsibility for.

8.51am: Here’s an amusing tale from Italy. A protest by Italy’s number crunchers has delayed the release of Italian business morale data.

Some 42 statisticians, researchers and computer technicians from ISTAT, Italy’s national statistics office, have occupied the room where the data are normally handed out and are holding a labour union assembly. They won an internal promotion two years ago that has not yet been recognised.

The protest means the business confidence figures for June will be published half an hour later than scheduled, at 9.30am BST. They are expected to show a worsening in morale.

Francesca Taratamella, who works in the national accounting department, said staff were protesting against the stats office’s failure to award promotions to those who were entitled to them. She said she and her colleagues had been given extra work and responsibilities without any promotion or increase in wages.

“More in general, we are here to lament the freeze on new hires, on salary increases and on promotions…in the public sector,” she told Market News International.

8.47am: It’s ‘Waiting for nothing,’ says Paul Donovan, managing director of global economics at UBS.

Markets are waiting for nothing to happen, with the euro heads of government summit looming on the horizon. Expectations have been lowered so much that it is just possible that markets react positively to any decision. Alternatively, markets look at the broken structure of the Euro and ask “is that it?”.

Weidmann of the Bundesbank keeps going on about how he does not want a debt union. We get the message. The point is that a fiscal union (as a long term end game) is all about shared tax revenues and shared spending. Eurobonds are a side issue.

There are reports of a eurogroup finance ministers’ meeting to discuss Spain’s request for money and Cyprus’s request for money (Cyprus is refusing to indicate how much money it would like to get from the dwindling number of liquid and solvent Euro economies).

The travails of the euro seem to be infecting even the irrepressible optimism of the US consumer, whose expectations have taken a turn down. The situation feels similar to last year – soft data like consumer confidence weakens, hard data like housing stats hold up.

8.39am: Here is today’s agenda:

• Italy to auction €9bn of Tresury bills
• Angela Merkel is due to speak to the Bundestag, Germany’s lower house of parliament, about the EU summit at 11.30am BST, according to news service RAN Squawk. This is ahead of her meeting with the French president in Paris.
• Eurogroup conference call at midday to discuss Cyprus bailout and Spanish request for banking aid
• German inflation numbers for June at 1pm BST

8.33am: Spain’s prime minister Mariano Rajoy said this morning he would ask other EU leaders at the upcoming summit in Brussels to use existing EU instruments to stabilise financial markets.

Speaking in parliament, Rajoy said access to financial markets was Spain’s top priority, and warned the country would not be able to to continue financing itself at the current high bond yields for a long time.

I will propose measures to stabilise financial markets, using the instruments at our disposal right now.

The most urgent issue is the one of financing. We can’t keep funding ourselves for a long time at the prices we’re currently funding ourselves.

8.10am: European stock markets have opened higher:

• The FTSE 100 index in London is up 25 points at 5472, a 0.5% gain, lifted by banking stocks Barclays, Lloyds Banking Group and Royal Bank of Scotland
• Germany’s Dax and France’s CAC have both risen 0.4%
• Spain’s Ibex has climbed 0.8%
• Italy’s FTSE MiB is up 0.7%

Spanish and Italian ten-year government bond yields are flat at 6.885% and 6.19% respectively.

7.53am: Ian Traynor, our Europe editor, reports ahead of today’s Merkel-Hollande meeting in Paris:

Chancellor Angela Merkel goes to Paris on Wednesday to try to strike a Franco-German deal with President François Hollande amid deep-seated differences at what has been described as Europe’s defining moment.

With the two key EU countries split for the first time in 30 months of single currency and sovereign debt crisis, José Manuel Barroso, head of the European Commission laid bare the high stakes in play at an EU summit in Brussels on Thursday as well as the high frictions between Germany and France.

Merkel’s first visit to the Élysée Palace under its new occupant has been hastily arranged and comes on the eve of what is being billed as a crucial Brussels summit which, apart from the immediate financial dilemmas, is to wrestle with a radical blueprint aimed at turning the 17 countries of the eurozone into a fully-fledged political federation within a decade.

“We must articulate the vision of where Europe must go, and a concrete path for how to get there,” warned Barroso. But he was unsure “whether the urgency of this is fully understood in all the capitals of the EU”.

Since his election last month, France’s socialist leader has quickly emerged as the most formidable challenger to German formulas for Europe’s salvation after two years of Berlin largely dictating the EU response to the crisis.

Merkel is feeling bruised, having just withstood two unusual attempts by fellow leaders to ambush her and get Berlin to hand over its credit cards to write off what they see as other countries’ profligacy.

In Mexico last week at the G20 and then in Rome at two bad-tempered summits in recent days, the Americans and the British – in cahoots with the leaders of France, Spain and Italy – sought to press Merkel into bankrolling fiscal stimulus and bank recapitalisation policies that would cut the vulnerable eurozone countries’ cost of borrowing.

The pressure on Merkel may have backfired and reinforced German resistance to the ideas. The view in Berlin is that Hollande will have to back down amid the relative weakness of the French economy.

7.51am: EU president Herman Van Rompuy published the leaked report for a path towards deeper economic and monetary union yesterday. Elisabeth Afseth, fixed income analyst at Investec, says:

The timeframe for achieving this is a decade, which is ambitious given the lack of agreement after well over two years of dealing with the crisis. Van Rompuy (in collaboration with ECB President Mario Draghi, EU Commission President Jose Barroso and the leader of the Eurogroup, Jean-Claude Juncker), sets out broad plans for further integration of fiscal policy as well as banking regulation, maintaining national decision making, but with the overriding control moving to the EU level.

It proposes upper limits on national budgets (in line with the fiscal compact) and moving towards joint bond issuance. The plan will be discussed at the European leaders’ summit tomorrow and Friday, I expect there might be some general agreement in the direction of need for further integration, but the plan includes a lot of measures that Germany has rejected firmly in the recent past and it is unlikely it will change its tone much.

7.21am: Good morning and welcome back to our rolling coverage of the eurozone debt crisis and world economy.

Expectations for the EU summit, which starts tomorrow, are getting lower by the day.

Angela Merkel’s comments today when she speaks to the German parliament will be closely scrutinised, after she reportedly ruled out the idea of jointly guaranteed eurozone debt for “as long as I live” at a closed meeting with her coalition partners yesterday. Later today the chancellor is due to meet French president François Hollande, her first visit to the Élysée Palace since the Socialist leader was elected.

Gary Jenkins of Swordfish Research said:

If she really did say that then it is difficult to see how this week’s summit can be anything other than a disaster and it may well be that the eurozone is heading into the abyss. Meanwhile it was reported that Mario Monti had threatened to resign unless common euro bonds were introduced, although this was denied by a spokesperson for the PM. Interesting that as far as I am aware Ms Merkel’s comments have not been denied…

Italian and Spanish borrowing costs surged at auctions yesterday, when the Italian government bought €2bn of bonds from its oldest bank, Monte di Paschi, in an attempt to shore up its capital cushion.

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EU leaders draft federal plan to save the eurozone ahead of crucial summit, Moody’s downgrades 28 Spanish banks, and Cyprus becomes fifth eurozone country to need a bailout…

Powered by Guardian.co.ukThis article titled “Eurozone crisis live: Markets cautious as politicians manoeuvre ahead of crucial summit” was written by Rupert Neate and Nick Fletcher, for guardian.co.uk on Tuesday 26th June 2012 16.39 UTC

5.54pm: It’s been another mixed day on the markets, with rumour and counter rumour ahead of the EU summit on Thursday and Friday.

A downgrade of 28 Spanish banks and talk of the country’s sovereign debt getting another cut by Moody’s helped push Spanish yields higher again, although still below the 7% level reached last week. Stock markets came off their worst levels despite some reported resistance to the EU’s draft federal plan to save the euro.

The FTSE 100 closed down 3.69 points at 5446.96, while Germany’s Dax was up 0.07%. France’s Cac slipped 0.3% but Italy’s FTSE MIB fell 1.11% and Spain’s Ibex 1.44% after German chancellor Angela Merkel supposedly said Europe would not have shared total liability for debt as long as she lives.

Eurozone finance ministers are expected to hold a conference call tomorrow to discuss Spain and Cyprus’s requests for financial help, and there will inevitably be a lot more posturing ahead of the summit.

So with that to look forward too, it’s time to close up for the night. Thanks for all the comments and we’ll be back tomorrow.

5.42pm: News from John Hooper in Rome to calm everyone’s nerves as the summit approaches …

As the Guardian reported a couple of days ago Silvio Berlusconi has been making noises about returning to government. Well, today he was reported to have added some clarification. The 75 year-old TV magnate was said to have told a meeting of his party’s MPs that he didn’t necessarily see himself as the next prime minister.

But he would be happy to serve in a future government as finance minister …

5.39pm: More on the resignation of deputy maritime affairs minister Giorgos Vernikos. Helena Smith in Athens writes:

It’s definitely NOT a good day for Antonis Samaras, who though at this early stage of his Greek premiership could be described as beleageured. After accepting the resignation of Vasillis Rapanos, his first choice for finance minister, the conservative leader has been forced to accept the resignation of Giorgos Vernikos, the deputy maritime minister.

Greece’s state-run news channel ERT is reporting that Vernikos announced the decision to step down following relevations – made initially by the main opposition far left Syriza party – of his ties with an offshore company in the Marshall isles. Under Greek law such ties are prohibited and in the new climate of post crisis Greece it would seem are being upheld.

5.17pm: Aside from the various Merkel and Monti comments ahead of the EU summit – which seem to follow the pattern of being made and then downplayed – there is a more positive tale doing the rounds.

According to Reuters and Bloomberg German sources are suggesting that the rules surrounding the forthcoming ESM bailout fund could be changed, allowing it to direct aid directly to national bank rescue funds. On top of that, the eurozone is apparently considering taking away preferred creditor status from the ESM.

That last point is important. One reason investors have been less than enthusiastic about, say, the Spanish bank bailout is that if the funds come from the ESM, they would rank higher than existing sovereign debt. That has helped push Spanish yields up and the price of its bonds down, since why would anyone invest if existing bonds rank lower in the pecking order.

A change to that seniority could prove a positive point for the markets, the euro and sovereign debt.

5.01pm: The Italian press are reporting that prime minister Mario Monti has threatened to quit unless eurobonds are introduced [report in Italian]. Germany’s Angela Merkel is of course dead set against eurobonds…(see the reported comments on shared liability at 4.13).

Earlier Monti told the Italian parliament that the forthcoming summit would not just rubber stamp pre-prepared documents, but needed to work towards a growth plan and “mechanisms to help control market tensions.”

4.23pm: But now comes the backtracking.

4.13pm: Markets are getting spooked again, and here’s one reason. According to Reuters, German chancellor Angela Merkely has said at a coalition party meeting that Europe will not have shared total liability for debt as long as she lives.

So is this a torpedo aimed at the earlier EU draft talking about turning the eurozone into a fully fledged political union within a decade?

Whether or not this is the case, the Spanish and Italian stock markets don’t like it – they are both down more than 1% now.

4.02pm: But don’t worry. The eurozone finance ministers are apparently due to hold another teleconference tomorrow ahead of the summit on Thursday and Friday. So that’s all right then.

4.01pm: Some nasty rumours about Spain, notably that Moody’s may soon cut the country’s credit rating to junk after last week’s downgrade.

As a reminder, Moody’s said when it cut the rating to Baa3 that the country was on review for another reduction. The agency has just reduced the ratings of 28 Spanish banks, and the cost of insurance against a default among Spain’s biggest banks is currently climbing again. A Bloomberg story quotes one analysts saying there was likely to be another downgrade of Spain’s sovereign debt within weeks.

All this – along with high yields Spain paid in its short dated bond auction today – has had a predictable effect on ten year yields. Michael Hewson at CMC Markets said:

Spain had to pay 2.36% for three month money, well above the previous 0.85% in May. Italy’s borrowing costs also rose at a two year auction today paying 4.71%, above the previous 4.04%.

Whispers in the market that Spain could well be cut to “junk” by Moody’s have seen Spanish yields once again edge back towards the 7% level, pushing above 6.8% again.

3.51pm: Being the world’s oldest bank and the producer of your own Chianti is no protection against the current financial crisis.

Italy’s Banca Monte dei Paschi, founded in 1472, is to receive a €2bn state bailout in the form of special bonds, to help plug a capital gap of between €1.3bn and €1.7bn. The new support brings the total level of state aid for the bank to €3.9bn. Here’s a Reuters piece looking at how such an institution ran into its present difficulties.

3.36pm: Meanwhile here’s a bit more about one Greek minister who must be expected to stay around for at least a little while, given he has only just been appointed.

According to our Athens correspondent Helena Smith, the new finance minister Yiannis Stournaras has strong views on liberalising the closed shop Greek economy. Helena says:

In many ways Stournaras is a replica of Vasillis Rapanos, who was forced to quit the job and may well have recommended the Oxford-educated Stournaras in his stead. A strong believer in reform, Stournaras is of the firm conviction that Greece’s myriad closed shop professions must be opened up immediately, along with the market, if the debt-choked country is to regain its competitiveness.

“He has very strong opinions on the need for reform and opening up the market,” said Pandelis Kapsis, a prominent political commentator and former government spokesman.

“In many ways he has exactly the same profile as Rapanos, both were top economic advisers to [former prime minister Costas Simitis] both headed banks, although in Stournaras’ case it was the commercial Emporiki Bank, were are university professors. In short both are excellent choices for the post.”

And an interesting fact:

3.29pm: The disruption of Greece’s new government continues, if current suggestions are true:

3.27pm: Yet more weak data from the US, on both the manufacturing and confidence front.

The Richmond Fed manufacturing index fell by 3 points in June compared to a 4 point rise in May. On top of that US consumer confidence fell for the fourth month in a row, down to 62 from 64.4 in the previous month. Analysts had expected the index to come in at around 63.5. Rob Carnell at ING Bank said:

US Consumer confidence has come in much weaker than consensus estimates. Together with a more downbeat Richmond Fed index, today’s data adds to the sense that the current run of soft US data is not just a temporary aberration, but something a bit more material. Not good news for risk assets.

Last week investors were betting that signs of weakness could prompt the US Federal Reserve to take aggressive measures to boost the world’s largest economy, up to and including further quantitative easing. In the event, the Fed merely increased its bond buying programme. But it left the way clear for further action if things deteriorated, and today’s data is certainly not showing any signs of improvement.

The news has done little to help the US market, with the Dow Jones industrial average currently down nearly 10 points.

2.39pm: It looks like Herman Van Rompuy, president of the European Council, significantly watered down plans to re-shape the Eurozone. The 7-page draft document released by the EC earlier today is significantly less ambitious than a 10-page version leaked to some media earlier this week.

The FT(£) says:

Herman Van Rompuy, president of the European Council, on Tuesday published a significantly scaled-back version of the highly anticipated plan for the future of the eurozone to be debated at a summit meeting this week.
The seven-page plan, which calls for progress towards commonly issued eurozone bonds and the eventual establishment of central EU treasury, is less ambitious and less detailed than earlier drafts, including a 10-page version circulated as recently as Monday.
That proposed giving EU institutions the power to rewrite national budgets and urged eurozone leaders to use their €500bn rescue fund to recapitalise European banks.
While earlier drafts of the report also contained detailed short-term measures that could be taken to address the current market upheaval, the draft published by Mr Van Rompuy on the website of the European Council contains far fewer details and suggests no timetable for implementation.

And with that, I’ll hand over to my colleague Nick Fletcher.

1.52pm: Finally we know who will be representing Greece at the Eu Summit on Thursday and Friday.

1.25pm: A much better profile by Reuters reveals that Stournaras, who was part of a team that negotiated Greece’s entry to the euro, has been dubbed “Mr Euro” in Greece.

Greece’s new conservative-led government scrambled to make a quick decision on the post after their first choice, banker Vassilis Rapanos, quit on Monday on the advice of doctors after spending four days in hospital suffering dizziness and abdominal pains.

His sudden resignation threw the government into confusion at a time when it faces the daunting task of trying to persuade sceptical international lenders to ease the harsh terms of a bailout that has enraged the population.

“Prime Minister Antonis Samaras has decided to name Athens University economics professor … Yannis Stournaras as finance minister,” Samaras’s office said in a statement. Party officials said the three Greek coalition leaders had quickly agreed on Samaras’s choice of Stournaras, 55, who is nicknamed “Mr Euro” in Greece.

1.09pm: Athens News has done a profile of Yannis Stournaras. It’s not hugely revelatory, but it does remind us that 55-year-old economist has written for the Guardian.

12.51pm: The Greek government has put out a statement on its new finance minister:

Prime Minister Antonis Samaras has decided to name Athens University economics professor and Director of (economic think-tank) IOBE Yannis Stournaras as Finance Minister.

Stournaras replaces Vassilis Rapanos, who resigned yesterday due to ill health less than a week after being appointed to the post.

12.29pm: Bloomberg’s Linda Yueh has tweeted the new Greek finance minister’s name:

Stournaras is an economics professor at Athens University and director of the economic thinktank IOBE.

12.05pm: More from Mervyn King.

In the last six weeks… I am very struck by how much has changed since we produced our May Inflation Report. I am pessimistic [about the eurozone outlook]. I am particularly concerned because over two years now we have seen the situation in the euro area get worse and the problem being pushed down the road.

11.48am: More details from European Commission President José Manuel Barroso’s press conference in Brussels.

11.36am: Some news in from Greece where our correspondent Helena Smith says while the quest for a new finance minister is ongoing, officials are promising that the holder of the post will be named today.

In the wake of the resignation of Vasillis Rapanos, it’s all steam ahead to find a new finance minister and, say, officials “as soon as possible.” Highlighting the urgency of the need for a replacement, prime minister Antonis Samaras, though still recovering from an emergency eye operation himself, met with senior aides at his home until late into the night to discuss the matter.
As head of a three party coalition whose junior partners are from the left, the conservative leader is keen to appoint a non-political figure to the post – the most crucial position in the Greek cabinet. “We will have a new finance minister,” the government spokesman Simos Kedikoglou said this morning adding that he expected his name (no women are being considered) to be announced “within the day.”
On the merry-go-round that is the great Athens rumour mill, the hum is that the new finance minister will be a banker or an economics professor who, like Rapanos, is well-briefed on the parlous state of the debt-choked country’s public finances. One name being considered is the Oxford-trained economist Yiannis Sournaras a choice that is known to be supported by the socialist Pasok party.
The minister is likely to be announced after a meeting that will take place at Samaras’ home at 7:30 PM Greek time between the prime minister and the leaders of his administration’s junior partners.
Rapanos, who has long suffered from frail health and is believed to have told Samaras of his intention to step down shortly after his fainting fit last Friday, may well stay on to give behind the scenes advice. The former head of the National Bank of Greece, who was released from the hospital in the last hour, will go down as the first minister to resign before even formally being sworn in. Although government officials are putting on a brave face, it is clear the high drama has cast a shadow over the new administration in the run up to Thursday’s critical EU summit.
Samaras’ inability to return to active duty has meant that the coalition, which controls 179 seats in the 300-member Greek parliament, will face further delays before it receives a vote of confidence after a parliamentary debate on its policy program as Greece’s constitution dictates.
The unexpected set-backs have meant that a visit by the inspectors from Athens’ troika of creditors at the EU, ECB and IMF has also been put on hold. Without their assessment of the state of Greek finances, EU mandarins have said it will be impossible to decide what the next steps will be in the Greek debt drama – and whether Athens should be given its next injection of cash or not.
Following weeks of political uncertainty in the wake of the country’s inconclusive election in May, reforms are “way off target” EU policymakers say.
After much to do, it has finally been decided that the country’s head of state president Carolos Papoulias will attend the forthcoming summit in place of Samaras who is under strict doctors’ orders to restrict his movement until next Monday at the earliest.

11.16am: The Spanish bank bailout will spark a firesale of the state’s stakes in the nation’s top businesses, according to this nice story from Reuters.

[It will end] a cosy culture of corporate-banking links and prompting a wider shake-up in ownership of the company landscape.
Spain formally requested euro zone rescue loans to recapitalise debt-laden former savings banks on Monday, but those who receive funds will be subject to European Union state-aid rules that include selling equity assets.
With the price of such assets languishing as the euro zone’s financial crisis drags on, that will involve the likely fire sale of big chunks of Spain’s corporate titans, including telecoms leader Telefonica, oil major Repsol and power firm Iberdrola.
UBS estimates 22 billion euros ($28 billion) of Spanish stakes could be up for sale, most of which is in the hands of savings banks. This represents as much as 9 percent of the capitalisation of the country’s blue-chip index.

10.59am: The results of Italy’s bond auction are also in. Two-year paper sold at 4.712% – the highest since December.

10.32am: Mervyn King has started speaking in front of the Treasury Select Committee. Heare are some key quotes. My colleague Phillip Inman will have a full story up shortly.

Monetary policy still does work by injecting more money into the economy

[British banks have] all been pre-positioning large amounts of collateral under the discount window facility and we welcome that.

There is nothing in principle against cutting bank rate further if that turns out to be necessary.

10.21am: Some expert comment on the dire public sector finances from Olann Kerrison, head of product management at the foreign exchange specialists Moneycorp:

Plan A, it would appear, is kaput. The spike in public sector borrowing, to £17.9bn in May, is a body blow to the Chancellor and the coalition government’s handling of the economy.
There is often a dip in tax revenues in May, following the end of the tax year, but this doesn’t hide the fact that borrowing is significantly higher than in May 2011 when it was just £15.2bn.
The simple fact of the matter is that tax revenues are down — and borrowing up — because the economy is weak. Unfortunately, there is every chance the economy will weaken further in the months ahead as the Eurozone unravels.
Domestic demand is weak, and so is demand from overseas, especially from the Eurozone. This is decimating tax revenues and forcing the Government to borrow more.
The Labour spin machine will be all over these numbers, reiterating that austerity doesn’t work.

10.15am: Ian Traynor has written a full story on the European leaders radical plan to reshape the eurozone.

[They] plan to turn the 17 countries of the eurozone into a full-fledged political federation within a decade in an attempt to placate the financial markets by demonstrating a political will to save the single currency in the medium-term.
The incendiary proposals for a banking, fiscal, and economic unions resulting in a “political union” are to be debated at an EU summit on Thursday and Friday. Following two bad-tempered meetings of European leaders in Mexico and Rome over the past week, the Brussels summit looks likely to see major clashes over the future of Europe as well as the immediate crisis surrounding sovereign debt, bad banks, and the euro’s survival.

You can read the whole of the report here.

10.06am: The results of Spain’s bond auction are out. Spain sold €3.0bn of short-term debt – but it came at price: the highest rates since November.
The yield on 3-month bonds was 2.362%, up massively from 0.846% last month. Six months bonds sold on a yield of 3.237% up from 1.737%.

9.53am: The ONS said public sector debt as a percentage of GDP (excluding financial interventions) now stands at 65% – the third highest on record.

9.41am: UK public borrowing figures for May are much higher than expected. The ONS said public sector net borrowing (excluding public sector interventions) came in at £17.9bn compared to £15.2bn last year.

9.11am: More details are coming through about the meeting between finance ministers of Germany, France, Italy and Spain in Paris later today.

“We want to work with Germany,” Moscovici told France Info radio, asked about the pressure on President Francois Hollande and German Chancellor Angela Merkel to reach an agreement on ways to curb the spiralling eurozone crisis.

“Tomorrow there is a meeting, which will be very important, between Francois Hollande and Angela Merkel and this evening I will receive the finance ministers: Mr. Schaeuble from Germany, Mr. Monti or Mr. Grilli of Italy and Mr. de Guindos of Spain along with the European Commissioner,” Moscovici said.

“We are in an active phase of preparation of this summit.”

Hollande wants measures like mutualised debt and joint bank deposit guarantees to be worked on at the same time as moves towards deeper fiscal integration, while Merkel, wants an accord on closer integration before any other steps are taken.

9.10am: We’ve got quite a busy day ahead of us, here’s a selection of the key events (all times are BST):

9:30am: Spanish and Italian bond auctions.
9:30am: Spain’s finance minister is up before parliament to explain the bailout.
9:30am: Public sector net borrowing figures for May are expected to have reached £16-16.5bn, compared with £15bn in May last year.
10:00am: Mervyn King is speaking in front of a Treasury select committee.
• Unspecified time: The finance ministers of Germany, France, Spain and Italy are meeting in advance of the EU summit on Thursday and Friday.

8.30am: The Greek English language paper Kathimerini reckons it knows who’s going to replace Vassilis Rapanos as finance minister.

Let’s hope the new guy lasts longer than Rapanos, who resigned yesterday due to ill health less than a week after being appointed to the post.

The Guardian’s Europe editor, Ian Traynor, has got hold of a copy of the gang of four’s master plan for the future of Europe and the Euro.

Ian says the seven-page document from the four presidents – Herman Van Rompuy of the European Council, Mario Draghi of ECB, Jose Manuel Barroso of the European commission, and Jean-Claude Juncker of 17-country Eurogroup – details a 10-year plan based on 4 “building blocks” – banking union, fiscal union, economic union, political union.

Ian’s writing up a full story now, but in the meantime, he’s posted the key points on Twitter.

8.05am: The BBC’s Gavin Hewitt reckons the finance ministers of the power players – Germany, Spain, Italy and France – are going to get down to business a couple of days early.

8.01am: As all eyes turn towards the Europe Union summit on Thursday and Friday, the FT claims to have seen a draft report which could give the EU sweeping powers to rewrite national budgets for eurozone countries that breach debt and deficit rules.

The proposals are part of an ambitious plan to turn the eurozone into a closer fiscal union, giving Brussels more powers to serve like a finance ministry for all 17 members of the currency union. They are contained in a report to be presented at the summit, which will also outline plans for a banking union and political union.

Read the full FT story here (£)

7.41am: Good morning and welcome back to our coverage of another day of high drama in Europe.

Last night Moody’s hit Spain, again. This time the rating agency downgraded 28 of the country’s banks. Moody’s latest salvo came just hours after the Spanish government finally formally asked for help from its European neighbours in cleaning up its stricken banking sector. It hasn’t said how much dosh it wants, but did stress that stressed that the €62bn top figure provided last week by two independent auditors of Spain’s banking system would cover against a severe downturn in the next three years – suggesting their request may not go much higher than that.

The world is also still reeling from the news that Cyprus has joined the unhappy club to ask for a bailout. To recap, that’s Greece, Ireland, Portugal, Spain and Cyprus – quite the Club Med special. Who’s going to be next, do you reckon?

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In the broadcast today: Will this be the Week to Save the EUR? With the EU Summit, the Italian and Spanish bond auctions, and the German parliamentary vote on the ESM and the fiscal pact on the horizon, we explain why the current trading week is pivotal for the euro and for the future of the European Monetary Union, we analyze the latest trend developments in the EUR/USD currency pair, we take a close look at the renewed weakness in the USD/JPY pair, we note the bearish breakout in the GBP/USD currency pair, we highlight the market’s reaction to the Spanish formal request for a bailout, the call from Cyprus for EU financial aid, the German opposition to Eurobonds, and the U.S. New Home Sales, we discuss new forecasts from Credit Suisse and UBS, and prepare for the trading session ahead.

Live Broadcast from 9:00 am to 10:00 am, Eastern Time, Monday – Friday.

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European shares fall for third day as Spain formally requests a bailout ahead of the EU Summit, Spanish and Italian bond yields rise, and Cyprus gets downgraded to junk by Fitch at the start of a crucial week for the euro and the euro-area…

Powered by Guardian.co.ukThis article titled “Eurozone crisis live: Spain formally requests banking aid” was written by Julia Kollewe and Simon Neville, for guardian.co.uk on Monday 25th June 2012 15.03 UTC

4.02pm: Thanks to those who pointed it out. Yes, Italian 10 year bonds were last above 6% two weeks ago, not January as suggested. Today, they have now fallen back below 6% to 5.98%.

3.51pm: Italian journalist Chiara Albanese has just tweeted this message from one of the largest Swiss banks

3.39pm: Ouch. We’ve not even made it to Thursday’s EU meeting, but Italian 10 year bonds have gone above 6%. Up 19bps today.
Spanish bonds up 27bps at 6.62%.

3.25pm: Over to Wall Street, with the Dow Jones opening down 166 points, 1.3%, at 12472, following in the footsteps of Europe where markets are also down

Thanks Julia.

Over to Luxembourg:
The EU has confirmed a formal embargo on Iranian oil starting on July 1.
The original plans had been drafted in January but came under pressure from Greece who wanted an exemption or extension in the hopes of easing its economic problems. Athens asked for credit guarantees that would help it to buy crude elsewhere, but this was rejected.

2.41pm: I’m handing over to Simon Neville now. Thanks for all your great comments and see you soon.

1.37pm: Over to Ireland, where house prices have risen for the first time since 2007 in May – a sign the country’s troubled housing market is starting to stabilise.

House prices, which slumped 50% between their peak and trough, rose 0.2% in May from the previous month. They were down 15.3% in the year to May, but the rate of decline is easing.

1.33pm: Greece’s new prime minister Antonis Samaras has been released from hospital, two days after undergoing eye surgery that will prevent him from travelling to the EU summit in Brussels at the end of this week. The newly appointed finance minister Vassilis Rapanos cannot make it either – he collapsed on Friday and is due to leave hospital tomorrow.

The summit will be critical for Greece, coming just a week after its new coalition government was formed following months of political turmoil and two inconclusive national elections.

Samaras underwent an operation to repair a detached retina on Saturday morning, and his doctors have said he will have to remain at home for several days to recover, although he can accept visits.

1.18pm: Time for a lunchtime round-up. European stock markets are down for a third day amid worries over Spain.

FTSE 100 index – down 35 points at 547, a 0.6% fall
Germany’s Dax – down 108 points at 6154, a 1.7% drop
France’s CAC - down 58 points at 3032, a 1.9% decline
Spain’s Ibex – down 165 points at 6711, a 2.4% fall
Italy’s FTSE MiB – down 359 points at 13303, a 2.6% drop

On bond markets, Spanish and Italian yields are moving higher again. The Spanish ten-year is up 18 basis points at 6.537% while the Italian yield has climbed 12 bps to 5.928%.

The euro has hit a near two-week low of $1.24713.

1.02pm: Rating agency Moody’s is poised to downgrade nearly all Spanish banks later today, according to reports from the country.

Spanish financial daily Expansion believe there will be downgrades of two to three notches most likely after Wall Street closes – although it could be earlier.
It would follow the downgrade of Spain’s sovereign rating by three notches earlier this month.

Moody’s, you may remember, downgraded 16 banks worldwide last week, including RBS, HSBC, Lloyds and Barclays, but with little impact.

12.43pm: One winner in the current crisis appears to be Russia’s biggest lender Sberbank. Deputy Chairman Andrey Donskikh told Reuters:

We are seeing loan requests from abroad, which is quite unusual for Sberbank, as the European financial system is not showing very positive signals

A bit of an understatement perhaps?

The bank recently bought Turkish lender Denizbank for $3.5bn and Austrian bank VBI’s eastern europe arm for $630m, but Donskikh says the bank has no plans to snap up any Greek or Spanish institutions.

12.32pm: He’s coming out!

Greek finance minister, Vassilis Rapanos (who has still not been officially sworn in), will leave hospital tomorrow, according to an official at the Hygeia Hospital. The official said: “Mr Rapanos had a gastroscopy and colonoscopy, which showed everything is completely normal.”

However, following his collapse on Friday, Rapanos is still unlikely to make the European summit starting on Thursday.

11.28am: Vincent Forest, economist at the Economist Intelligence Unit, has sent his thoughts on the Spanish request for banking aid:

Although no document has been signed yet, it is now official that Spain will request aid from the euro zone institutions to shore up its banking sectors. Many details are already known, such as the necessity for the funds to be channelled through the Fund for Orderly Bank Restructuring, also known as FROB.

This implies that, ultimately, the burden and risks associated with helping the Spanish banking sector will be shouldered by the Spanish government. Whatever the amount requested, it will add up to the already rising public debt. This bail out will come with less strings attached than the ones received by Greece, Portugal and Ireland. The conditions attached to the deal will apply only on the Spanish banking sectors, whereas the other countries had to accept an almost complete takeover of public finances.

Such conditions would have cast even more serious doubts on the Spanish finances, resulting in an escalation of the crisis that the euro zone could not afford. Furthermore, given the strong commitment by M. Rajoy’s government to fiscal discipline, the need for fiscal monitoring was less prevalent. Spain has therefore so far been able to retain national sovereignty, at least in the eyes of the general public.

The origin, and especially the amount of the bailout will be of prime importance. It is essential that the loan provided exceeds by a certain margin the estimated capital requirements for the banks. Anything too far from the announced €100bn could fail to reassure investors, and create further volatility and instability.

The biggest problem associated to this bail out is that it is merely a reshuffling of debt in Spain, therefore tackling more the liquidity crisis than the solvency crisis that is getting more acute every week. Further developments at the euro zone level are essential to solve Spain’s problems, and will be discussed during the next summit on Thursday and Friday.

11.23am: The Spanish banking bailout – which Spain pointedly refuses to call a ‘bailout’ – is likely to be concluded in a matter of weeks. EU economic and monetary affairs commissioner Olli Rehn said this morning, in response to Spain’s formal request for aid of up to €100bn:

I am confident that we can conclude an agreement on the memorandum of understanding in a matter of weeks, so that we can proceed with the restructuring effort.

The policy conditionality of the financial assistance, in the form of an EFSF/ESM loan, will be focused on specific reforms targeting the financial sector, including restructuring plans which must fully comply with EU state aid rules.

Eurozone finance ministers gathered in Luxembourg last Thursday said an agreement with Spain should be ready and signed by their next meeting on 9 July.

11.11am: Chances are you’ve never heard of Maria Dolores de Cospedal. She is president of Castilla-La Mancha and inherited the biggest deficit of Spain’s 17 regional governments – which she is determined to tackle ruthlessly. Read more in the Wall Street Journal here – ‘A Spanish Leader Emerges as a Crusader for Austerity’.

10.51am: Following this morning’s request by Spain for a rescue package for its banks which could total up to €100bn, Open Europe has published a new briefing looking at the funding needs of Spanish banks and the Spanish state. The think tank argues that, taking into account that Spanish house prices may drop another 35%, the country’s banking sector could need an immediate €110bn capital injection to withstand potential losses – substantially above the recent official estimates. Without substantial banking reform and an upturn in the state of the Spanish economy this amount could increase further. Open Europe estimates that total exposure of EU countries to the Spanish economy is around €913bn.

Open Europe’s head of economic research Raoul Ruparel says:

Funding for the Spanish banking sector is an incredibly fluid target and could go well beyond €100bn if the situation in the Spanish and eurozone economy continues to deteriorate. Though it comes with merits, if not carefully managed and subject to the right conditions, this package could merely serve to deepen the dangerous loop between Spanish banks and government without offering a clear solution to the crisis. In turn, if more pressure is piled on Spanish banks and therefore government debt, it could force Spain into a full eurozone bailout.

With Spain facing funding costs of €548bn over the next three years, the eurozone’s bailout funds are not equipped to handle a Spanish rescue. To avoid such a scenario, the current bank bailout plan just has to come with the right conditions – including losses for bank bondholders and bank wind-downs.

Everyone agrees that the IMF estimates of €40bn for Spanish bank recapitalisation look too low. Open Europe estimates that the banking sector needs between €90bn and €110bn, meaning even the €100bn rescue package currently being discussed may not be enough. The amount needed could further increase if banks struggle to raise provisions against losses on top of their capital requirements. The external stress tests announced last week – which concluded that Spain’s banks need €62bn – are equally too low given that they worked from current data, which may be insufficient or incorrect, the think tank reckons.

It expects that the rescue package currently on the table, along with higher borrowing costs, could increase Spanish debt to 94% of GDP in 2013 and 112% in 2015 (with only slightly lower growth than expected).

10.45am: Fitch has cut Cyprus’ credit rating to junk status – to ‘BB+’ from ‘BBB-’, with a negative outlook. It’s down to the island’s banks. Here is a bit from the statement:

The downgrade of Cyprus’s sovereign ratings reflects a material increase in the amount of capital Fitch assumes the Cypriot banks will require compared to its previous estimate at the time of the last formal review of Cyprus’s sovereign ratings in January 2012. This is principally due to Greek corporate and households exposures of the largest three banks, Bank of Cyprus, Cyprus Popular Bank (CPB) and Hellenic Bank and to a lesser degree the expected deterioration in their domestic asset quality.

10.27am: As mentioned earlier, the Greek government has been thrown into disarray as to who should represent the crisis-hit country at the crucial two-day EU summit that begins in Brussels on Thursday.

Helena Smith in Athens writes:

Senior sources say the leaders of the coalition’s two junior partners – the Socialist Pasok and small Democratic Left – may well attend in addition to a four-strong team lead by the new foreign minister.

“It looks very likely that [Pasok leader] Evangelos Venizelos will attend as he will be anyway for a meeting of the European Socialist parties,” said one source. Venizelos, who was finance minister when the €130bn rescue package was agreed, has called renegotiation of the deal a “national priority” with Athens announcing a list of steps to soften the impact of accord over the weekend.

“These unexpected illnesses couldn’t come at a worse time. We need the strongest team possible to revise the memorandum,” said another government source.

The heat is already on. Leading EU figures, starting with the Germany finance minister Wolfgang Schäuble, have announced that Greece is way off –track in its reform program.

At the very least, Greek officials say they want to extend the timeframe in which the country is allowed to meet fiscal targets so that spending cuts and structural reforms can be relaxed. Athens wants another two years, taking the program through to 2016. EU partners are already saying the extension will be costly and likely amount to creditors being forced to cough up as much as €20bn in extra funds.

Postponement of an inspection tour by Troika monitors – until early July – exacerbated the sense in Athens today that economic recovery of the eurozone’s weakest link is off course and likely to remain so for some time yet. On the basis of their findings, Troika officials from the EU, ECB and IMF will decide whether Greece is deserving of its next injection of cash. Public coffers are set to dry up completely by mid-July.

More here.

10.23am: Our man in Madrid, Giles Tremlett, says about Spain’s formal request for banking aid:

Spain’s bland, formal letter requesting aid of up to €100bn for its banks fits perfectly in what seems to be a Spanish strategy of dragging the bailout process out as long as possible. Mariano Rajoy’s government refuses to even call this a bailout and may muddy the waters further by avoiding ever giving a definitive, overall sum of how much money it wants.

El Pais suggests today that it will dip into the €100bn credit line bit by bit, depending on the needs of individual banks – but figures for some of their needs will not be available until September.

Both the government and the Bank of Spain have repeatedly said that the money is not needed urgently. Spain still believes – or it did on Friday, according to finance minister Luis de Guindos – that it might be able to get the European rescue funds to give money directly to Spanish banks, without it counting as national debt.

By stretching the whole process out as long as possible, while avoiding detailed explanations of exactly what is needed and when, there is a chance that clear rules might eventually be introduced to allow this – or so Madrid seems to think.

Germany disagrees and the risk is that other eurogroup countries may become inreasingly frustrated with prime minister Mariano Rajoy, especially as his government publicly insists that it wants to clear the bank business up as soon as possible.

9.37am: More on the Spanish aid request. The country has requested aid of up to €100bn for its banks. Spain’s economy minister Luis de Guindos wrote in a letter to eurogroup chairman Jean-Claude Juncker that the final amount would be determined at a later stage, but should be enough to cover all banks’ needs plus an additional security buffer. An independent report put the cost of bailing out Spain’s banks at €62bn last week.

My colleague Jo Moulds has provided a speedy translation. Re the amount, de Guindos requested “an amount sufficient to cover the capital requirements, plus a margin of additional security, up to a maximum of €100bn”.

The Spanish authorities will offer all their support in evaluating the eligibility criteria, the definition of financial conditionality, the monitoring of the implementation of measures, and the definition of the contracts for financial aid, with the aim of finalising the memorandum of understanding before July 9, so it can be discussed at the next eurogroup.

9.34am: News in from Athens where our correspondent Helena Smith says although officials are putting on a brave face the inability of the prime minister and his finance minister to perform their duties is causing ructions. There is even speculation that newly appointed finance minister Vasillis Rapanos, who is still in hospital, may have to turn down the job.

Greek media are full of it this morning: the sudden illness of Antonis Samaras and his finance minister Vasillis Rapanos is “disharmonising” the government. There is mounting speculation that before he is even formally sworn in, the highly regarded Rapanos may be forced to turn down the job of finance minister because of frail health. “It will be decided in the coming days whether he will stay on in the role,” Flash radio announced.

The 65-year-old technocrat, the head of the National Bank of Greece, the country’s biggest lender until last week was rushed to hospital after suddenly collapsing on Friday. It is unsure when he will be released although doctors say it “could be tomorrow”. The Canadian-trained economist who has long battled health problems spent the weekend undergoing a battery of tests after complaining of acute abdominal pain and dizziness.

Noone is denying that the post of Greek finance minister is possibly the worst job on the continent of Europe. With the economy shrinking for a fifth straight year, with a record 1.2 million Greeks out of work and the easing of Greece’s latest EU-IMF sponsored bailout agreement now seen as vital if the debt-choked country is to get out of its economic death spiral, the workload, both at home and abroad, could not be greater.

9.28am: Lee McDarby of Investec looks ahead to the EU summit:

It looks like we are heading for another week focused very much on the eurozone. Germany’s chancellor Merkel, France’s president Hollande, Italy’s prime minister Monti and Spanish prime minister Rajoy met as planned in Rome on Friday. All sides appear to be converging towards the creation of some kind of growth package worth in the region of €130bn, or 1% of EU GDP. However it should be noted that so far there is no indication for now as to how this programme will be funded.

Hollande said that commonly issued Eurozone bonds will be needed but that it shouldn’t take 10 years to create these – a remark that seems to suggest progress on common issuance at the upcoming summit seems very unlikely. Overall, the Summit should move leaders a few steps further in the right direction but hopes of anything more are likely to be met with disappointment.

9.25am: Spain has formally requested European aid for its banks, Reuters is reporting – and it looks like it has asked for a blank cheque. The news agency quotes an economy ministry spokeswoman as saying that the country hasn’t asked for a specific number.

9.20am: Greek journalist Efthimia Efthimiou has just tweeted that Greece’s Socialist leader Evangelos Venizelos and Democratic left leader Fotis Kouvelis are due to meet this afternoon, perhaps to discuss whether to attend the EU summit at the end of the week.

8.47am: Billionaire investor George Soros has once again turned up the pressure on Germany, saying it needs to step up to the plate to save the eurozone. He has blamed Angela Merkel for the crisis in the past. More here, from my colleague Josephine Moulds.

8.25am: And @zerohedge tweets:

8.22am: Eusebio Garre, banking and capital markets professional in Frankfurt, tweets (@xgarre):

8.18am: This tweet from the ECB last night, congratulating the four winning teams who remain in Euro 2012, has raised some eyebrows:

8.11am: European stock markets have opened slighty lower, for a third day: The FTSE 100 index in London is down nearly 20 points, or 0.4%, at 5495. Germany’s Dax has lost 0.7%, France’s CAC has shed 0.6%, Spain’s Ibex is down 0.4% and Italy’s FTSE MiB has edged 0.2% lower.

On bond markets, the Spanish 10-year government yield is up 7 basis points at 6.423% while the Italian equivalent has climbed 4 bps to 5.856%.

8.01am: The Bank of England needs to pump at least another £50bn into Britain’s “stalled” economy, says MPC member David Miles. He warns in an interview with the Financial Times that only a “substantial” third round of QE will kickstart recovery. He sees the Bank’s new liquidity support for banks under the ECTR as a “complement” to QE rather than a substitute, rejecting the view that the MPC “has run out of effective levers”. He also explicitly rejects the argument that it is better to wait and see how effective the new liquidity and funding measures are before acting. Finally, Miles reckons the economy’s recent unexpected weakness can’t be attributed to the fiscal austerity measures, instead blaming commodity price increases and, more recently, elevated bank funding costs.

Chris Crowe and Blerina Uruci at Barclays Capital say:

Mr Miles has been one of the most consistently dovish members of the MPC, voting for additional easing at the June policy meeting along with three other members including Sir Mervyn King. His comments are therefore unsurprising. Nevertheless, they highlight the range of views on the MPC on the need for further easing, a question complicated by the growing range of policy tools available to policymakers given the potential for complimentarity and substitutability between the different measures.

7.56am: Looks like the GfK confidence number for Germany has been postponed until tomorrow.

7.51am: A light day for data, with new home sales from the US and GfK consumer confidence figures from Germany.

Gary Jenkins of Swordfish Research has sent us his morning musings:

So we commence yet another week that could determine the future of the eurozone with the big event being of course the summit that will take place on Thursday and Friday. However the most likely outcome is that the summit will end with the now normal comments about the unstinting determination to keep the eurozone together, some small moves towards putting a growth agenda and other various policies that are unlikely to make any significant difference in the medium term. To be fair it is difficult to agree any substantive measures when there is such a fundamental difference regarding the way forward.

At the heart of the matter is Germany’s refusal to contemplate mutualisation of debt without traditional sovereignty decisions being removed from member states and even this after some form of national referendums to enable any such move to have some legitimacy. If I was a German politician I guess that would be my approach too. Meanwhile the likes of Spain and Italy would prefer some form of joint borrowing to allow their own borrowing costs to be reduced and indeed ensure that they can borrow. The likelihood then is that the Eurozone will have to continue with its policy of “muddle through, and hope for the best.”

7.09am: Good morning and welcome back to our rolling coverage of the eurozone crisis and world economy.

Greece got knocked out of the Euro on Friday by Germany 4-2 in the quarter finals. England followed suit last night, yielding to Italy in a penalty shootout. That means Germany will face Italy on Thursday, while the night before the other two remaining teams Spain and Portugal battle it out for a place in the final.

The main event this week is the EU summit on Thursday and Friday. Today, Spain is expected to formally apply for its long awaited banking bailout. An independent report from consultants Oliver Wyman suggested lat week that Spanish banks only need €62bn – compared with the €100bn approved by the EU.

However, Michael Hewson, senior market analyst at CMC Markets UK, notes:

Given that economic activity in Spain remains muted, with rising unemployment and non- performing loans at a 20 year high, it seems likely that this so called adverse €62bn figure could well rise rapidly. In any case this lower than expected figure caused Spanish bond yields to slide back from their highest levels of the week but they still remain eye-wateringly high.

Furthermore uncertainty remains as to how the bailout will be applied and under what conditions, due to disagreements amongst EU leaders as to how the Spanish bank sector should be restructured.

Today’s meeting of ECB president Mario Draghi and French president François Hollande in Paris could turn out to be a short one, with the latter asking the central bank president to ease monetary policy and restart bond purchases under the Securities Markets Programme, while Draghi is likely to ask the French President to stop dragging his feet and work on a fiscal and banking union.

Turning to Greece, the troika of the IMF, ECB and EU were due in Athens today to assess how far Greece has fallen behind with its austerity proramme due to the elections. But their visit has been postponed after both the new prime minister Antonis Samaras and the finance minister Vassilis Rapanos were taken ill at the end of last week. Samaras is recovering from an emergency eye operation while Rapanos was rushed to hospital after fainting on his first day, hours before he was due to be sworn in.

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The Big Four of the eurozone pledged 1% of GDP to spur economic growth as a way out of the financial crisis, but leaders of France, Germany Italy and Spain fail to endorse full plan to protect countries under attack by markets…

Powered by Guardian.co.ukThis article titled “Eurozone big four pledge 1% of GDP to underwrite banks and stimulate growth” was written by John Hooper in Rome and Ian Traynor in Brussels, for guardian.co.uk on Friday 22nd June 2012 18.42 UTC

The leaders of the eurozone’s biggest economies announced on Friday night that 1% of the European Union’s GDP was to be set aside to help the continent grow its way out of the financial crisis. But doubts were immediately expressed as to what share of the package – said to be worth €130bn (£105m) – would be genuinely new money.

After several hours of apparently tense discussions, there was no immediate agreement on a plan outlined by Italy’s prime minister, Mario Monti, on Thursday, aimed at stabilising Europe’s banks and protecting countries under attack in the markets.

“There was an agreement between all of us to use any necessary mechanism to obtain financial stability in the eurozone,” said Mariano Rajoy, the Spanish prime minister, afterwards.

But the German chancellor, Angela Merkel, insisted that the EU must take full advantage of the instruments already at its disposal. Her remark suggested she is wary of two new funds – to guarantee bank depositors and as a lender of last resort to ailing banks – understood to have been on the agenda at Friday’s talks.

In a sign that tempers are becoming increasingly frayed before next week’s crucial summit, the normally gentlemanly Monti used his closing remarks to attack France and Germany publicly.

With Merkel and the French president, François Hollande, standing just feet from him on the podium, he reminded the world’s media that it was not Greece or any of the other alleged EU basket cases that had first broken the rules on fiscal discipline in the eurozone, but the single currency’s two biggest nations – albeit with the endorsement of Italy, which then held the EU presidency.

Friday’s meeting of the big four leaders in Rome came as yet more gloomy eurozone economic indicators were released. German business confidence has fallen to a two-year low, while Italian consumer confidence has plunged to its lowest level on record. Monti’s popular support is in decline as the Italian economy fights both recession and rising unemployment and Rome faces increased borrowing costs.

Hollande revealed that all four leaders were in favour of a European financial transactions tax, a small tax on all financial deals which was originally proposed to tame speculation in the financial markets. His comment followed agreement by a group of countries – not including the UK – at the EU finance ministers’ meeting in Luxembourg to press ahead with plans for the tax.

David Hillman of the UK’s Robin Hood Tax campaign – which backs the financial transactions tax and wants any cash raised to be earmarked for development – welcomed the agreement, but added that “the UK public will be rightly angry that George Osborne is resisting efforts to make the City pay its fair share”.

He said that a Robin Hood tax would “boost growth as well as raising billions to tackle poverty and protect public services at home and abroad”.

One of the keys to next week’s summit will be the precise terms of the growth package. The €130bn would appear to represent a sum that might be raised or redirected from existing funds, rather than any commitment of new money. Nicholas Spiro, of Spiro Sovereign Strategy, said: “The pact has a shuffling of the deckchairs feel to it.”

EU governments have already agreed to boost the capital of the European Investment Bank by €10bn, hoping it will be leveraged into €60bn in the financial markets for investment purposes. The growth package also appears to entail deploying up to €55bn in unspent EU structural funds.

Governments have already agreed to allow the sale of “project bonds” in the markets in the hope of raising capital for major infrastructure projects.

Another measure by which the summit will be judged is progress towards a project for guaranteeing financial stability which, according to an informed source, was being worked on by the “gang of four”, including representatives of the European Central Bank (ECB), Eurogroup, and European commission and council. One aspect of the project was spelled out by Monti in an interview with the Guardian and other leading European newspapers on Thursday.

This would involve tying the purchase of sovereign bonds to the performance of the country in need of help. Virtuous states that had introduced structural reforms and contained their budget deficits would be rewarded.

In its present form, the plan would see the buying done by the European Financial Stability Facility, the bailout fund for states, rather than the European Central Bank.

The other aspects of the plan would involve the creation of two new rapid response funds: one would guarantee bank depositors; the other could be used to deal with institutions such as Spain’s Bankia that looked as if they might pose a threat to the entire eurozone, creating, if not a bank of last resort, a fund of last resort.

Merkel appeared to be less than convinced of this idea, or at least bent on ensuring it was accompanied by iron controls. In an apparent reference to the still-secret plan, she said that if Germany were to give money to a Spanish bank she would have no way of knowing how it was spent – and that would be a “giant problem” for her.

The proposed new bank intervention fund appears to require new administration because the ECB, with a mandate to deal strictly with monetary policy, could not run the proposed new funds.

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