September 4 2012

In the broadcast today: Will the ECB Disappoint EUR Bulls? In light of the upcoming European Central Bank monetary policy announcement, we explore the possible outcomes of this important central bank meeting and examine its potential impact on the EUR and other currency majors, we analyze the range bound price fluctuations of the EUR/USD exchange rate, we take a close look at the GBP/USD pair ahead of the Bank of England’s monetary policy meeting, we keep an eye on the CHF following a disappointing economic growth report from Switzerland, we highlight the market’s reaction to the Reserve Bank of Australia interest rate announcement, the Swiss GDP, the Euro-zone Manufacturing PMI, and the U.S. ISM Manufacturing Index, we discuss new forecasts from JPMorgan Chase, UniCredit and Commerzbank, and prepare for the trading session ahead.

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Germany, France, the UK and the Netherlands could stop fulfilling their obligations to the EU if the crisis worsens, Moody’s warns. Details of Moody’s decision. Leaked Draghi comments pull yields down. Switzerland’s GDP falls by 0.1%…

Powered by article titled “Eurozone crisis live: Moody’s cuts European Union rating outlook to negative” was written by Graeme Wearden, for on Tuesday 4th September 2012 06.48 UTC


Germany tells Greece to keep reforming

Greek finance minister Yannis Stournaras received an blunt message from the German government today: implement those economic reforms, or else.

It was delivered in Berlin, where Stournaras met German finance minister Wolfgang Schäuble. After the meeting ended up, the finance ministry issued this statement:

Most important is that Greece fully implement its obligations. Finance minister Schäuble pointed this out to his colleague once again.

The ministry added that Germany remains determined to see the details of the Troika report into Greece’s economy before taking a decision on the country’s request for more time to hit its targets. That report may not be released for several weeks.

Stournaras also held talks with German foreign minister Guido Westerwelle, so here’s a photo:


Barroso backs bond-buying plan

Jose Manuel Barroso, president of the EC, argued this morning that the European Central Bank would be right to help struggling eurozone countries by purchasing their debt, as long as they promised economic reform in return.

Barroso told a meeting of European Union diplomats in Brussels that the ECB should help ease the funding problems of member states that pledge economic and fiscal discipline. arguing:

The ECB considers this the most critical issue, and rightly so. The ECB cannot of course finance the economies of our member states. But if the member states can give sufficient assurances in terms of discipline and convergence, the ECB then can and should in fact act.


Portugal’s 10-year sovereign bonds ended last month at their strongest level since the country was bailed out in May 2011, a sign that investors may be a little more confident about its prospects.

Tradeweb, the electronic bond and derivatives marketplace, reports that the Portuguese 10-year bond yield* ended August at 9.03%. It said this was due to a rise in “positive market sentiment” about the progress being made in peripheral countries.

* – the interest rate on the bond, which moves inversely to the value of the bond.

This graph shows (if you squint) how Portugal’s bond yields are still much higher than Ireland, which also signed up for a bailout.


Keep Talking Greece has more details of today pensioners’ protest at the Greek Health Ministry (see 11.26am for earlier info and photos)

It says that 200 pensioners took part in the action, and that they were outraged at being described as “liars” and “bullies” by health minister Andreas Lykourentzos (who had initially declined to meet them)


Spain’s toxic banking debts

El Pais newspaper has published some interesting number-crunching this morning, looking at the amount of toxic real estate rapidly accumulating in those nationalised Spanish banks which both need up to €100bn in eurozone rescue money and must offload their poisoned property assets onto a new “bad bank” to be set up soon.

From Madrid, Giles Tremlett reports:

In the first half of this year, Spain’s four nationalized banks have increased the amount of toxic real estate assets (meaning so-called dubious and substandard loans that property developers quite possibly will not pay back as well as properties that have already been repossessed) on their books from €56bn to €71bn-worth.

Perhaps the most worrying figure is that Spain’s biggest banking nightmare, BFA/Bankia, now admits to some €3bn (or 10%) more in loans to developers than it did six months ago. This is not because it has started lending again, but because these loans have been “discovered” at what used to be Bancaja, one of several savings banks which came together to form Bankia.

The other banks are CatalunyaBanc, NCG Banco/Novagalicia and Banco de Valencia. All are expected to offload their toxic real estate onto the new bad bank which will be set up by the end of November as part of the euro zone rescue deal. Other banks that take rescue money may also offload their dodgy real estate loans and foreclosed properties onto the “bad bank”, which will have up to 15 years to sell them and try to make a profit.

Some €28bn’s worth of property has already been foreclosed by these banks, meaning that they now own it. But how much is it really worth on a market in which building land, for example, is largely illiquid and impossible to sell? The four banks currently own land that was nominally worth €12.5bn. The bad bank, presumably, will not pay them nearly that much.


The European Commission has declined to get into a slanging match with Moody’s, the FT’s Peter Spiegel reports from Brussels….


Pensioners protest in Athens

A group of pensioners have reportedly stormed the Health Ministry in Athens today, in protest at state cutbacks that have driven up the price of medicines and left many people unable to afford treatment. reports that “a few dozen pensioners” demanded a meeting with health minister Andreas Lykourentzos, and briefly scuffled with police.

Lykourentzos apparently declined to meet with the group, who also shouted slogans outside the ministry.

Here are some photos from the scene:

It’s not just the pensioners who are furious. Suppliers and medical staff are angry that they have not been paid for months. Yesterday doctors who work within Greece’s largest state-run healthcare provider began charging their patients, in protest at the organization’s unpaid bills (more here).


Yiannis Mouzakis, who blogs as The Prodigal Greek, has written a post today about Greece’s economic slump following a visit to the country.

It’s a good read, and explains the dire position that Greece is now in:

Even for the informed follower of the Greek crisis, the headlines coming out of Greece do not capture the full extent of the economic deterioration the country is experiencing and the complete disconnection between the people and the state, a disconnection that will inevitably test the strength of the social fabric.

Business owners have seen their revenues decrease by 30-40% since last year when the country and the economy were already feeling the impact of a full year of the policies dictated by the troika. The drop in revenues is more than 50% compared to the summer of 2010. My trip also coincided with the clearance of the tax returns for the 2011 tax year. Families that received last year minor tax rebates for their 2010 income, this year have to pay in the region of 2,000 euros extra as a result of the various tax measures the Greek government had to implement in a bid to comply with the program’s targets and secure the disbursement of bailout funds necessary to continue basic state functions. This process is the result of the recession-driven repeated misses in revenues targets.

Greece is heading into yet another tough winter with the economy in a tailspin. Disposable incomes across the board have taken a severe hit and, most worryingly, the public is exhausted from two years of draconian austerity, with no hope in sight.

He also argues that Greece’s eurozone partners should provide a heling hand by delaying interest repayments and extending loan maturities. That would provide the ‘breath of air’ which prime minister Antonis Samaras has asked for.


Chris Beauchamp, market analyst at IG Index, reports that there are “jitters” in the City today ahead of the ECB monthly meeting on Thursday. Trading volumes are still rather low, with bearish investors pushing shares lower (see 10.03am).

He adds:

Moody’s decision to cut the outlook for the EU’s credit rating to negative underscores how pernicious the crisis has become, but the general opinion still seems to be that something fairly substantial will be unveiled on Thursday.

In other words, there could be turmoil in the financial markets if Draghi doesn’t deliver something significant, especially having hinted strongly yesterday that the ECB could buy Spanish and Italian debt of three-year maturity or less without breaching its mandate (see 8.44am)


In the UK, a slump in construction activity has sent a new shiver through the sector and shown that Britain’s economy is really struggling.

New orders fell at their fastest rate since April 2009, while optimism about business outlook was weakest since last October, according to Markit’s monthly survey of purchasing managers.

The overall PMI came in at 49.0 in August, down from 50.0 in July, which indicates the sector shrank last month.

This graph shows how UK construction output has gone off the rails in recent months:

IHS Global Insight’s Howard Archer described today’s data as “bleak”, adding:

The construction sector is currently hampered by major headwinds, notably including public spending cuts, a weak economy, a struggling housing sector, and problems in getting funding for large-scale projects.

In particular, the government’s spending cuts are limiting overall expenditure on public buildings, schools and hospitals.


Moody’s decision to cut the EU’s credit rating outlook (see 7.42am) has helped to send Europe’s three largest stock markets down this morning.

FTSE 100: down 43 point at 5714, -0.75%

German DAX: down 14 points at 7000, -0.18%

French CAC: down 8 points at 3444, -0.25%

Traders appear to be sitting tight until they hear what the ECB decides at Thursday’s governing council meeting.

James Humphreys of Duncan Lawrie Private Bank commented:

There is a lot of nervousness out there with a lot of investors sitting largely on cash, not wanting to commit because of the backdrop in Europe and what is coming up over the course of the month.

In Spain and Italy, though, markets are up – reflecting the rally in both country’s short-term debt (see 8.44am).

Spanish IBEX: up 42 points at 7476, +0.55%

Italian FTSE MIB: up 68 points at 15335, +0.45%

Worryingly, Italian and Spanish longer-term debt has not rallied as much as the shorter-term bonds. Looking further ahead, the financial markets appear to be pricing in dangerously high bond yields for Spain, in particular, in a few years time.


Meeting, meetings….

Several key players in the eurocrisis are holding meetings today, as the shuttle diplomacy continues.

Greek finance minister Yannis Stournaras is in Berlin for talks with German counterpart Wolfgang Schäuble. He’s expected to present the details of Greece’s plan for €11.5bn in budget cuts. Greek newspaper Kathimerini reckons Stournaras will also lobby for a two-year extension to Greece’s austerity programme.

Also in Berlin, Angela Merkel will meet with European Council president Herman Van Rompuy later this morning. Hopefully the Chancellor is invigorated following her trip yesterday to a beer tent in Abensberg, Bavaria….

And over in Rome today, Italian prime minister Mario Monti is hosting François Hollande (from 12 noon BST).


Le Pen attacks fiscal treaty

French far-right leader Marine Le Pen has promised to make life tough for president Hollande in the coming weeks over Europe’s new fiscal treaty.

Le Pen told BFM TV this morning that she will organize a campaign against the European treaty, which the French parliament will vote on this autumn. She added that her party’s two MPs (which include her niece Marion) will vote against it (no surprise there).

Le Pen didn’t give more details of her planned campaign, but did argue that the eurozone should be dismantled, saying:

The euro was an error. It’s time to fix it.

The fiscal pact is already a headache for Hollande. Recent polling shows that a majority of French citizens want a referendum on it, with a narrow majority indicating they would vote in favour.


Draghi comments drag yields down

Spanish and Italian short-term government bonds are rallying this morning, after comments made by Mario Draghi to a “closed session” of the European parliament leaked last night.

Spain’s two-year bond yield has dropped to 3.36% this morning, the lowest since early May, while Italy’s has dropped to 2.56%, for the first time since late March.

This follows the news that Draghi, European Central Bank president, had told MEPs that it would be quite legal for the ECB to buy short term sovereign bonds.

Draghi (apparently) told the Economic and Monetary Affairs Committee of the European Parliament that:

If we are in the short term part of the market where bonds have a length of time maturity of up to one year, two years, or even three years, these bonds will easily expire…..

So there is very little monetary financing effect at all in what we are doing.

A political row blew up in Brussels after Draghi’s comments were leaked to the media. The committee’s chairwoman, Sharon Bowles, said the group had brought the Parliament “into disrepute”.

The comments just add to the anticipation, with two days to go until the ECB’s governing council holds its monthly meeting, when we could find out the full details of Draghi’s plan.


Spanish jobless total rises again

New Spanish unemployment data shows that the country’s jobless crisis worsened again last month.

The number of people out of work increased by 38,179 in August, pushing up the jobless total to 4.63m. It’s the first rise in four months.

Unemployment rose in the service, construction and industrial sectors – suggesting that people are being ‘let go’ as the tourism season ends.


Swiss miss: GDP falls by 0.1%

Disappointing GDP data from Switzerland this morning suggests that it is feeling the chill from the eurozone crisis.

Swiss GDP fell by 0.1% in the second quarter of 2012, rather worse than the 0.2% expansion predicted by economists.

While domestic demand remained strong in Switzerland, service exports fell – reflecting the drop in activity in Europe.

Bernd Hartmann of VP Bank commented:

The Swiss economy successfully bucked the difficult trend in the euro zone for a long time. But the slight contraction in the second quarter shows that the Swiss economy cannot completely decouple itself.

The linkages within Europe are too great.


Analyst reaction….

Moody’s decision to cut the European Union’s credit rating outlook to negative (see 7.42am) hasn’t caused much alarm in the City.

Many EU countries have either seen their outlook cut, or their actual rating lowered, in recent months… so arguably it’s a surprise the EU remained as AAA with a stable outlook* for so long ['stable' isn't the first word I think of when pondering the EU's outlook]

Here’s some early reaction:

Michael Hewson of CMC Markets:

Moody’s decision….brings it into line to reflect the negative outlooks to the main contributors to the EU budget, namely, Germany, France, UK and the Netherlands who are also on negative outlook with the same agency.

Nevertheless it highlights the concerns about the debt sustainability and growth prospects of the main EU contributor nations.

David Buik of Cantor Index:

So Moody’s have threatened downgraded the outlook for the EU to negative, threatening its AAA status! – Whoopee! Mafeking has been relieved! I suppose this august rating agency is going to tell us that night follows day next time…


Moody’s cuts EU credit rating outlook

Good morning, and welcome to our rolling coverage of Europe’s debt crisis.

Overnight, ratings agency Moody‘s has lowered its outlook on the European Union’s AAA rating to negative, from stable, which is the first step towards a full downgrade.

The decision reflects the growing pressures on the four biggest countries who fund the EU: Germany, France, Britain, and the Netherlands, who together provide almost half of the EU’s budget.

Should their economic situations worsen, Moody’s argues, they could be forced to prioritise their own debt obligations rather than their commitments to the EU.

All four countries are rated AAA with Moody’s, but have seen their outlook cut to negative in recent months as the eurozone crisis has rolled on.

Here are some highlights from Moody’s statement (online in full here):


The negative outlook on the EU’s long-term ratings reflects the negative outlook on the Aaa ratings of the member states with large contributions to the EU budget: Germany, France, the UK and the Netherlands, which together account for around 45% of the EU’s budget revenue. The creditworthiness of these member states is highly correlated, as they are all exposed, albeit to varying degrees, to the euro area debt crisis.

Moody’s believes that it is reasonable to assume the same probability of default by the EU on its debt obligations as the highest rated key members states’ probability of default. Whereas Moody’s acknowledges that there are structural features in place that enhance the EU’s creditworthiness, they are in Moody’s view not sufficient to delink the EU’s ratings from the ratings of its strongest key member states. In particular, in the event of a scenario of extreme stress in which Aaa-rated member states would default on their debt obligations,

• 1) defaults on the loans that back the EU debt would be highly likely,

• 2) the EU’s cash reserve would likely be stressed, and

• 3) the EU member states would likely not prioritise their commitment to backstop the EU debt obligations over the service of their own debt obligations.

Hence, it is reasonable to assume that the EU’s creditworthiness should move in line with the creditworthiness of its strongest key member states.

Analyst reaction to follow….. © Guardian News & Media Limited 2010

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