July 24 2012

In the broadcast today: Is the EUR End Game Already Here? With the EU debt crisis escalating and the odds of an exit from the EMU by Greece or Spain rising, we continue to focus on the EUR and ponder if we are entering the final “make or brake” phase that will decide the future fate of single currency, we analyze the latest trend developments with the EUR/USD currency pair, we keep an eye on the selling pressure in the USD/JPY pair , we note today’s double bottom support in the GBP/USD currency pair, we highlight the market’s reaction to the credit rating downgrade of Germany by Moody’s, the German and the Chinese Manufacturing PMI, and the Euro-zone Composite PMI, we discuss new forecasts from Bank of New York-Mellon and UBS, and prepare for the trading session ahead.

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Moody’s credit rating agency cuts outlook on Germany and two other euro-zone countries, German finance ministry hits back, “a consensus” is building among the German political class that the time may be nearing to cut Greece adrift, and force it out of the euro…



Powered by Guardian.co.ukThis article titled “Eurozone crisis live: Germany’s credit rating outlook lowered to negative” was written by Graeme Wearden, for guardian.co.uk on Tuesday 24th July 2012 06.43 UTC

2.04pm:

Europe editor Ian Traynor reports that “a consensus” is building among the German political class that the time may be nearing to cut Greece adrift, and force it out of the euro.

Here’s his analysis of some of today’s key developments:

Leaders of Chancellor Angela Merkel’s two coalition partners, Bavaria’s conservative Christian Social Union (CSU) and the liberal Free Democrats (FDP), have said in recent days that Greece may have to go.

And the first cracks have emerged among the leadership of the main opposition social democrats (SPD) which has taken a more generous lineon Greece throughout the crisis.

With the European Commission president, Jose Manuel Barroso, suddenly announcing a trip to Athens for the first time since the crisis erupted 30 months ago and with the troika of EC, ECB, and IMF officials curently in Athens reportedly nonplussed by Greece’s failures to meet the terms of two bailouts, there is a sense that theGreek tragedy could be nearing its denouement.

The EC said that Barroso would meet Prime Minister Antonis Samaras on Thursday in Athens, seeking to portray the suddenly announced visit as routine. The same day the troika team is to grill the Greek financeministry about the government’s intentions.

Another troika, the three-man leadership of Germany’s SPD, appears split on Greece for the first time. The party leader, Sigmar Gabriel, argues that Athens should be given more time to meet the bailout conditions, while Peer Steinbrueck, a former finance minister and potential chancellor challenger next year, said for the first time atthe weekend that he had growing doubts about whether euro membership would survive in its current form.

Merkel and Wolfgang Schäuble, the finance minister, have been tight-lipped this week on the growing calls for a “Grexit”, but German press reports indicate that the crunch point could be reached if Greece is deemed to need even more bailout funds, a scenario widelyseen as likely.

Merkel could balk at a third bailout because she would need to return to the German parliament for approval and she is already having tocontend with mounting backbench revolts over her euro policies.

The Frankfurter Allgemeine Zeitung, citing expert analysis,
calculated today that a Grexit would cost Germany €83bn euros.

1.40pm:

Just hearing that Ladbrokes has slashed its odds on Germany’s AAA rating being downgraded by Moody’s, S&P or Fitch.

From 10/1 last night, the odds are now just 2/1, following Moody’s decision to cut Germany’s outlook to negative, from stable.

1.22pm:

When Antonis Samaras attacked EU officials for attempting to sabotage Greece’s efforts to stay in the euro (see 10.47am), I wonder if he really had certain German politicians in mind.

Today Patrick Döring, general secretary of Chancellor Angela Merkel’s junior coalition partners the Free Democrats (FDP), joined the ranks of Berlin policymakers suggesting that Grexit might be welcome.

Döring argued that:

It could help to create confidence in markets if Greece were no longer part of the Eurozone.

Fellow FDPer Philipp Rösler made a similar point yesterday, saying a Greek euro exit was no longer a horrifying idea. He was subsequently blasted for such ‘unprofessional’ comments.

12.53pm:

STOCK MARKET LATEST

The Spanish stock market has suffered fresh falls today, with the IBEX 35 wobbling around the 6,000 point mark again. Italy is also down again, while other markets are broadly flat after yesterday’s tumbles.

IBEX: -175 points at 6002, -2.83%

Italian FTSE MIB: – 193 points at 12513, -1.5%

FTSE 100: -2 points at 5531. – 0.04%

German DAX: – 10 points at 6408, -0.18%

French CAC: – 3 points at 3098, – 0.1%

David Jones of IG Index says traders have not been too alarmed by Moody’s announcement, as they are more concerned by developments in the eurozone periphery:

Markets have bigger things to worry about at the moment, with the prospect of further bailouts for Spain and the ever-present Greek problem

12.33pm:

Here’s a question to ponder over your lunch: how long did the Spanish parliament spend seriously debating the pros and cons of entry into the
euro?

John Hooper, our correspondent in Rome, reckons the answer is “less than a day” – and the same is probably also true for Portugal, Greece and Italy.

In reminiscent mood, John writes:

I recall the process well because, in the mid-1990s, I was the
Guardian’s Southern Europe correspondent. Shortly after the then Italian prime minister, Romano Prodi, came into office, he paid a call on his Spanish counterpart, José María Aznar.

Prodi assumed (perhaps wisely in retrospect) that Italy and the other southern European member states would need more time to adjust to the strictures of single currency membership and would, therefore, go into a ‘B’ group of later entrants. So he was shocked to find that Aznar fully intended Spain should be in the euro from the start.

The reason was that Aznar had found to HIS horror that Portugal was planning to be in the first group and would have relatively little difficulty meeting the Maastricht criteria for entry. At the time, Portugal had only a minimal welfare state, so its government could squeeze its budget deficit with comparative ease.

The whole thing became a national virility test. Spain could not be out if kid brother Portugal was in. And Italy could not be out if kid cousin Spain was in.

Almost no consideration was given to the pros and cons of membership either by politicians or the media. The discourse throughout southern Europe was all about “being in the first-class carriage” and “passing the Maastricht exam”.

When all three countries were accepted for entry – as in Greece later – it was not a time for sober assessment of the obligations it implied, but for national rejoicing.

12.20pm:

Looking back at Germany. Paul Donovan of UBS believes that Moody’s decision to cut the German, Netherlands and Luxembourg AAA-ratings to “negative outlook” is the prelude to a rash of actual downgrades.

In a research note titled “AA is the new AAA“, Donovan predicted “a series of downgrades of Euro area sovereigns over the coming quarters” – whether the eurozone survives the crisis, or splinters

Here’s the logic:

Essentially, if the Euro survives (and we think that it will), there has to be a burden sharing that implies a lower credit quality for most of the higher rated states. If the Euro does not survive, then no Euro area country can hope to maintain an AAA rating for its debt; indeed the issue becomes if any Euro area economy could maintain investment grade status.

It’s debatable, though, how much attention investors are actually paying to credit ratings these days. Bond yields are a better guide to market confidence, and many safe (and even some not-so-safe countries), have seen their borrowing costs drop to levels that would have been unthinkable a few years ago, even for a AAA country.

For example, Swiss two-year bonds rallied to new record high levels this morning, pushing yields into negative territory again:

11.49am:

More alarming signs for Spain.

1) The cost of insuring its government debt against default has hit a new record high.

The Spanish credit default swap contract has jumped by 16 basis points to 640bp (so it would cost €640,000 a year to insure €10m of Spanish five-year bonds).

Gavan Nolan of Markit points out that a Spanish CDS is now 65 basis points HIGHER than the Irish equivalent, even though Ireland has already been forced out of the money markets and into a bailout.

2) The Spanish 10-year bond yield has nudged even higher, to a new euro-era record of 7.601%. There’s no respite for Spain in the bond markets.

11.24am:

The European commission president, José Manuel Barroso, is to visit Athens later this week to discuss the situation with Antonis Samaras, the Greek PM (officials in Brussels just announced).

That’s the first such visit in over three years, and comes as EC, IMF and ECB officials continue to examine Greece’s finances.

It’s going to be a busy week in Athens – on Thursday, senior Troika officials are scheduled to hold crunch talks with finance minister Yannis Stournaras

11.11am:

Lord Turner, chairman of the Financial Services Authority, said this morning that he is “very concerned” about the eurozone crisis.

Giving a speech on the future of Britain’s banking sector in London, Turner urged eurozone leaders to press on with their own reforms.

My colleague Jill Treanor is there, and radios in this report:

“The eurozone cannot hang around,” said Turner calling for an acceleration of banking union.

The eurozone needs to be able to directly recapitalise banks and cut the “fatal” tie between sovereigns and banks, he added.

That “fatal tie” could have been strengthened by Spain’s bond auction this morning. In previous sales, Spanish banks have been enthusiastic buyers of Spain’s sovereign debt – often using money borrowed from the European Central Bank at generous rates.

10.59am:

With excellent timing, we have a worker from a credit rating agency on hand this morning to discuss the workings of the sector.

My colleague Joris Luyendijk has interviewed the gentleman, anonymously, for his Banking Blog – in which he is meeting scores of people from across the City and reporting their stories.

Today’s interviewee is online NOW to answer your questions. Just click here to read the interview, and then interact with him in the comments section there.

And here’s a flavour of Joris’s piece, in which the interviewee talks about how the City has learned little from the financial crisis:

Everybody pretends it’s all OK. Sometimes I feel finance has reacted to the crisis the way a motorist might respond to a near-accident. There is the adrenaline surge directly after the lucky escape, followed by the huge shock when you realise what could have happened. But then, as the journey continues and the scene recedes in the rearview mirror, you tell yourself: maybe it wasn’t that bad. The memory of your panic fades, and you even begin to misremember what happened. Was it really that bad?

10.47am:

Antonis Samaras, the Greek prime minister, has hit out at certain unnamed European officials for sabotaging Greece’s efforts to rebuild its economy and remain in the euro.

Speaking at a parliamentary meeting in Athens, he admitted that the Greek economy could contract by more than 7% this year (which is, I think, a deeper downturn than previously predicted). Growth would return in 2014, he pledged.

The PM insisted that Greece was committed to its goals, but also ‘let rip’ after several days of headlines which claimed that Germany, or the IMF, had lost faith in Greece.

According to Dow Jones, Samaras said:

There are some EU officials who come out and say Greece won’t make it. They are saboteurs of the Greek effort.

With officials from the Troika now back in Athens, Samaras told the meeting that Greece’s financial programme must be changed, to remove the elements which are fuelling the recession.

Striking a positive note, he also declared that Greece can “surprise” the world, through its handling of the crisis.

10.13am:

As promised, here’s some expert comment on this morning’s Spanish debt auction:

Nicholas Spiro of Spiro Sovereign Strategy argued that the sale was a qualified success, given that demand for Spanish bills rose:

All things considered, the result is not so bad, especially since it’s auctions of shorter-dated paper that Spain is counting on to retain market access. The most important take-away from this auction is that Spain was able get all its debt out the door. Still, in March Spain was able to issue 6-month debt at a yield of under 1%. Now it’s paying 3.7%.

But looking beyond this auction, Spiro warns that Spain is in a terrible mess:

The bank-focused bail-out is perceived as insufficient, a funding squeeze in the regions is putting more pressure on Spain’s creditworthiness, non-stop austerity is increasingly seen as self-defeating and the recession is deepening.

Marc Ostwald of Monument Securities said there was relief that the auction had “been and gone” without calamity, but also saw little reason too cheer. He told Reuters that:

It’s not going to change anything for Spain, and it is not going to reverse the generally weak trend that we have seen.

9.48am:

SPAIN

The results of Spain’s bond auction are just in:

Madrid has sold €3.02bn of three- and six-month debt, which is slightly more than targeted. But yields have (as predicted) jumped, as investors drive up Spanish borrowing costs.

Here’s the details:

€1.63bn of 3-month bills were sold: yields rose to 2.433%, up from 2.362% at the last auction. Bid-to-cover ratio (the measure of demand) rose to 2.9 from 2.6

€1.42bn of 6-month bills were sold: yields rose to 3.691%, up from 3.237%. Bid-to-cover ratio rose to 3.0, from 2.8.

I think we’ll call that an OK result – as a failed debt auction would have been a disaster for Spain. Short-term debt is not the best measure of credit-worthiness, of course, and the yields are higher than Spain would like.

But It Could Be Worse.

More considered analysis from City experts to follow….

9.41am:

Spanish 10-year bond yields just hit a new euro-era record high of 7.592%.

9.33am:

Bond traders have largely shrugged off Moody’s threat to cut Germany’s AAA rating.

The value of 10-year bunds has dropped slightly, pushing up yields on the securities by 0.087 percentage points to 1.26%.

After a stream of record lows, it makes a change to read about German yields going up:

The yield on two-year bunds also rose, but is still in negative territory at -0.037%. Hardly a sign that investors are worried about Germany’s ability to repay its debts.

9.29am:

EUROZONE HIT BY MANUFACTURING SLUMP

The eurozone’s manufacturing and services sector both shrank this month as the region’s economic downturn deepened. according to economic data just released.

Markit‘s monthly service sector PMI came in at 47.6, up slightly on June’s 47.1, but still indicating that activity continued to fall.

The manufacturing sector PMI dropped to 44.1, from 45.1 in June, showing a deeper contraction (partly due to a weak performance from Germany – see 8.40am).

This is the sixth month in a row in which outlook in the eurozone private sector has shrunk. Chris Williamson of Markit said the data is “suggesting that things are getting worse”.

9.11am:

The Eurogroup (the collection of eurozone finance ministers) has taken the slightly unusual step of commenting on Moody’s decision to cut Germany, the Netherlands and Luxembourg to a negative outlook (see 7.55am).

Eurogroup head Jean-Claude Juncker was keen to accentuate the positive, saying:

We take note of the rating decision of Moody’s which confirms the very strong rating enjoyed by a number of euro area member states, as supported by the sound fundamentals which these and other euro area countries continue to enjoy.

Against this background, we reiterate our strong commitment to ensure the stability of the euro area as a whole.

Meanwhile David Smith, economics editor of The Sunday Times, reckons that Moody’s could be making the crisis worse.

9.00am:

The man who ran the bank that almost bankrupted Ireland has been arrested this morning.

Sean Fitzpatrick, a former chief executive of the now nationalised
Anglo Irish bank, was detained as part of an investigation
into alleged financial irregularities.

From Ireland, Henry McDonald reports:

Fitzpatrick was held by the Garda Síochána attached to the Office of the Director of Corporate Enforcement. It is part of a rolling inquiry by the Gardaí from the force’s bureau of fraud investigation and the ODCE (office of the director of corporate enforcement).

Fitzpatrick is expected to appear at the Republic’s courts of
criminal justice in central Dublin later today.

Fitzpatrick is the third former Anglo Irish executive to be arrested in the last 24 hours. Taking control of Anglo Irish cost Irish taxpayers an estimated €30bn.

8.40am:

GERMAN PMI DATA WORSE THAN EXPECTED

Economic data just released has shown that Germany’s manufacturing and services sectors are both shrinking this month.

The “flash PMI’* for Germany’s manufacturing sector fell to 43.3, down from 45 in June, which means that it shrank at a faster pace.

Germany’s service sector also contracted slightly, with a PMI of 49.7 (compared with 49.9 in June). Economists had expected 50.0 (ie, no change in activity)

* PMI = purchasing managers index; a survey of businesspeople across a sector

This graph shows how German’s PMI readings have fallen in recent months as the eurozone economy has deteriorated:

8.29am:

In the bond markets, Spanish and Italian government debt has recovered slightly after yesterday’s turmoil, but yields remain worryingly high:

Spanish 10-year bond yield: 7.433%, – 0.062 percentage points

Italian 10-year bond yield: 6.283%, -0.047 percentage points

Traders are waiting to see the results of Spain’s auction of three and six-month bonds (due after 9am).

Marc Ostwald of Monument Securities predicts that yields will jump, writing wryly that

A sharp rise in rates is a “sine qua non”, given secondary market levels and that obscure fact that Spain’s banks (the folks that “have to buy” these bills) need a bail-out.

8.04am:

Finland is now the only AAA-rated eurozone country with a stable outlook with Moody’s [CORRECTED*]

Why? Because Finland has taken such a hardline stance with Greece, demanding collateral in return for its aid packages. That’s reassured Moody’s, which has reaffirmed its stable outlook on Finland’s AAA rating.

Michael Hewson of CMC Markets believes this may encourage other EU countries to copy the Finnish approach:

This could well see other countries start to demand collateral as well which could well complicate the swift disbursement of future bailout funds.

* UPDATED: S&P, though, have Finland on negative outlook (details)

7.59am:

The German finance ministry issued a robust response to Moody’s decision to cut Germany’s credit rating to AAA with a negative outlook.

It argued that the threats identified by the agency were not new, and pledged to remain Europe’s “anchor”.

Here’s the official statement:

By means of its solid economic and financial policy, Germany will retain its ‘safe haven’ status and continue play its role as the anchor in the euro zone responsibly.

Germany continues to find itself in a very solid economic and financial situation.

7.51am:

The official statement from Moody’s, explaining why it has revised the outlook on Germany, the Netherlands and Luxembourg’s prized triple-A credit ratings is online, here.

In it, Moody’s argued that none of the three countries deserves a “stable” rating because of the growing risk of Greece exiting the euro. That, it said would trigger “a chain of financial-sector shocks”, leading to the unwinding of the eurozone.

And even if Greece remains in the eurozone, there’s the problem of Italy and Spain. The burden of any bailout packages for those two countries would fall heavily on all three countries – again making a ‘stable’ rating implausible.

7.29am:

THE AGENDA

Good morning, and welcome to our rolling coverage of the eurozone financial crisis.

The big news overnight is that credit rating agency Moody’s has lowered its outlook for three of the eurozone’s AAA-rated countries, including Germany.

Moody’s warned there was an increased risk of Greece crashing out of the eurozone, creating widespread panic, as it cut its outlook for Germany, the Netherlands and Luxembourg from stable to negative.

The move came after a manic Monday for the markets, with heavy selling as fears grew that Spain might be forced to seek a sovereign bailout.

Spain will remain on everyone’s mind today. It is selling up to €3bn of three- and six-month bonds this morning, ahead of a meeting between the German finance minister, Wolfgang Schäuble, and his Spanish counterpart, Luis de Guindos.

On the economics front, we get new purchasing managers data from across the eurozone this morning, showing how its services and manufacturing sectors have performed in July.

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