February 2013

EU officials agree bonus cap against UK opposition. Mixed data from Spain reflects uncertainty. Berlusconi investigated for corruption. US jobs data points to recovery, GDP revised higher to show 0.1% growth in the final quarter of last year…

Powered by Guardian.co.ukThis article titled “Eurozone crisis live: Bankers face cap on bonuses after EU deal” was written by Josephine Moulds and Nick Fletcher, for guardian.co.uk on Thursday 28th February 2013 14.38 UTC

2.29pm GMT

Italy uncertainty should not hit Ireland’s bond issue plans

Speaking of the Italian election, Ireland does not believe the uncertainty over the outcome should derail its plans to issue bonds this year.

The country aims to sell a new benchmark 10-year bond in the first half of the year, the chief executive of its National Asset Management Agency John Corrigan told Dow Jones. He said:

Italy is obviously going through a difficult time following the election and that has some impact on European capital markets, but our judgement is it won’t knock us off course in relation to our return to the market.

Updated at 2.38pm GMT

2.24pm GMT

Here’s the Economist’s view of this week’s Italian election result (no comment needed):

2.14pm GMT

Rehn says UK should not sit on European sidelines

Olli Rehn has now turned his attention to the UK, saying it should remain involved in the EU.

He says if he were a British citizen, he would not want his country sitting on the European sidelines. It is firmly in Britain’s interest to use its energy to reform Europe rather than undo it.

Not a fan of a referendum then, it would seem.

As one of our former colleagues notes:

Rehn has added that there is a need to urgently complete the repair of the banking system.

Updated at 2.19pm GMT

2.04pm GMT

And with that I’ll pass you over to my colleague Nick Fletcher.

2.02pm GMT

EU’s Rehn confident Italy will find its way

Back to London, where Olli Rehn, the European Commissioner for economic and monetary affairs, is expressing his confidence that Italy will swiftly find its way forward.

Speaking at a Policy Network conference, he says it is important that Italy pursues reform for sustainable growth.

More generally, he says high debt countries have only one option, to restore sustainability to finances. Surplus countries, meanwhile, should use reforms to boost domestic demand.

He says fiscal consolidation needs to proceed at a careful but steady pace.

1.50pm GMT

Mixed data out of Spain reflects uncertainty

The mixture of good and bad news from Madrid today reflects the uncertainty hanging over Spain’s economy as the government boasts about almost meeting EU-set deficit targets while austerity deepens recession. My colleague Giles Tremlett reports:

The 6.74% budget deficit – just 0.4% off target – will be welcomed in Brussels, though the figure surprises some observers. It is still possible that, as with the 2011 deficit, it will increase as more reliable figures appear over coming weeks. Most impressively, assuming the figures are accurate, is the way regional governments – once the rogue elephants in Spain’s public finances – have slashed deficits close to government-set targets.

But a final quarter drop in GDP of 0.8% – more than double the previous quarter’s shrinkage – bodes badly for a country where unemployment is already officially at 26%, as consumer spending falls even while Spaniards save less.

Early (and incomplete) figures for this quarter point to “continued contraction of activity, in a context of marked apathy in internal consumption,” according to the Bank of Spain.

Mariano Rajoy’s government hopes it will be rewarded for good behaviour – and for not being Italy – with a relaxation of this year’s Brussels-set deficit target, which is currently at 4.5%. It is also predicting a return to growth at the end of the year.

But the biggest fear in Madrid today is that a predicted fragile recovery that is still more than six months away will be thrown off track if Italy provokes a return to euro jitters – with Spain first in line to suffer contagion.

1.34pm GMT

US jobless claims point to recovery

Sticking with the US, jobless claims dropped 22,000 last week to a seasonally adjusted 344,000. That was better than expected and suggests the jobs market in the US is picking up.

1.32pm GMT

US GDP revised up but misses expectataions

US GDP has been revised up to +0.1% for the fourth quarter of 2012 from an original estimate that GDP actually fell by 0.1%.

Still this was not as big a revision as some had forecast, with analysts betting that the economy had in fact grown by 0.5%.

(Just to clarify, the US GDP figures are annualised, so they show the value that would be registered if the quarterly rate of change were maintained for a full year.)

Updated at 1.41pm GMT

1.24pm GMT

Nerves about Italy should not be overdone – ECB’s Nowotny

There has been a clear improvement over the past year in Europe’s economic situation but there is more work to be done to lift the southern economies out of trouble, ECB policymaker Ewald Nowotny said today.

With masterful understatement, he noted the nervousness about Italy’s inconclusive election results but said it should not be overdone.

Of course everyone’s a bit nervous. One should keep things in perspective. I do not think there will be fundamental change in the politics in Italy because there are just economic necessities that you have to follow.

There was a bond auction yesterday that went quite well. One shouldn’t overdo it.

1.13pm GMT

EU bonus cap ‘deluded’ says Boris Johnson

London mayor Boris Johnson expresses his opposition to the EU bonus cap, in his inimitable style.

This is possibly the most deluded measure to come from Europe since Diocletian tried to fix the price of groceries across the Roman empire.

It would be interesting to know what people abroad think of Boris. Clown or comedy genius?

12.32pm GMT

Cyprus election result boosts chances of deal with lenders – Moody’s

Meanwhile the election of pro-bailout candidate Nicos Anastasiades in Cyprus has boosted the chances of a deal with international lenders, says Moody’s

But the ratings agency said the results of the weekend’s other eurozone election did not alter its assessment the island could eventually default. It said:

Domestic banks’ recapitalisation needs remain uncertain and we anticipate Cyprus’ debt burden will rise dramatically, reaching an unsustainable level. There is a 50% chance that the sheer size of Cyprus’ anticipated debt load will eventually compel authorities to pursue every avenue for debt reduction, including private sector losses on Cypriot debt.

12.08pm GMT

Van Rompuy confident Italy will stick with euro

More assurances that Italy will stick with the euro project. The faster they come the weaker they sound.

Here’s European council president Herman Van Rompuy, who this morning expressed his full confidence that Italy will continue to remain a stable and strong member of the European Union and of the eurozone.

Van Rompuy met outgoing Italian prime minister Mario Monti today to discuss the upcoming council, which will discuss growth and job creation.

12.02pm GMT

Despite the UK government’s opposition to the EU bonus cap, MEPs from both Labour and the Tories broadly welcomed the deal.

Labour MEP, Arlene McCarthy, said:

These rules are designed to make banks safer, more accountable and ensure they focus on lending to the real economy.

It’s a shame that the UK government has sought to defend this broken bonus culture by acting as the trade union for a minority of highly paid traders. The coalition government says they want reform of the banking sector yet they are the only member state to defend the status quo by maintaining the current flawed bonus culture.

Conservative MEP, Vicky Ford, said:

I do fear that a cap on bankers bonuses is a blunt instrument but I was pleased to sharpen it by including elements that encourage bankers to take long-term decisions, otherwise they risk their bonuses being clawed back.

Of course some top bankers will be affected by the bonus cap but I feel that we have managed to produce a deal that will strike the right balance for the majority of bankers who take responsible decisions. If the bonus cap is shown to cause bankers to begin relocating outside the EU then we will have the ability to swiftly look again at the provisions in place through an early review.

11.52am GMT

Bonus cap could make banking more attractive

The EU cap on bonuses (see 7.32am and following) could alter the way the City works and for the better, says another commentator from the Cass business school.

Andre Spicer, professor of organisational behaviour, said:

The new EU curbs on bankers’ bonuses will force banks to rethink how they motivate their star performers. For some time banks have relied on super-sized bonuses to attract and retain star performers.

Some of the alternatives to large bonuses will include longer-term incentives which are linked to performance of the institution over five or 10 years. It might include soft incentives such as better working hours, more supportive work environments, more opportunities for self-actualisation and more interesting design of jobs. This could lead to workplaces where bankers are no longer willing to put up with 364 days of stressful work and one good day when bonuses are paid. This will mean banking is likely to be a more attractive job for a wider range of people.

The cap on bonuses will also mean that banks need to rethink their business models. Until now banks have relied on a few stars in small units of investment banking to make significant chunks of the bank’s profit. Now banks will need to think about ways of harnessing the talent of the vast majority of their employees who don’t receive giant bonuses. This could see the large banks returning to older style banking.

But, he writes, the cap could drive bankers into more lucrative posts at hedge funds or private equity firms.

Updated at 12.33pm GMT

11.45am GMT

Spain’s deficit comes down to 6.7%

Spain will miss its target for deficit reduction this year, but not by too much.

The public deficit has come down to 6.74% in 2012, from 8.9% in 2011. That misses the target of 6.3% agreed with Europe, but should be enough to appease the markets.

The European Commission is said to be happy with Spain’s performance and is expected to give the country another extension on shrinking the deficit to below 3%. At present, that target is set (somewhat ambitiously) for next year.

Spain’s treasury minister Cristobal Montoro said there was no need for new budget cutting measures, and that strict rules on autonomous regions’ spending are working.

11.34am GMT

Just to confirm the EU bonus cap has been written specifically for the financial industry, so it will apply to bankers’ and their ilk, not other industries. Thanks to laasan for the question in the comments below.

11.24am GMT

Osborne on the ropes

Why do they do it? Surely by now politicians are so afraid of the damaging headlines, they should know not to be photographed in bizarre poses.

But apparently not. The Evening Standard is running a picture of embattled chancellor George Osborne skipping… even as he grapples with the loss of the UK’s triple-A rating, a rising deficit, and an economy struggling to show any kind of growth. Post your captions in the comments below.

Updated at 11.26am GMT

11.10am GMT

EU bonus cap ‘ludicrous’ – London-based commentator

Here’s Pete Hahn of Cass Business School, on the bonus cap.

Much of banking and economics are cyclical and the basis of bonuses was to address cyclicality. Certainly, bonus payments lost that purpose and need to be reoriented. Yet, the current proposal appears aimed at ludicrously legislating the economic cycle and creating ever higher fixed salaries and perks for those leading the largest banks. Those worried about Europe’s growth might think about how high fixed pay packages with limited upside might influence senior bankers to increase risk taking or not.

11.06am GMT

City of London lashes out at ‘counterintuitive’ bonus cap

There’s more reaction coming through on the EU cap on bonuses agreed overnight (see 7.23am). Unsurprisingly, there are dissenting voices in the City. Mark Boleat, policy chairman at the City of London Corporation, said:

This bonus cap risks placing the EU at a competitive disadvantage to other international financial centres in Asia and the US. The devil will be in the detail but removing flexibility from pay arrangements in this highly cyclical industry would seem counterintuitive – especially if it leads to higher fixed salaries.
In recent years, much work has been undertaken to tie remuneration and incentives more closely to sustainable, long-term performance. This has included introducing a right of claw-back, payment in shares with only a limited cash element and deferred payment, and greater transparency over the packages paid to the highest earners in a business. This is already changing the culture across the industry to ensure pay reflects performance.

The MEP who negotiated the deal for the European Parliament, Othmar Karas, this morning tried to downplay the impact of the cap in Germany. But, as AP’s Brussels correspondent notes, any effect felt there will be multiplied in London.

11.00am GMT

No risk of contagion from inconclusive elections – Italian president

Back to Italy, where the president Giorgio Napolitano said he sees no risk of wider European contagion from the Italian political situation.

Reuters reports him saying there is a difficult path ahead but that he is convinced Italy’s future is in Europe. He says he is confident that Italy will continue to take its responsibilities and accept sacrifices needed to continue the European project.

The Italian people have made a democratic choice that must be respected, he says. The constitution does not allow the process of forming a new government to be accelerated.

10.22am GMT

Eurozone inflation drops to 2%

Eurozone inflation eased in January to 2%, paving the way for a possible rate cut from the European Central Bank.

Eurostat said the annual inflation rate came down from 2.2% in December. That brings the 12-month average to 1.9%, just below the ECB’s inflation target, which could let the central bank cut rates in a bid to boost activity.

Howard Archer of IHS Global Insight said:

The ECB currently seems reluctant to take interest rates lower than the current record low level of 0.75%, but the bank could be forced into reconsidering its position if the eurozone fails to show clear signs of economic improvement over the coming weeks or if the euro strengthens anew to reach new highs. Downside risks to the eurozone outlook could mount if protracted political uncertainty in Italy leads to a renewed intensification of sovereign debt tensions.

Updated at 10.45am GMT

10.12am GMT

Berlusconi investigated for corruption

Reports are emerging that Silvio Berlusconi – who won a sizable portion of the vote at the Italian elections – is being probed in Naples for suspected corruption and illegal party funding.

Italian news agency ANSA said the case regards money allegedly paid to Senator Sergio De Gregorio – who defected from the centre left to join Berlusconi’s party some years ago – citing judicial sources.

The news prompted little surprise on Twitter at least.

Updated at 10.16am GMT

9.56am GMT

EC president says confidence returning to Europe

Over in Ireland, EC president Jose Manuel Barroso is sounding upbeat. Speaking to a business conference, he said there are signs that confidence is returning to Europe, but the situation is still “fragile”.

The banking debt crisis exposed the uneven performance of competitiveness across Europe and the region must now implement reforms for businesses to get the most out of the single market, he said.

And, for his Irish audience, he praised the country’s progress under the bailout programme.

He was appearing alongside Irish prime minister Enda Kenny, who said the country has to deal with the ‘issue of high unemployment’.

Figures out yesterday showed Irish unemployment falling, but still high at 14.2% in the fourth quarter of last year.

Kenny also had warm words about European politics.

9.43am GMT

It’s no wonder Monti agreed to keep his commitment at the European Commissions Competition forum. He clearly wanted a bit of love after Sunday’s humiliating defeat.

9.25am GMT

Mario Monti, outgoing PM, concludes with the following…

The message I would like to leave with you, in 2013 Italy will have a close to zero structural deficit. There is an accompanying strategy at the EU level that needs to be pursued, unless we passively allow that simplistic, some would say populistic (I do not pass judgment on the Italian elections) tendency to have the EU policies derailed.

He gets rapturous applause and a standing ovation. But it’s got to be said it was a very dry speech. Against the likes of Beppe Grillo, it’s no great surprise he didn’t get the votes at home.

9.17am GMT

If you do the right policies and don’t get the recognition (ie rates don’t come down), there is a political backlash, says Monti.

9.15am GMT

9.13am GMT

Monti says there are delays between when a good reform is brought in and when the benefits are felt.

The benefits in terms of growth tend to take more time than the benefits to the financial markets.

9.12am GMT

Back to outgoing Italian prime minister Mario Monti, who is speaking in Brussels.

He is defending his record, saying the market situation in 2011 left no choice but to cut the budget and push through reforms, despite low growth.

9.04am GMT

German unemployment down in February

We’ll keep one eye on that. Meanwhile, German unemployment fell in February, although slightly less than forecast (in seasonally adjusted terms).

The number of people out of a job dropped by 3,000 to 2.9m in February, while economists were expecting it to fall by 5,000.

The unemployment rate held steady at 6.9% (after January’s rate was revised up to 6.9%).

The closely watched jobless total (which is not adjusted) remained above the 3m mark.

8.56am GMT

So far, the focus is very much on competition and it does not look like he will be taking questions.

Italy has felt the benefits of competition with new high-speed rail links, says Mario Monti (who is still being billed as Italy’s prime minister, despite being the clear loser in Sunday’s elections).

Updated at 8.57am GMT

8.54am GMT

Monti speaks in Brussels

Over to Brussels, where Mario Monti is giving the keynote speech at a Competition Conference. You can watch it live here, he’s speaking in English.

8.36am GMT

Markets rise on hope of central bank support

Over to the stock markets, which are looking up on the hope that central banks will step in again to support the economy, although Italy is lagging behind amid the political uncertainty.

UK FTSE 100: up 0.4%, or 27 points, at 6353

Germany Dax: up 0.8%

France CAC 40: up 0.6%

Spain IBEX: up 0.8%

Italy FTSE MIB: up 0.1%

8.29am GMT

Bankia posts biggest loss in Spanish corporate history

Sticking with Spain, one of the country’s nationalised banks today posted a loss of €19bn, by far the largest loss ever reported in Spanish corporate history.

The bank has undertaken a major operation cleaning its balance sheet of soured property loans and other loss-making activities over the past year.

Investors were expecting a big number after Bankia warned of huge losses when it was bailed out late last year.

The Bankia chairman Jose Ignacio Goirigolzarri said in a statement that the bank’s priority is…

To make Bankia a profitable institution in order to return to the community the support it has given us.

8.21am GMT

Spanish fourth quarter GDP drops 0.8%

There is some miserable data out of Spain this morning, which saw its GDP figures revised down to -0.8% for the final quarter of last year, from an initial estimate of -0.7% That means the Spanish economy shrank by 1.9% over the year.

That is the sixth straight quarter that Spain’s economy contracted and the downturn appears to be speeding up, with GDP dropping at its fastest quarterly pace since mid-2009.

Updated at 8.29am GMT

8.10am GMT

German finance minister ‘never said the crisis was over’

Still nothing has been settled in Italy after Beppe Grillo – the ex-comedian whose Five Star Movement broke through in spectacular style at the elections – ruled out backing a government led by the centre left.

Though European markets are settling down after the inconclusive election results, there is still plenty of nervousness out there. And eurozone policymakers are falling over themselves to point out they never said the crisis was over.

German finance minister Wolfgang Schauble said that Italy’s inconclusive weekend election had raised the risk of market turmoil spreading to other euro countries and urged Italian politicians to form a stable government quickly. He told Reuters:

The election result in Italy has sparked doubts in the market that a stable government can be formed. When such doubts arise there is a danger of contagion. We saw this last year when elections in Greece led to political uncertainty. Other countries are then infected.

I never said the euro crisis was over. I only said that we have made significant progress. We need to continue on this path, but we will have setbacks.

7.51am GMT

Bonus cap morally right – think tank

Sony Kapoor, managing director of the Re-Define think tank, meanwhile says it is economically sound and morally right. He writes:

This will help tackle the culture of excessive risk-taking and the bending of rules that has now become endemic to banking. Undertaking this at an EU-wide level will also limit any large-scale migration of the so-called ‘talent’. It will reduce the risks borne by tax-payers and go a long way to rehabilitate the industry, making it focus on serving the real economy again.

7.47am GMT

Fears that bonus cap will push up salaries

But there are concerns the move will be counterproductive. This from the chief economist at the Economist Intelligence Unit…

Updated at 7.52am GMT

7.32am GMT

Good morning and welcome back to our rolling coverage of the eurozone crisis and other global economic events.

Overnight, EU leaders agreed to introduce what will amount to the world’s strictest curbs on bankers’ bonuses, railroading opposition from the UK Treasury.

The basic agreement will cap bankers’ bonuses at a year’s salary. While it still needs approval from EU governments, the main points could become law as early as next year.

And the UK cannot veto it. This will rock the City of London, where bonuses can sometimes be as much as 12 times a bankers’ salary.

My colleague Ian Traynor reports from Brussels:

The UK financial sector was dealt a withering blow on Wednesday night when the European Union agreed on moves to slash the bonuses that may be paid to bankers, defeating strong Treasury opposition to the new rules.

A meeting of officials from the 27 countries of the EU with MEPs and the European commission agreed to cap bankers’ bonuses broadly at a year’s salary, with the proviso that the bonus could be doubled subject to majority shareholder approval.

The agreement has still to be approved by EU governments before coming into force next year. While details may still be tweaked, it is expected that the main points will become EU law.

Britain, strongly opposed to the new legislation, will not be able to veto it as it will be carried by a qualified majority vote of the EU member states.

The deal will be another blow for Chancellor George Osborne who strongly opposed the deal. The FT reports:

Tensions were so high that George Osborne, at one point snapped and said defending the package would make him “look like an idiot”.

Updated at 7.34am GMT

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Grillo damns Bersani as a political stalker. Steinbruck’s ‘clowns’ comment annoys Italian president. Italy holds successful auction, sells €6.5bn of bonds. EU austerity plans shaken by Italian vote. US pending home sales rise more than expected…

Powered by Guardian.co.ukThis article titled “Eurozone crisis live: Fresh deadlock in Italy as Grillo rules out alliance with centre-left” was written by Graeme Wearden, for guardian.co.uk on Wednesday 27th February 2013 15.18 UTC

3.15pm GMT

Bersani’s ally: no deal with Berlusconi

It’s official – the Left Ecology Freedom party, which teamed up with Pier Luigi Bersani in the election, is refusing to take part in a coalition with Silvio Berlusconi.

Reuters has the full details:

The junior partner in Italy’s centre-left coalition on Wednesday rejected forming a governing alliance with the centre-right after neither side won enough seats to govern in this week’s election.

“No grand coalition,” said Nichi Vendola, leader of the Left Ecology Freedom party, after a meeting with centre-left leader Pier Luigi Bersani.

In a statement, Vendola said he hoped populist leader Beppe Grillo did not want a right-left government either, and called for a government that would “give an electric shock” to the country.

Updated at 3.21pm GMT

2.53pm GMT

It’s moving fast in Italy… one of Bersani’s allies has ruled out a deal with Berlusconi’s People of Freedom party, reports Reuters.

Here’s the newsflash:


Looking for the details now….

Updated at 3.11pm GMT

2.49pm GMT

It’s lose lose lose for Bersani

Beppe Grillo’s decision (see 2.36pm) leaves Pier Luigi Bersani in a very difficult position. If an alliance with Five Star is ruled out, then his only hope of a majority is through a grand coalition with Silvio Berlusconi.

Political analyst Alberto Nardelli explains:

Updated at 3.18pm GMT

2.36pm GMT

Grillo rules out alliance with centre-left group

Big news from Italy – Beppe Grillo has ruled out forming an alliance with the centre-left, dashing hopes that the two sides could form a stable government.

The leader of the Five Star Movement made the announcement in a blog post in which he blasted Pier Luigi Bersani as “a stalker” and a “dead man talking” who should have resigned rather than attempted to woo his rivals – as he did last night.

Writing on his blog, Grillo reiterated his opposition to any form of formal alliance with Bersani’s Democratic Party. Instead, Grillo said, Five Star would only support policies which it agreed with.

The news was accompanied with a remarkable graphic of Pier Luigi Bersani presented as a corpse:

Click here for Grillo’s full statement.

Reaction to follow

Updated at 2.43pm GMT

2.24pm GMT

Italian president blows out Peer Steinbrück over clown comments

German politician Peer Steinbrück has paid a heavy price for joking yesterday that the Italian election had been won by a couple of clowns – Italy’s president, Giorgio Napolitano, has cancelled a meeting with him.

The rebuke comes after Steinbrück‘s, the SPD’s candidate for the chancellorship in this autumn’s general election, told voters at an event called Straight Talk with Peer Steinbrück that

To a certain degree I am appalled that two clowns have won.

In fairness to Steinbrück, he’s not the first person to connect Beppe Grillo’s career as a satirist with Silvio Berlusconi‘s long record of being, well, Silvio Berlusconi – or “a clown with a testosterone boost”, as he put it.

But Napolitano – on a trip to Germany – is most unamused.

Der Spiegel has more details.

Updated at 2.52pm GMT

1.35pm GMT

Bean blasts negative interest rates plan

In the UK, one of the Bank of England’s deputy governors has tried to shoot down speculation that Britain might experiment with negative interest rates — a day after a fellow deputy suggested it might.

Charlie Bean insisted that the Bank was not about to ask to be paid to hold commercial banks’ deposits, despite Paul Tucker hinting that it was under consideration.

Speaking at a conference organised by the Institute of Economic Affairs, Bean said:

Any suggestion that we have a plan to introduce negative interest rates immediately, I should make absolutely clear, is not the case.

The ECB cut its deposit rate to 0.0% last year, in an attempt to get banks to lend. But as our economics correspondent, Phillip Inman, reports, Bean says the Bank of England couldn’t easily folow.

Bean did his best to demolish the policy, saying it would create huge problems for banks that have tied mortgages to the current bank base rate of 0.5%.

“It has significant negative side-effects which is why I do not support it,” explained Bean.

He pointed out that the European Central Bank has a separate rate for some commercial bank deposits because they are forced to keep particular reserves, whereas UK banks are allowed flexibility.

Disaggregating some bank deposits with Threadneedle Street from others would be a minefield, Bean added.

I just chatted with economist Shaun Richards, who argued that the ECB’s move hadn’t worked:

Zero rates had zero effect. The ECB cut the deposit rate to zero, and all the money just moved to another account in the ECB.

Richards said he wasn’t surprised to see Tucker discussing negative rates, given the weak state of the UK economy and the Bank’s failure to stimulate output. But he pointed out that previous rate cuts haven’t had much effect, and warns that savers would inevitably suffer.

Just to be clear, this is different from the Bank of England’s base rate, which is at a current record low of 0.5%. Our Q&A explains all….

…unlike a certain radio station this morning, it seems:

Updated at 2.26pm GMT

12.46pm GMT

Greek embezzlement

Over in Greece, the former mayor of Thessaloniki has been jailed for life after being convicted of stealing almost €18m from the city.

Vassilis Papageorgopoulos was convicted of embezzlement after a trial where four others were also convicted and received lesser sentences, including the municipality’s former general secretary, Michalis Lemousias, ex-cashier Panayiotis Saxonis.

Greek newspaper Kathimerini reports:

Papageorgopoulos and 17 other officials stood trial for allegedly embezzling almost 52 million euros from the municipality’s coffers, though the Thessaloniki court on Wednesday said that there was proof of 17.962 million euros having been misappropriated by the former mayor and his cohorts.

The other 13 officials were acquitted.

Updated at 1.47pm GMT

12.04pm GMT

Reforms must carry on – Van Rompuy

Herman Van Rompuy, president of the European Council, has joined the ranks of Eurocrats warning Italy that they cannot avoid fiscal consolidation.

Speaking after meeting the prime minister of Hungary, Viktor Orbán, Van Rompuy said the pair had spoken about “ the economic and social situation in Europe”.

As I have said before – and others like me – I believe that 2012 marked a turning point in the crisis in the eurozone – and that the worst is now hopefully behind us.

But we should not become complacent – neither in Member States nor at the level of the European Union and the eurozone. There is no real alternative to keep up reforming our economies. There is no way back for any of our Member States.

Updated at 1.48pm GMT

11.41am GMT

There’s very little political action to report in Italy yet (where the Pope is making an emotional farewell to huge crowds in the Vatican).

But Beppe Grillo’s Five Star group are making murmurings about a potential deal with Bersani, it seems:

11.25am GMT

Word from Brussels that the European Commission president, José Manuel Barroso, will meet Italy’s current prime minister, Mario Monti, to discuss the situation.

11.02am GMT

Reaction to Italian bond sale

The news that Italy’s much-watched bond sale went smoothly (see 10.24am) has cheered analysts, although some traders are muttering darkly that we don’t know who bought the bonds (so perhaps domestic banks mopped most of them up to ease the panic).

Nick Spiro of Spiro Sovereign Strategy said the sale had gone “relatively smoothly”, but warned:

The higher yields show that Italian sovereign debt is now caught in a tug-of-war between the reassurance provided by the ECB’s fiscal backstop and the confusion and instability in Italian politics.

…While there’s still none of the panic of November 2011 or July 2012, sentiment towards Italy has deteriorated markedly since Sunday’s inconclusive parliamentary election.

Nick Stamenkovic of RIA Capital Markets said the results would generate “some relief”, with buyers calculating that an Italian government will be carved out, somehow.

They got reasonable demand, but clearly investors demanded a higher risk premium to take it down.

Demand reflected by the bid/cover ratio suggests that despite the uncertain outlook, investors believe that some sort of a coalition will be cobbled together in coming weeks.

And Elisabeth Afseth of Investec agreed that the important point is that the Italian debt management office “got it done”.

The yields are higher than anything they’ve done for quite some time but that’s hardly a big surprise but they got the amount they wanted.

But some were more cynical:

10.24am GMT

Italian bond sale success

Breaking: the results of the Italian debt auction are in, and it has gone better than feared.

Borrowing costs are up compared with the previous auctions (no surprise there!), but they are not at dangerous levels. And there certainly wasn’t a buyer’s strike – Italy sold the full €6.5bn on offer.

Here’s the details:

• Italy sold €2.5bn of 5-year bonds at an average yield of 3.59%, up from 2.94% last time.

• It also sold €4bn of 10-year bonds at an average yield of 4.83%, up from 4.17%

And the bid-to-cover ratio (the amount of bids compared to the amount on offer) actually rose, to 1.6, from 1.3 last time.

Reaction to follow

Updated at 1.50pm GMT

10.03am GMT

The better news in today’s UK GDP data is that the economy actually grew over the last 12 months.

Britain’s economy was 0.3% higher than a year ago – not flat as expected. That’s because the ONS have revised two other quarters last year. It now thinks GDP in Q1 2012 only fell by -0.1% (from -0.2%), while Q3 2012 GDP is now estimated at +1.0% (from +0.9%).

On the one hand, this is much weaker than the UK government had expected (via the independent Office for Budget Responsibility)

On the other hand, some eurozone countries would welcome any growth:

Updated at 1.52pm GMT

9.35am GMT

UK GDP confirmed

Despite rumours it would be revised down, UK GDP is unchanged at -0.3% for the last quarter, the ONS just reported.

Output data for various sections of the British economy showed that:

• UK services sector shrank by 0.1% in October-December

• Construction output rose by 0.9%

• Industrial output tumbled by 1.9% and manufacturing output by 1.3% — both the steepest falls since the first quarter of 2009

9.27am GMT

Moody’s has warned it could downgrade Italy

Rating agency Moody’s weighed in on the Italian election deadlock last night, warning that it could downgrade the country’s credit rating if a government can’t be formed, or if its economic reform agenda now stalls.

In a statement, Moody’s said:

We would consider downgrading Italy’s government debt rating in the event of additional material deterioration in the country’s economic prospects or difficulties in implementing reform

A deterioration in funding conditions as a result of new, substantial domestic economic and financial shocks from the euro area debt crisis would also place downward pressure on Italy’s rating.

Moody’s currently rates Italy just two notches above Junk status, at Baa2.

8.55am GMT

Bernanke helps ease markets

City traders also appear to be taking comfort from US central bank chief Ben Bernanke – who yesterday calmed fears that the Federal Reserve will tighten monetary policy.

Mike van Dulken, Head of Research at Accendo Markets, explains:

While Italian political chaos likely to persist as discussions take place on coalition formation, investors still looked to put more onus on US Fed Chairman’s statement that quantitative easing was here to stay.

8.51am GMT

Shares rally

After yesterday’s drama, Europe’s stock markets are rising in early trading.

Italy’s FTSE MIB: up 106 points at 15657, + 0.7%,

FTSE 100: up 29 points at 6299, + 0.5%

German DAX: up 35 points at 7629, +0.4%

French CAC: up 24 points at 3646, +0.7%

Spanish IBEX: up 64 points at 8044, +0.8%

So why the change? One argument is that investors would actually welcome some grit being thrown into the wheels of the eurozone austerity machine.

The prospect of a Bersani-Grillo government, providing some stability but less fiscal consolidation, isn’t a reason to panic.

Investors haven’t been demanding that economic growth is choked off recklessly across Europe — their concern is simply that they get their money back.

Or as one London fund manager put it:

8.23am GMT

Deadlocked Italy holds bond sale as EU faces turmoil

Good morning, and welcome to our rolling coverage of the eurozone financial crisis following the dramatic Italian election results, and other key events in the world economy.

It never really went away, but there’s no doubt that the eurozone crisis is now getting everyone’s full attention again.

The deadlock in Italy following the weekend’s election is a very nasty shock to those who thought the worst was somehow over for Europe.

With a majority of voters rejecting the reform plans favoured by the EU, we might be looking at months of drama:

As our front page story today declares:

Three years of German-led austerity and budget cuts aimed at saving the euro and retooling the European economy was left facing one of its biggest challenges as Italian voters’ rejection of spending cuts and tax rises opened up a stark new fissure in European politics.

The governing stalemate in Rome and the vote in the general election – by a factor of three to two – against the austerity policies pursued by Italy‘s humiliated caretaker prime minister, Mario Monti, meant that the spending cuts and tax rises dictated by the eurozone would grind to a halt, risking a re-eruption of the euro crisis after six months of relative stability.

That was yesterday. Now, Italy’s first challenge is to sell up to €6.5bn of long-term government bonds this morning.

Investors are certain to demand a higher rate of return, with Italy’s future so uncertain. How much higher (and how many bond traders take part), will show how nervous the markets are today.

And the big question remains – who will govern Italy?

Last night Pier Luigi Bersani threw down a challenge to Beppe Grillo and his Five Star Movement (M5S) — you’ve won influence, now use it.

As John Hooper reported from Rome:

At a press conference in Rome, a weary-looking Bersani said it was time for the upstart movement to do something more than just demand the removal of Italy’s mainstream politicians.

“Up to now, they have been saying: ‘All go home.’ But now they’re here, too. So either they go home as well, or they say what they want to do for their country and their children.”

Such an alliance would scupper the Grand Coalition favoured by Silvio Berlusconi. Your move, Beppe.

We’ll be watching all the latest political and financial developments through the day….

Updated at 8.37am GMT

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In the broadcast today: Is there Further EUR Weakness to Come? In the aftermath of the uncertain outcome of the Italian election which has raised the prospects of a hung parliament, we examine the factors weighing on the euro and ponder if there might be further weakness to come for the single currency, we analyze the latest trend developments in the EUR/USD currency pair, we continue to monitor the sell-off in the GBP/USD pair, we note the first signs of a corrective pattern in the USD/JPY currency pair, we highlight the market’s reaction to the Italian election results, the Fed Chairman’s testimony to the Senate, the U.S. Consumer Confidence, Richmond Fed Index and New Home Sales, we discuss new forecasts from Bank of New York-Mellon 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 down sharply. Confusion in Italy as analysts say new elections may be necessary. Euro trades under pressure on rising Italian and Spanish borrowing costs. Fed Chairman Ben Bernanke defends QE in his testimony to Senate…

Powered by Guardian.co.ukThis article titled “Eurozone crisis live: Italian political deadlock sends markets tumbling” was written by Graeme Wearden (7.15am-1.45pm) and Nick Fletcher (now), for guardian.co.uk on Tuesday 26th February 2013 15.27 UTC

3.27pm GMT

It wasn’t all bad news for Italy’s technocrat prime minister Mario Monti, whose poor performance in the election is a bit of an embarrassment and a slapdown of his austerity reforms. It appears he didn’t fail everywhere:

Updated at 3.27pm GMT

3.09pm GMT

Fed chairman Bernanke defends bond buying programme

US Federal Reserve chairman Ben Bernanke has strongly defended the central bank’s bond buying programme in testimony to the Senate.

He said the benefits of the stimulus outweighed the possible costs. He said the Fed was aware of the public losing confidence it its ability to unwind its programme smoothly or the possible destabilising effects of low interest rates. But he said these risks did not seem material at the moment. He said:

To this point, we do not see the potential costs of the increased risk-taking in some financial markets as outweighing the benefits of promoting a stronger economic recovery and more rapid job creation.

But he urged politicians to avoid the spending cuts due to come into force at the end of the week, which he warned could combine with earlier tax rises to create a “significant headwind” for the economic recovery.

Markets have greeted his dovish tone on the quantitative easing programme positively, concluding it means the prospect of further easing.

The testimony followed some positive data, with positive new homes sales, growing consumer confidence and an unexpected jump in the Richmond Fed manufacturing survey.

Updated at 3.11pm GMT

2.59pm GMT

US markets open higher

US markets, which fell sharply on Monday after the impasse in Italy became clearer, are recovering ahead of a testimony before the Senate by Federal Reserve chairman Ben Bernanke.

The Dow Jones Industrial Average is up almost 100 points in early trading, but this has done little to help European markets, which are still firmly in the red.

• The FTSE 100 is down 1.11% or 70.52 points

• Italy’s FTSE MIB is 3.84% lower

• Germany’s Dax is down 1.41% and France’s Cac 1.63%

• Italy’s borrowing costs are still higher, up to 4.82% from 4.37% last night

2.48pm GMT

Ireland close to €300m savings on public pay bill

While Italy struggles to elect a government the Irish Coalition seems to be on the verge of saving €300m of its public pay bill as the Republic continues to be the ‘poster child’ for the EU, writes Henry McDonald in Dublin.

Agreement on a national wages and pension agreement in the public sector still hinges on unions accepting the deal. They are balloting their members over the weekend.

But the politician heading up the negotiations, the Labour Minister Brendan Howlin promised today that this will be the “last ask” from the government to the unions in terms of accepting austerity measures.

Speaking outside Government Buildings in central Dublin today, Howlin directly appealed to the unions to endorse the agreement: “I have said to public servants that this is the last ask. If you consider this, swallow hard as I know it’s not easy and vote for this, we will not be coming back again and we can plan our recovery over the next three years.”

Cuts to wages include a ten per cent reduction for any civil servant earning €185,000 or more. To demonstrate solidarity with public servants, the Cabinet are also taking pay cuts.

Taoiseach Enda Kenny will see his €200,000 salary reduced to €185,350, while Irish Deputy Prime Minister and Foreign Minister Eamon Gilmore will see his €184,405 salary drop to €171,308.

2.41pm GMT

Eurogroup head Dijsselbloem calls for Italy to stick to agreements

Jeroen Dijsselbloem, the Dutch finance minister and new head of the eurogroup, has added his voice to those calling for Italy to stick to its agreements with the rest of the eurozone. He told Dutch broadcaster RTL7:

I think and I hope there is a broad understanding that there is also a responsibility for the stability of the eurozone as a whole, and that agreements have to be met.

Pulling Europe from the economic doldrums requires a stable, political policy, also in Italy.

2.29pm GMT

Here’s a quick summary of the developments so far:

The Italian election has resulted in deadlock, with the centre-left group led by Pier Luigi Bersani winning a narrow victory in the lower house but the senate deeply split

There was a surge of support for Beppo Grillo’s Five Star Movement with voters disillusioned by austerity and the existing political parties

European stock markets are in retreat and Italy’s borrowing costs rising after the uncertain outcome

Two German politicians have said Italy must stick to its reform programme despite the surge in support for parties opposing it

The European Commission said it had heard the concerns of the people but Italy must continue to address its deficit

Analysts say unity government could still be formed but new elections may be necessary

Our latest news story on the election is here.

Updated at 2.43pm GMT

2.10pm GMT

Portuguese leaders divided over bailout

With the current political crisis in Italy, there are also disagreements elsewhere about the way forward.

In Portugal for instance, prime minister Passos Coelho has been playing down concerns about its bailout, as its creditors start another review. As reported by Reuters, he said:

We do not want more time under the adjustment programme, neither more time, nor more money. We intend to conclude the bailout programme by mid-2014 with the same financial package that has been envisaged.

But the leader of the main opposition party has said the package should be renegotiated. Socialist head Antonio Jose Seguro said:

We need more time and a delay of interest payments. There cannot be more austerity, there has to be a strategy of growth. I hope the government refuses proposals (by the troika of lenders) for more austerity.

Seguro also said the election result in Italy was “very worrying”.

1.45pm GMT

What’s next for Italy?

Open Europe, the think tank, outlines the potential scenarios for Italy:

  • A national unity government, if Bersani, Berlusconi and Monti join forces – could be possible but may not be enough to avoid snap elections (maybe as early as next year, and after the electoral law is changed);
  • Grillo U-turns and agrees to form a coalition with Bersani’s centre-left alliance;
  • A re-run election (presumably within 3-4 months) (with a caretaker government taking temporary control)

But without a change to Italy’s convoluted system of proportional representation, a new election might not help!

Under scenarios 1 and 3, there will be a lot of pressure to change the electoral law before new elections to avoid a similar stalemate. For that, however, there needs to be a majority in both houses, meaning that we’re looking at a potential Catch-22.

Berlusconi, of course, has already said he wouldn’t want fresh elections – and other parties also appear opposed.

Here’s the likely timescale:

15 March: First seating of the Italian parliament (both chambers).

By 20 March: The speakers of both chambers should have been elected.
After 20 March: Italian President Giorgio Napolitano starts official consultations on the formation of the new government.

However, there’s another problem – Napolitano no longer has the power to dissolve parliament, because he is in the last six months of his mandate (his term finished in May).

So if a new vote is needed, there could be months of paralysis while MPs elects a new president, so that parliament could be dissolved.

Full details here.

And with that, I’m handing over to Nick Fletcher….

12.51pm GMT

Bersani press conference this afternoon

Pier Luigi Bersani, the centre-left leader who won control of the Italian lower house but not the Senate, is due to give a press conference in around three hours time (4pm GMT / 5pm CET)

12.38pm GMT

Addressing Italy’s debt problem

The European commission also warned that Italy must address its huge debt pile, in its first public comment on the election results.

Olivier Bailly, EC spokesman, told a regular press briefing in Brussels that Italy needs a government that will push for stronger economic growth and job creation.

Asked about today’s tumbling stock markets, Bailly said:

Markets are free to react the way they want. As far as the Commission is concerned, we would like to underline our full confidence in the Italian authorities in their capacity to find and establish a political majority that will continue to deliver a growth and jobs agenda, which is what Italy needs to reduce the unsustainable level of its debt.

At around €2 trillion, Italy’s public debt is expected to hit 128% of national output during 2013. But its annual deficit is relatively low, and could fall below 3% of GDP this year.

Bailly also insisted that the EC had heard the voice of Italians, and indicated some frustration with the way the election was fought (Bersani, in particular, approached the campaign rather cautiously)

Updated at 1.28pm GMT

12.10pm GMT

Another photo from the Frankfurt stock market (that’s Beppe Grillo on the TV news).

11.51am GMT

Short-selling ban

Italy’s financial regulator has responded to the heavy falls on the Milan stock market by banning people from short-selling shares in the country’s biggest bank – Intesa San Paolo.

Intesa San Paolo’s shares have already shed 10% in a volatile sell-off this morning.

Short-selling bans, which prevent speculators selling shares they don’t own – are often rolled out at times of crisis. They won’t stop investors selling out, though, and traders in Italy aren’t impressed:

Updated at 1.29pm GMT

11.37am GMT

Latest stock market prices

Europe’s financial markets are still in retreat today, led by Italy where there’s been little relief from its rout.

Spain’s stock market has also seen a rush of sellers – reflecting concern that an escalating eurozone crisis could swamp Madrid’s efforts to avoid a bailout.

Here’s a round-up of the latest major indices:

Italy’s FTSE MIB: down 745 points at 15606, -4.5%

FTSE 100: down 81 points at 6273. -1.29%

German DAX: down 149 points at 7623, – 1.9%

French CAC: down 85 points at 3636, – 2.29%

Spanish IBEX: down 227 points at 8017, -2.75%

Italian borrowing costs also remain sharply higher, after nervy bond traders drove down its bonds. 10-year Italian bonds are changing hands at a yield of 4.78% — around 0.4 percentage points higher today.

Higher yields indicate that Italy is a riskier bet – a safe call, frankly. but something of a worry given tomorrow’s big bond sale.

Robert O’Daly, Italy analyst at the Economist Intelligence Unit (EIU), comments:

With Italy looking ungovernable, the financial markets are responding as expected.

Updated at 12.19pm GMT

11.06am GMT

Germany’s foreign minister, Guido Westerwelle, has now weighed in, becoming the third German politician to argue that Italy must stick with Monti’s reform plan.

Speaking in Berlin, Westerwelle said it was important that a stable Italian government is formed quickly – one that is committed to Monti’s policies.

Given Monti’s poor show, and the way Berlusconi won support by painting himself as the alternative to German oppression, this may not be the best approach from Westerwelle:

Updated at 11.37am GMT

10.44am GMT

Italy has seen its borrowing costs jump at its auction of short-term debt this morning.

It sold €8.75bn of six-month bills, as planned, but at an interest rate of 1.237% – much higher than the 0.73% agreed at a similar sale last month.

Analysts blamed the post-election deadlock.

Italy is due to sell long-term debt tomorrow, and Christian Lenk of DZ Bank is warning that it will probably have to accept higher borrowing costs then too.

Updated at 10.51am GMT

10.34am GMT

John Hooper: the real story of Grillo’s success

Our Southern Europe editor, John Hooper, flags up that we shouldn’t simply see the Italian election result as a simple vote against austerity.

He explains that the surge in support for Beppe Grillo’s Five Star movement reflects a deeper disenchantment with Italy’s entire political system:

John writes:

Market analysts this morning are interpreting this as a vote against austerity. But that is not the whole story, and they will misunderstand (and underestimate) the result if they see if through an exclusively euro zone, macro-economic lens.

Many of Grillo’s supporters are unquestionably fed up with their economic prospects. A recent study by the Demos think tank showed they were far more likely to be (a) pessimistic about Italy’s (and Europe’s) prospects and (b) unemployed.

But while Grillo did indeed lambast the current direction of the EU and the euro zone in his campaign (decrying Mario Monti as Angela Merkel’s poodle), his Five Star Movement’s main target is Italy’s sleazy, complacent political establishment. A new government made up of pro-growth, anti-austerity ministers drawn from among the same old parties will not make the M5S go away.

What is more, the movement’s attitude to the EU is profoundly ambiguous. When I spent well over an hour with him a few weeks ago he described himself as a “convinced European”.

That meeting led to this article: Beppe Grillo: populist who could throw Italy into turmoil at general election.

John continues:

But, Grillo says, the decision on the euro is such an important one that Italy’s membership needs to be decided by the people in a referendum. The same is true of M5S’s economic approach.

Grillo himself espouses an anti-capitalism that chimes with many of the ideas of the Occupy and anti-globalism movements. But his movement’s programme actually talks about cutting the budget deficit, and with spending cuts.

Updated at 12.20pm GMT

10.17am GMT

Germany: Italy must stick to Monti’s reforms

Two German politicians have declared that Italy must stick with the reform programme which Mario Monti has put underway — despite the surge of support for parties which oppose it.

Michael Grosse-Brömer, the parliamentary floor leader of Merkel’s Christian Democrats (CDU), said this morning.

It is important that Italy has a functioning government. Monti’s reform path must be continued.

(via Reuters).

German economy minister Philipp Rösler was putting a brace face on events, saying that he could imagine a better result for the pro-reform parties.

But in a statement, Rösler insisted there was no other way:

There is no alternative to the structural reforms that are already underway and which include consolidating the budget and boosting competitiveness.

Meanwhile the German tabloid newpaper, Bild, is horrified by Beppe Grillo’s ascendancy, and the reappearance of Silvio Berlusconi.

Its headline asks: “Are they going to destroy our euro now?”

“Our” euro?

Updated at 12.20pm GMT

9.57am GMT

Heads-up: Italy is about to hold an auction of short-term bonds.

9.54am GMT

Italy’s current prime minister, Mario Monti, is about to hold talks with the governor of the Bank of Italy, Ignazio Visco, and his own finance minister, Vittorio Grilli, about the situation following the election.

Updated at 12.20pm GMT

9.38am GMT

Our Europe editor, Ian Traynor, reports that there is shock in Brussels about the Italian election result:

But in Britain one Conservative MP, the maverick Douglas Carswell, has welcomed the surge in support for Beppe Grillo, and Mario Monti’s poor showing:

9.33am GMT

Lizzy Davies: confusion in Italy

From Italy, our Rome correspondent Lizzy Davies reports that Italians have woken up to “utter confusion”

Last night the possibility of fresh elections was being mooted by some.

But the centre-left Democratic Party appeared to back away from that, and this morning Berlusconi had had his say too. Asked on Canale 5 television about another vote, the former prime minister replied in his inimitable style: “I don’t think that would be helpful in this situation because there are no political programmes that have been discussed. The only one to have put forward programmes in this campaign was me.”

As mentioned at 8.40am, Berlusconi said all parties must reflect on the result and make sacrificies “for the good of Italy”.

Lizzy reports that, with the markets sliding, the former PM reminded us of his financial views, and criticised comparisons between Italy’s borrowing costs and Germany’s.

The spread between yields on Italian and German government bonds was “an invention of two years ago” without which Italians had lived very happily for years, he explained, adding that he was not worried about the effect the result was having on the markets.

“The markets are independent and also a bit reckless,” he said. According to the Ansa news agency, he said: “Let’s be done with the spread. Let leave it.”

That spread has widened significantly today, following the fall in the value of Italian bonds (see 7.57am).

Why there is stalemate in Italy

The situation after yesterday’s elections is that the centre-left has, as expected, secured a majority in the lower house of parliament, or chamber.

But in the upper house, or Senate, it has just two seats more than the centre-right bloc led by Silvio Berlusconi’s Freedom People party.

Centre-left: 119 seats

Berlusconi’s alliance: 117 seats

Beppe Grillo’s Five Star Movement: 54 seats

Mario Monti’s centrist group: 18 seats

Thus total deadlock – as Grillo has previously said that Five Star will not work with other parties.

Updated at 9.37am GMT

9.12am GMT

What the City experts say

The Italian election results have knocked the wind right out of Europe’s austerity drive, City analysts are suggesting today. Here’s a round-up of early comment:

Kit Juckes of Société Générale:

The cognoscenti will be focusing on the fact that the Italian election was a clear anti-austerity protest by the people of the Euro Zone’s third-largest economy.

Austerity delivers an even higher debt levels as it induces perma-recession, so what’s the point?

Gary Jenkins of Swordfish Research

The election result is an embarrassment for Mario Monti, who managed to win around 10% of the vote in both houses, a triumphant return for Mr Berlusconi and a breakthrough for Beppe Grillo’s Five Star Movement. One can assume that Angela Merkel had to be served her dinner with plastic cutlery last night.

….the early indications are that Mr Grillo is still sticking to his pre-election promise that he would not enter into a coalition with either of the traditional parties. If he sticks to that line then it would appear to leave only some form of ‘Grand Coalition’ or new elections. One would imagine that the last thing that Mr Bersani would want is another set of elections because the momentum would appear to be with Mr Grillo.

Marc Ostwald of Monument Securities:

It would appear that another round of elections are inevitable [after] a victory for Mr Grillo, a resounding defeat for the establishment as represented by Berlusconi, Bersani and Monti.

Matt Basi, of CMC Markets:

Results from this weekend’s Italian election saw voters show firm opposition to austerity plans instigated by outgoing PM Mario Monti, in favour of a comedian and a tax evader with a scandal list that goes on longer than a Bunga Bunga party. Unsurprisingly, Italian treasuries are better offered this morning.

Updated at 9.22am GMT

8.51am GMT

Trading in several Italian banks was suspended as soon as the market opened, because investors were so desperate to sell, trader @finansakrobat explains:

8.40am GMT

Berlusconi hints at deal with centre-left

Political developments in Italy: Silvio Berlusconi has ruled out forming a coalition with Mario Monti, the technocratic PM who took power when Berlusconi was ousted in November 2011.

In a TV interview Berlusconi, whose centre-right coalition was narrowly defeated in the lower Italian parliament, said that all parties need to make sacrifices.

Asked if he’d be prepared to work with Pier Luigi’s centre-left Democratic Party, Berlusconi said:

Italy cannot be left ungoverned, we have to reflect.

Berlusconi conceded that the centre-left had won the battle in the lower house (last night his party had argued that the race was too close to call). He also argued that Monti’s weak performance showed that Italians would not accept his unpopular austerity measures.

Updated at 12.23pm GMT

8.29am GMT

Shares in Italy’s two biggest lenders are being hammered – Intesa San Paolo is down 10%, with UniCredit falling 8.8%.

Updated at 12.23pm GMT

8.21am GMT

There’s also a big selloff in Spain – where the IBEX index has fallen by 3%.

Updated at 8.21am GMT

8.19am GMT

Italian stock market tumbles

in Milan the Italian stock market is plunging – by much more than feared.

The FTSE MIB, made up of the biggest companies on the market, has fallen by 5% — shedding over 760 points (it took several nervous minutes before all shares were trading properly)

Yesterday afternoon the MIB actually spiked by 4% when the first exit polls emerged, suggesting a win for the centre-left coalition. The reality – a divided Senate with no clear way ahead – has sent investors fleeing.

8.11am GMT

FTSE 100 falls at start of trading

As feared, European stock markets are sliding at the start of trading.

The FTSE 100 has dived by 92 points, to nearly 1.5%, to 6262. Financial stocks are suffering, with Barclays shedding more than 5%

Here’s a chart of the biggest fallers:

The French market has been hit even harder by the chaos in Italy, down over 3%, while Germany’s DAX is down over 1%.

Updated at 8.11am GMT

8.02am GMT

Our latest news story from Italy is online here: Italy election sparks fresh fears for euro. Here’s a flavour:

Neither right nor left had an outright majority in the upper house, where the balance will be held by Beppe Grillo’s Five Star Movement (M5S). Grillo has ruled out supporting either side in his drive to sweep away Italy’s existing political parties and the cronyistic culture they support – a sentiment he appeared to reiterate after the count by insisting the M5S was not planning on “any stitch-ups, big or small” and lambasting Berlusconi’s voters for committing “a crime against the galaxy”

7.57am GMT

Italian and Spanish borrowing costs jump

Alarming moves in the bond markets too, where Italian government debt is being sold off sharply, dragging Spain down too.

The yield (or interest rate) on 10-year Italian bonds has jumped dramatically to 4.82%, from just 4.37% last night. That’s a truly dramatic move, and means traders are rushing to sell their Italian bonds.

Spanish 10-year bonds, another key benchmark, are now yielding more than 5.4%, from 5.1% last night.

It’s a picture we’ve seen before in the eurozone crisis, when fear grows over a peripheral country’s ability to repay their debts.

Updated at 10.31am GMT

7.49am GMT

Euro falling towards $1.30

The uncertainty in Italy has sent the euro reeling, now down by nearly 3 cents against the US dollar since the first predictions from Italy.

It just hit a low of $1.3034 – having received a thorough hoofing during Asian trading dominated by talk that the the eurozone’s economic plans were in deep trouble.

As Paul Bloxham, HSBC’s chief economist for Australia, told CNBC:

We’re now left in limbo and we don’t know what the election result means for the reform agenda and the policies Italy needs to implement. It’s not a helpful outcome at all.

Updated at 10.31am GMT

7.38am GMT

Markets expected to tumble

City traders are expecting big losses when trading begins.

IG is forecasting that the main Italian index, the FTSE MIB, will fall by over 400 points, or 2.5%. It also reckons the FTSE 100 will dive by 100 points in London.

Markets hate uncertainty, as Chris Weston, IG’s chief market strategist, explains:

We simply don’t know the state of play with Italian politics, and markets find sellers in times of instability.

The President will take centre stage now and either form a ‘grand coalition’, although this seems unlikely. It has been speculated that Mr Bersani may look to team up with Beppe Grillo’s Five Star movement (again unlikely), or ultimately fresh elections will be called down the track.

This is a story of anti-austerity and one where most hadn’t expected the anti-austerity / anti-European parties to do anywhere near as well as they have. The Italian voter has spoken out and this has thrown up political instability as perhaps the number one issue facing Europe in 2013.

7.15am GMT

Italian Senate split after shock election

Good morning. European financial markets are expected to tumble this morning after Italy’s general election left the country deadlocked

After a dramatic day in Italy, the centre-left group led by Pier Luigi Bersani has won a narrow victory in the lower house of parliament.

The Senate, though, appears to be deeply split with no party winning sufficient seats to control it.

And the really big shock for the European establishment is the success of the Five Star Movement, led by comedian Beppe Grillo. It has won more votes than any other party – a remarkable achievement, which shows deep anger in Italy against the political status quo.

But it was a bad night for Mario Monti, whose centrist pro-reform coalition was a distant fourth place – failing to win enough seats in the Senate to form a coalition with Bersani.

There is talk that a second election will be needed to break the deadlock, unless political leaders can somehow agree a workable coalition.

The euro has already fallen sharply in overnight trading, and traders are braced for a big sell-off when European stock markets open in one hour’s time.

Just when when politicians and financial markets have grown confident (some might say complacent) that the worst was over, the eurozone debt crisis has flared back into life.

We’ll be tracking all the developments through the day …

Updated at 10.30am GMT

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Italian election boosts euro – live coverage here. Sterling drops below €1.14 after Moody’s downgrades UK. Investors want new growth measures from George Osborne. What the analysts say. Financial markets upbeat about Italian election result…

Powered by Guardian.co.ukThis article titled “Pound slides against euro after Moody’s downgrade – live” was written by Graeme Wearden, for guardian.co.uk on Monday 25th February 2013 16.48 UTC

4.48pm GMT

Wondering how Britain’s downgrade, and the fall in the pound, affects you? My colleague Hilary Osborne has the answers here: How the loss of Britain’s triple-A credit rating will affect consumers (savers who enjoy holidaying across the Channel should take a deep breath first)

4.34pm GMT

Sterling’s Silvio lining

Those twists and turns in the Italian general election have helped sterling recover some ground against the euro – but the pound is still down 1% at €1.143.

The pound is also heading for its lowest closing level against the US dollar in two and a half years, at just over $1.51.

So not a great day for sterling. No wonder Osborne decided against talking the pound down – it can fall perfectly well on its own!

Updated at 4.48pm GMT

4.23pm GMT

Osborne resists conscription into currency wars

One more interesting line to flag up from George Osborne’s session in parliament – asked about the possible impact on sterling of the Moody’s downgrade, the chancellor cited the G7′s recent promise not to conduct a currency war.

That ought to please his predecessor, Lord Lawson (who ran the Treasury between June 1983 and October 1989). Yesterday, Lawson said it would be a disaster for ministers or central bankers (yes, you, Mervyn King) to suggest that a weak pound would be useful.

As Lawson put it:

I think it would be a very great mistake if anyone in the government or Bank of England gave the impression we would like to see a further depreciation of sterling.

That would not be clever; that would not be sensible; that would not be helpful.

Updated at 4.28pm GMT

4.06pm GMT

New projections from the Italian general election have completely punctured the rally in Milan.

The news that Silvio Berlusconi‘s centre-right coalition is thought to be ahead in the Senate has pushed the FTSE MIB into negative territory; an hour ago, it was up 4%.

Paul Owen has the details:


Centre-right coalition: 31.7%

Centre-left coalition: 29%

Five Star Movement: 25.1%

Centrist coalition: 8.5%

More on Paul’s rolling coverage: Italian election results – live coverage

Updated at 4.16pm GMT

3.42pm GMT

The key line from George Osborne is that he’s not going to change the pace of his deficit reduction plan; otherwise, a bad situation would be even worse.

Ed Balls, shadow chancellor, is arguing that the government is illogical, having previously insisted that its plan A was essential in order to keep the AAA rating.

Osborne, though, claims Balls is the man without an economic plan: “His answer to a debt crisis is to borrow more,” Osborne says.

Good knockabout stuff (it’s on Sky News and BBC Parliament), and on Andrew Sparrow’s blog.

Updated at 4.15pm GMT

3.36pm GMT

Osborne questioned over AAA downgrade

Over in Parliament, Ed Balls is demanding an urgent answer from George Osborne on Britain’s economic policy after the loss of the AAA rating.

Andrew Sparrow is live-blogging all the action here from parliament:

Osborne begins by pointing out that UK bond yields are stable today, and that the FTSE 100 is up: there is no panic in the markets, he says.

And then he’s swiftly into the politics, saying Moody’s is encouraging him to continue “the process of winding down the huge debts built up over the last decade”.

Updated at 4.11pm GMT

3.33pm GMT

Latest odds on a sterling crisis

There is plenty of speculation that the pound is heading to parity with the euro (it got to €1.02 at the end of 2008).

Ladbrokes has now weighed in, offering odds of just 6/4 that sterling falls to €1 or lower this year (from below €1.14 now).

It also offers just 4/1 on the pound slumping to parity against the US dollar. That would only happen if there was a remarkable run on the pound this year – so the odds feel a little ungenerous. Still, you may have other thoughts …

Updated at 3.34pm GMT

3.11pm GMT

Irish unions agree pay cuts

Another important development to flag up in Ireland: a breakthrough in the Irish government’s bid to slash its massive public pay bill as part of the IMF/EU/ECB austerity programme.

The deal means bigger pay cuts for higher earners, as Henry McDonald reports from Dublin:

During talks to revise the so-called Croke Park Agreement between the state and public sector trade unions it has been agreed that government employees earning more than €185,000 per annum will take a 10% pay cut.

Overall pay cuts will kick in for state workers at 5.5% for those earning more than €65,000 up to the 10% ceiling for the highest earners.

The Irish public sector is one of the most highly paid in the industrialised world and has one of the best, most generous pension systems. The Fine Gael-Labour government has been under tremendous pressure from the so called troika of the IMF, EU and ECB to reform its public sector and slash wages.

The deal, if agreed by a series of ballots of public sector-based unions, will run from July 2013 until 2016.

Ireland’s minister for public expenditure, Brendan Howlin, said: “These proposals constitute a fair and balanced agenda to repair our public finances.

“The revised measures recommended by the LRC (Labour Relations Commission) meet the budgetary targets of the government and address many of the concerns expressed by the staff representatives during the negotiations.”

Updated at 3.15pm GMT

2.57pm GMT

Back to Britain, and here’s a video clip of a defiant George Osborne saying he won’t “run away” from Britain’s problems, and insisting that the situation would be even worse if he changed his policies.

Updated at 3.12pm GMT

2.45pm GMT

Bank shares are leading the rally in Italy, gaining at least 6% each. Trading in Monte dei Paschi Siena, Italy’s oldest bank, which has been hit by a major scandal, has just been paused because its shares jumped so strongly.

And shares in Mediaset, the media empire owned by Silvio Berluconi, are up by over 8%.

For full coverage of the Italian election, check out Paul Owen’s rolling blog.

Updated at 2.48pm GMT

2.28pm GMT

The Italian stock market has jumped since the exit polls came out. It’s up 3.9%, or 636 points, at 16870.

The euro has also jumped, now up 1 cent against the US dollar at $1.329.

Updated at 2.47pm GMT

2.27pm GMT

The exit polls from Italy are in, and the stock markets are rallying hard.

The top line is that the centre-left Democratic party has won the most votes in races for both the upper and lower house, with a clear lead over Silvio Berlusconi’s party.

The second key development is that Mario Monti, the technocratic PM parachuted in to run Italy, has been rejected by the public. Bebbe Grillo’s Five Star Movement has won much more support.

Here are the projections for the lower house, from SkyTG 24

Democratic Party: 34.5%

Berlusconi’s coalition: 29%

Five Star Movement: 19%

Monti’s centrist coalition: 9.5%

And for Senate

Democratic Party: 37%

Berlusconi’s coalition: 31%

Five Star Movement: 16.5%

Monti’s centrist coalition: 9%

Updated at 2.46pm GMT

1.36pm GMT

Just half an hour until the voting closes in Italy and we get the exit polls from a general election that will help to determine the future of the eurozone financial crisis.

Robert O’Daly, Italy analyst at the Economist Intelligence Unit, reckons this is “arguably the most important [election[ since the start of the country's membership of the euro."

A stable, reformist government is hoped for, but there is a high risk of a hung parliament with Mr Bersani's centre-left winning a majority in the lower house but unable to form a majority in the upper house, even with the added support of outgoing prime minister Monti's centrists.

My colleague Paul Owen is blogging the results here: Italian election results – live coverage.

Updated at 2.13pm GMT

1.16pm GMT

EU demands no let-up in Irish austerity

In Ireland, the government has been warned not to look upon €1bn they saved from the IOU bill on the busted Anglo Irish Bank as a "windfall".

Henry McDonald reports from Dublin:

Olli Rehn, the EU's commissioner on economic and monetary matters, said the money should not be used to lighten the load of next year's Irish budget.

Rehn's intervention this morning will be viewed in Dublin as a sign that the EU, alongside with the European Central Bank and the IMF, still calls the shots when it comes to Ireland's fiscal policies.

Speaking on RTÉ's Morning Ireland programme, Rehn said the money should not be used to "soften" next year's budget.

Rehn said it was important that Ireland stick to the EU/IMF programme, which has imposed austerity cuts and reduced public spending.

The EU commissioner said he was surprised the savings had been described in some quarters as "windfall gains".

He said it was important that the Irish government be consistent in its fiscal policies, and continue to implement measures to reduce the debt burden.

After Ireland secured a deal on the so-called promissory notes to bondholders of the defunct Anglo Irish Bank, some have been urging Enda Kenny and his coalition partners to spend the saved €1bn on capital building projects to help stimulate domestic demand in the republic.

Those are just the kind of projects City investors want to see from George Osborne (see 10.02am for more details)

Updated at 2.10pm GMT

1.11pm GMT

Rating agencies: who rates them?

The relatively muted reaction to the UK's downgrade bolsters the argument that rating agencies simply get too much attention.

Moody's doesn't have a souped-up Delorean hidden in the basement; it's simply working off the same indicators and forecasts as everyone else.

Except a trader or fund manager can take a decision, and execute it, a lot faster than an agency typically manages.

Vince Cable, the business secretary, dismissed the downgrade as "largely symbolic" yesterday – which was certainly not the tune Osborne has been singing for years (Labour provides a round-up here). But supporters of the chancellor say he managed to protect the AAA when it mattered most.

Back in January 2012, my colleague Aditya Chakrabortty wrote perhaps the definitive take-down of the cult of the rating agency: Time to take control of the credit rating agencies.

Why should S&P and Moody's earn such vast sums? Certainly not for their oracular genius – the agencies have as much foresight as Mr Magoo. In my working life, the credit-rating duopoly has failed to warn investors about the Asian financial crisis, Enron, the subprime crisis, Lehman Brothers – and Greece.

My particular favourite, Moody's report dates from December 2009 and is titled "Investor fears over Greek government liquidity misplaced". Six months later, Athens received a $147bn rescue package.

Not much has changed over the last year, alas. The EU did agree new rules to control the agencies last year, but tougher measures were watered down.

Updated at 2.11pm GMT

12.47pm GMT

Sterling hits 16-month low against the euro

Sterling continues to sink against the euro today - partly due to the Moody's downgrade, and partly due to optimism that the Italian general election will deliver a stable election (see 11.40am)

The pound is now down 1.75 euro cents at €1.139, a tumble of 1.5% since trading began. That's the lowest level since October 2011.

A weaker pound is a blow to those of you planning a holiday on the continent, but should provide a boost to exporters. Many firms, though, have argued that they'd rather have simple certainty about the pound's value over the next couple of years (also, if you buy raw materials or certain parts from Europe, a weaker pound can be a handicap).

12.35pm GMT

… Or will he?

There's speculation in parliament this afternoon that George Osborne may miss the urgent question on the downgrade, owing to an unfortunate clash with his pre-scheduled skit at the inquiry into banking:

The opposition would love that! My learned colleague Andrew Sparrow is on the case from parliament (his Politics live blog is here)

Updated at 12.42pm GMT

12.29pm GMT

Osborne to face MPs

Labour has got its way - George Osborne will have to answer an urgent question about Britain's downgrade, at 3.30pm.

11.57am GMT

Over in Westminster, the Labour party is trying to thwart George Osborne's efforts to keep his head down. The opposition is reportedly planning to haul the chancellor to parliament to answer an urgent parliamentary question on the Moody's downgrade of the UK credit rating.

Osborne won't be able to avoid discussing the situation today – he's due to appear at a parliamentary inquiry into Britain's banking sector at 3.45pm GMT (it will be streamed live here)

Updated at 12.04pm GMT

11.52am GMT

Sky News's Ed Conway neatly sums up the market reaction to the UK's triple-A downgradey: Apocalypse No.

Updated at 12.03pm GMT

11.50am GMT

Italy sold €2.82bn of bonds this morning, in another sign that the financial markets are optimistic about today's general election.

The two-year bonds were shifted at an average yield of 1.68%, with traders bidding for 1.65 times the amount of debt on offer. That's a good result, according to the RBS credit strategist Alberto Gallo.

Updated at 12.03pm GMT

11.40am GMT

Italian election exit polls due soon

The big story in the eurozone crisis is the Italian general election. Polls in Italy close at 2pm GMT (3pm local time), at which point we'll be swamped with exit poll data.

That will be fascinating, especially as opinion polls have been outlawed for the last two weeks.

The crucial questions is whether the centre-left Democratic party has won an outright majority in both the lower house of parliament and in the senate.

Intriguingly, voter turnout was lower in early voting yesterday than at the previous election. Political analysts say it was notably down in areas where Silvio Berlusconi has enjoyed solid support.

That may mean the Democratic party performs well, perhaps giving its leader, Pier Luigi Bersani, a clear majority.

However, the wild card in the election is the Five Star Movement, whose comedian leader, Beppe Grillo, has won supporters with a message of radical change, including a plan for a referendum on Italy's eurozone membership.

If Grillo wins a substantial share of the vote, he could win enough seats to deny Bersani that majority, perhaps forcing a coalition with Mario Monti.

Right now, the euro is rallying as traders conclude that Silvio Berlusconi has not had a good election. it's up 0.64% against the US dollar and 1.3% against the pound (one reason sterling fell to a 17-month low).

The whole election could depend on Lombardy, in the north of the country. Dubbed the Italian Ohio (the US state where American presidential elections are often decided), it could give Bersani the keys to the Senate - if he wins first place there. Fail, and he may need to form a coalition.

Updated at 11.52am GMT

10.50am GMT

The FTSE 100 index continues to rally today, up 35 points at 6371. My colleague Nick Fletcher writes that the blue-chip index is showing its global credentials again, with hopes of more monetary easing boosting shares prices.

For a start, comments from US Federal Reserve officials late on the same day spelt out the merits of its bond-buying programme, prompting hopes of continuing stimulus for the world's largest economy. And in Japan, sentiment was boosted by talk that the next central bank governor could be Haruhiko Kuroda, Asian Development Bank president, who is an advocate of aggressive monetary easing.

And with a survey showing Chinese manufacturing growing for the fourth month - albeit slipping back from two-year highs - the mining sector was given a lift.

Updated at 10.55am GMT

10.42am GMT

Gilts take trip back to safety

Good news for George Osborne (and the rest of Britain, really): UK sovereign bonds have swiftly recovered from the loss of the AAA rating at Moody's.

After an early rise, UK bond yields have sunk back to Friday's levels - suggesting the downgrade has had no short-term impact on British borrowing costs (borrowing for 10 years costs around 2.1% a year).

Updated at 10.53am GMT

10.26am GMT

How the pound doing?

A quick update on sterling:

• Against the US dollar, the pound is stable and pretty fat at around $1.51. It initially slumped to its lowest levels since July 2010, in early trading in Asia, but clawed its way back as European traders got to work.

• But against the euro, the pound has shed more than 1% this morning to €1.1433. That means one euro's now worth 87.4p.

• The Bank of England's own 'trade-weighted' measure of sterling (valuing the pound against a range of other currencies) has been pulled down to its lowest level since September 2011.

So, certainly not a run on the pound: few currency traders are breaking sweat. As explained at 8.56am, the financial markets had been expecting a downgrade, and the weakness of the UK economy had pushed sterling down steadily through the year, as this graph shows.

Updated at 10.31am GMT

10.02am GMT

City looks for more stimulus from Osborne

George Osborne spent the weekend insisting that he would not abandon his deficit-reduction targets in the light of the downgrade. However, some City analysts and investors believe, and hope, that the chancellor will announce more measures to stimulate growth.

M&G's retail bond team reckon Moody's may have done Osborne a favour by shooting the AAA now:

Gemma Godfrey, head of investment strategy at Brooks Macdonald, told me lat night that investors wanted to see Osborne announce new infrastructure spending in next month's budget.

She explained:

The markets are more focused on growth than on deficit reduction … As an investor in a low-growth environment, you're looking for any areas that can give you growth.

The emphasis should be to kickstart growth, because without growth our debt levels will be very hard to manage.

Godfrey pointed out that infrastructure spend is classified as "capital" rather than "current" spending, giving Osborne the opportunity to announce fresh spending plans.

An interesting accounting quirk could come to the rescue: infrastructure spend is classified as 'capital', not 'current', spending, and with a £3 boost to the economy per £1 spent, the pressure could encourage a strategy of investing for growth and companies that benefit could see profits boosted.

Alternatively, the risk is that too great a focus on deficit reduction could further squeeze the economy and domestic corporate revenues.

With Fitch due to rule on Britain's AAA after the budget, Osborne needs to play a blinder. Jane Foley of Rabobank comments:

While Chancellor Osborne at the weekend pledged not to err from his austerity course, this is not a path supported by all members of the coalition, so the news raises the risk for intra-government tension, which could in itself undermine the pound.

The 20 March budget is the perfect opportunity for the chancellor to lay out his response to the ‘growth v austerity' arguments, which now have fresh momentum. These policies will be crucial in determining whether other credit ratings agencies decide whether or not to downgrade the UK further.

Updated at 10.18am GMT

9.39am GMT

Markets rally again

European stock markets have completely shrugged off the UK downgrade:

FTSE 100: up 45 points at 6381, + 0.7%

German DAX: up 72 points at 7734, +0.95%

French CAC: up 16 points at 3722, + 0.4%

Spanish IBEX: up 52 points at 8233, + 0.67%

Italian FTSE MIB: up 138 points at 16372, +0.8%

Updated at 10.07am GMT

9.05am GMT

Paul Donovan, managing director of Global Economics at UBS, refuses to get excited about the downgrade, telling clients in a research note:

One of the credit rating agencies downgraded the UK from AAA for some reason or another.

The government responded with complete indifference, which will likely be the reaction of investors.

It's certainly true that the pound remains stable against the US dollar this morning, at $1.515.

Updated at 10.07am GMT

8.56am GMT

Moody's downgrade: what the analysts say

City analysts are in broad agreement that the loss of Britain's AAA rating was 'priced in'. Here's a round-up of the early comment:

Kit Juckes of Société Générale said:

Let's start at home. Firstly, the risk of a UK default is no higher today than it was a week ago and remains incredibly low, simply because the pound can act as a shock absorber. That's the beauty of this floating currency thingy, which only becomes a problem in a real rout (think GBP/USD below parity).

Secondly, the downgrade was so well flagged that surely it is priced in.

And thirdly, while this does harm to the UK chancellor's credibility, the rating agencies have already trashed their credibility irredeemably.

Juckes added, though, that the pound looks "for all the world" as if it could drop to $1.40 against the US dollar in the longer term.

Louise Cooper of CooperCity says the downgrade proves that, without growth, the UK's debt figures look "very nasty":

The UK is not a safe haven, it only became one because the rest of Europe looked so scary, the UK was relatively safe. But thanks to [the European Central Bank president Mario] Draghi, the risks of a eurozone implosion have reduced, at least for the time being. Therefore the risks of the UK, by itself, are back in the spotlight.

At different times in history and the economic cycle, particular data becomes more or less important . I am old enough to remember the money supply-targeting of the Thatcher years. For the UK, the data to watch very closely currently is any indicator of future output/GDP and the monthly government debt figures.

The UK is on a tightrope, with little in the way of a safety net. Wobbles could easily become catastrophic. Osborne: hold on tight to that balancing pole.

Gary Jenkins of Swordfish Research believes the Moody’s downgrade could set the tone for the year:

So, there we have it: officially we are now Good Britain; no longer Great, I’m afraid. Oh well, it had to happen sooner or later, and it’s nice that S&P let Moody’s go first this time. The key drivers of the downgrade were: ‘continued weakness in the medium-term growth outlook, challenges that subdued growth poses to the government’s fiscal consolidation programme, and, as a consequence of the UK’s high and rising debt burden, a ‘deterioration in the shock-absorption capacity of the government’s balance sheet …’

Difficult to argue with that. And if the economic data across much of Europe continues to be as poor as it has over the last few months, then I think we shall see these lines repeated by the agencies in 2013.

Kathleen Brooks, research director at Forex.com, said the downgrade “reinforces the perilous economic position the UK is in”:

This downgrade may fuel more speculation that QE will be restarted later this year. This is pound negative for the medium term, and we could see sub-$1.50 in the near term.

Updated at 10.06am GMT

8.40am GMT

Uk gilts fall

Britain’s sovereign debt has also weakened this morning, but not dramatically.

The yield on UK 10-year gilts is up to 2.15%, from 2.1% on Friday.

In broad terms, the yield is the interest rate on a bond – so it indicates that UK borrowing costs are now higher. However, they are still extremely low, in historical terms.

The broader question is whether the loss of the AAA has a longer-term impact. As Paul Griffiths, co-global head of fixed income at Aberdeen Asset Management, put it over the weekend:

It is certainly a different situation to when the US was downgraded and treasury bill yields and the dollar rallied. Investors viewed the decision as a sign of deteriorating global growth and continued to see US treasuries as a safe haven. The UK does not have that same status.

Updated at 9.59am GMT

8.21am GMT

City experts reckon the weekend chatter about a new sterling crisis (see below) was somewhat overblown.

As Michael Hewson of CMC Markets put it on Radio 5 a few minutes ago, this is “a political sideshow rather than an economic sideshow”.

There’s an awful lot of negative news related to the pound, and a lot of it is priced in.

Updated at 9.56am GMT

8.17am GMT

Sterling hits 17-month low

Breaking: The pound has slid to a new 17-month low on the currency markets this morning after the Moody’s downgrade.

The sterling trade-weighted index, which tracks the pound against a basket of currencies, has dropped around 1% this morning.

The slide is partly because of the pound dropping around one euro cent against the euro, to €1.145.

As this graph shows, the slide started once trading began in Asia overnight.

The pound has actually held up quite well against the US dollar. It’s broadly unchanged this morning, at $1.515 (having shed one cent late on Friday night).

Updated at 9.56am GMT

7.48am GMT

Britain faces life after the downgrade

Good morning. Britain is tasting life outside the triple-A club after Moody’s decided on Friday night to cut the national credit rating for the first time in history.

The downgrade prompted fears over the weekend of a run on the pound, and speculation that UK borrowing costs could be driven higher as investors lose faith in Britain.

The decision by Moody’s deals a bruising blow to the embattled chancellor, George Osborne, who has repeatedly nailed his credibility to the AAA rating. Former chancellors have warned that Britain faces a difficult road, with Ken Clarke predicting it will take “several more years” before the AAA can be clawed back.

The pound did wobble in Asian trading overnight, and is down around by one euro cent against the euro this morning. But there’s no sign, yet, of a full-blown sterling crisis.

We’ll be tracking all the reaction to the AAA downgrade, along with other key events in the world economy. Those include the results of the Italian election, as financial markets nervously wait to see whether a clear winner emerges.

Updated at 9.54am GMT

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European Commission now believes eurozone GDP will shrink by 0.3% this year. Italy goes to the polls this weekend in a general election that could sooth the eurozone, or inflame it. Anti-austerity Beppe Grillo ‘gaining support’ as election looms…

Powered by Guardian.co.ukThis article titled “Eurozone crisis live: EC admits recession will be deeper than feared” was written by Graeme Wearden (7.45am-2.30pm) and Nick Fletcher (now), for guardian.co.uk on Friday 22nd February 2013 15.47 UTC

3.47pm GMT

Street newspaper to be launched in Athens next week

A street newspaper to be sold by homeless and unemployed people will be launched in Greece next week.

The paper, called Shedia (‘Raft’) will be sold in Athens and becomes the 122nd street paper to join the Glasgow-based International Network of Street Papers (INSP).

According to a press release, Shedia has recruited over 70 vendors ahead of the launch next Wednesday and will sign up more once it hits the streets.

Vendors buy the magazine for €1.50 and sell it for €3, keeping the proceeds. Chris Alefantis, founder of Shedia said:

Following years of preparations, the country’s only street paper is about to be launched. Fighting poverty and social exclusion is at the forefront of our campaign, particularly considering the desperate economic hardship that Greece and its people are currently faced with.

3.39pm GMT

Iberia staff protest airline’s planned job cuts

On the last day of the current five day strike by Iberia airline staff in Spain, there have been protests at airports in Madrid and Barcelona.

According to AP, several thousand protesters gathered inside the largest terminal of Madrid’s international airport, blowing whistles and air horns in a noisy demonstration against the airline’s 3,800 planned job cuts. In all the unions plan 15 days of strikes.

3.20pm GMT

Belgian business confidence improves

Business confidence in Belgium rose to a 10 month high in February, but was still in negative territory.

The index came in at -11 compared to -13.2 in January and expectations of around -12. The improvement came as manufacturers said they were increasingly positive about the outlook. The news follows the German Ifo index, which showed its biggest monthly rise since July 2010.

On the Belgian figures, Philippe Ledent at ING said:

After a very disappointing result in January, Belgian business confidence rebounded in February. In the manufacturing sector, which constitutes the biggest part of the index, confidence increased by 2.8 points, after a drop by the same amplitude last month. A healthier assessment of inventories and better confidence in future demand are driving this slight recovery. Confidence also increased in the service sector, for the second month in a row.

Even if the short term outlook remains quite subdued, today’s business confidence confirms that the Belgian economy is probably turning the corner. To be sure, full year growth is likely to remain limited in 2013, to the tune of 0.2%. But compared to last year (-0.2%), this has to be considered as good news.

3.09pm GMT

Italian bond auctions to provide early election reaction

One of the first indications as to how the markets view the Italian election outcome will come early next week as the country issues more bonds. Reuters reports:

Italy may have to pay a big premium to sell bonds next week if the market gets rattled by an indecisive election result that puts in doubt reforms needed to spur growth and cut the country’s debt.

A sale of inflation-protected bonds on Monday will be the first test of investor demand as Italians go to the polls to choose a new government that will have to deal with the country’s mammoth €2trn of public debt.

This will be followed up by an auction of an estimated €7bn of conventional bonds on Wednesday, expected to include a new 10-year benchmark paper. The Italian Treasury [is] the sole scheduled issuer in the euro zone primary market next week.

Markets are widely expecting the centre-left party of Pier Luigi Bersani to win the February 24-25 vote and rule in coalition with technocrat centrist Mario Monti, with a comeback by former Prime Minister Silvio Berlusconi – reviled by markets – largely dismissed.

This has kept Italian bond yields steady in recent weeks after an initial sell-off in early February, with benchmark 10-year debt yields within the 4.10%-4.75% range that has prevailed so far this year.

2.33pm GMT

Am scooting now, so Nick Fletcher will guide the blog into port. Have good weekends all (I’ll be in the office on Sunday, so expect I’ll be tweeting the latest Italian developments then too). GW

2.20pm GMT

Photos: Monti goes for youth vote at final rally

Italy’s outgoing premier, Mario Monti, has held his final pre-election rally in Florence today:

Can’t find a transcript yet, but Monti’s official Twitter feed has been tweeting various pledges, including several aimed at younger Italians:

Young people are paying for 20 years of inefficiency, so our priority is to create new jobs


Now that our public finances are no longer temporary, I promise to make the lives of our young people less precarious

Updated at 2.21pm GMT

2.05pm GMT

Reuters has just published an article warning that Italy’s next prime minister faces an extremely difficult task.

Here’s the first section (full story here):

Italy’s new government, after elections this weekend, must cut bureaucracy and taxes and reform an ineffective legal system if the shrinking economy is to be jolted back to life, businesses and foreign investors say.

Italians vote on Sunday and Monday for a successor to Mario Monti’s technocrat government whose austerity policies saved Italy from a Greek-style debt crisis but did nothing to pull it out of deep recession. Italy’s economy has contracted for six consecutive quarters, shrinking 2.2 percent last year, and companies say it is time to pull down the barriers that have hampered Italian businesses and put foreign investors off Italy for years.

“I would like a government that truly thinks about growth and that could bring Italy out of the quicksand,” said Massimo Scaccabarozzi, CEO of pharmaceutical company Janssen-Cilag SpA, a unit of Johnson & Johnson.

“It’s no secret that we are bottom of the list when it comes to ease of business.”

It also points out Italy ranks 73rd out of 183 countries as a place to do business, according to the World Bank index.

“The new government must simplify procedures, make the system more transparent and figure out how to cut labour costs,” said Fabio Gianisi, a Milan lawyer who advises Chinese and Russian investors with an interest in Italy.

1.43pm GMT

Europe’s stock markets have not been hit by this morning’s predictions of a deeper eurozone recession (10.09am onwards), or the latest talk of a hung Italian parliament (see 11.52am).

FTSE 100: up 49 points at 6340, + 0.78%

German DAX: up 85 points at 7668, + 1.13%

French CAC: up 72 points at 3697, +2%

Italian FTSE MIB: up 292 points at 16302, +1.8%

Spanish IBEX: up 137 points at 8151, + 1.7%

And in the bond market, Spanish and Italian sovereign debt has strengthened slightly. The yields on their 10-year bonds are down 4 basis points, or 0.04%, at 5.16% (Spain) and 4.43% (Italy).

1.03pm GMT

Pier Luigi Bersani, whose centre-left Democratic Party is most likely to win Italy’s general election, is pledging to push European leaders to rethink their approach to the crisis:

12.35pm GMT

Re-Define: Time for a Grand Bargain for the eurozone

Sony Kapoor, head of the Re-Define thinktank, says today’s warning of a deeper eurozone recession is the fault of European leaders for pursued “economically illiterate, socially destructive, self-defeating polices” since the financial crisis began:

This self-defeating policy must change, he argues. Here’s a flavour:

Instead of a more relaxed fiscal and monetary policy supporting the structural reforms that were necessary, as we have been suggesting for a long time now, the EU has followed a deeply flawed policy of fiscal contraction. This is the result of the application of a ‘small economy mentality’ that prevails in the German economic debate to what is the largest economic area in the world. The current economic policy betrays a level of macroeconomic illiteracy that is shocking for an otherwise well-educated policy-making elite.

Instead of on focussing on a 5-10 year strategy and a financially, politically and socially sustainable adjustment path for rebalancing, EU leaders have taken a very short-termist view of policy. At the same time that they rant against the short-termism of financial markets, their own policies have been even more myopic. What may be rational for a small country in the short-run, which is the policy lens they have used, will be self-defeating and irrational for the EU-wide economy over a longer horizon.

Re-Define argues that Europe’s leaders are failing their own test, of reducing fiscal deficits and stabilizing debt to GDP ratios, even if we ignore the ripping of the region’s social fabric.

Instead of the current policies Re-Define proposes a “grand political bargain”, which addresses the imbalances across the eurozone and creates a fairer balances between fiscal consolidation and growth:

What we need at this point is a grand political bargain, and that is one that only Mrs Merkel can offer. We will require a period of five to ten years of adjustment in the European economies which needs to happen both in deficit countries as well as surplus ones not suffering from the immediate crisis. During the course of this adjustment, financial support needs to be made available at reasonable cost to the economies to provide political and economic space for structural reforms and medium-term fiscal adjustment.

Without such a grand political bargain, which gives certainty, predictability and which puts us onto an economically, financially socially and politically sustainable path we are in deep-deep trouble. But such a bargain is not likely, at least not before the German elections. Let us see what happens after, but we are not holding our breath.

The full article is here.

11.53am GMT

Anecdotal evidence of Grillo’s impact on the race:

11.52am GMT

John Hooper: Beppe Grillo’s popularity is scaring Bersani, and bad for Monti

Back to Italy, and there are reports that Beppe Grillo’s radical Five Star movement is polling in second place, ahead of the Berlusconi-Northern League alliance.

Our Southern Europe editor, John Hooper, provides this punchy analysis of the general election campaign:

Pier Luigi Bersani this morning switched his attack to Beppe Grillo, and got personal. One of Grillo’s vulnerabilities as a paladin of the people is the considerable wealth he has amassed – a product of his successful career as a comedian.

“I’m the son of a mechanic, not abillionaire”, said Bersani.

His remark added substance to a report in Corriere della Sera this morning that Bersani’s aides are now thoroughly alarmed by Grillo’s progress in the final stages of the campaign.

Without quite saying so (because Italian publications are banned from carrying poll results in the last two weeks before the vote), Corriere indicated clearly that surveys conducted for the Democratic party showed Grillo’s Five Star Movement (M5S) overtaking Silvio Berlusconi’s Freedom People (PdL) movement to regain the second placeit held for a while early last summer.

Now, if you look here, you will see the rather more heavily disguised results of a poll carried out by a firm that has consistently favoured Berlusconi. It does not show Grillo in second place, but it does show him on 19%, which is a huge leap – of about six per cent – since the polling ban came into effect.

(As this Google translation may explain, they’ve pretended the election is a horse race – perhaps the losers will show up in UK supermarkets).

Back to Hoops:

That is bad enough for Bersani’s PD. But just as worryingly, there is mounting evidence from the same un-publishable polls that the alliance flung together by the outgoing prime minister, Mario Monti, is fading rapidly. That makes psephological sense.

Monti and Grillo both represent alternatives to the established
parties. Trend lines drawn through poll results by the Termometro Politico web site have been showing for some time that support for their two parties is inversely correlated.

If Monti and his pals were to take only 10% of the vote, say, we might well get either a hung parliament or a centre-left that could only pass legislation with more help than Monti can offer. Even if the radical left-wing alliance headed by a state prosecutor, Antonio Ingroia, can muster enough votes for a seat or two, that is going to mean going cap in hand to Grillo.

Updated at 12.04pm GMT

11.27am GMT

LTRO repayments are lower than expected

The European Central Bank has just spooked the markets by reporting that fewer banks than expected have taken the chance to repay ultra-cheap loans handed to them just over a year ago.

The ECB reported that 356 banks will hand back a total of €61.1bn of Long Term Refinancing Operation (LTRO) funding, sharply lower than the €130bn analysts had expected.

Banks didn’t have to hand back the money today – last month, though, the amount repaid early was much large than expected. That was taken as a sign that bankers were more optimistic about the situation. So what’s changed?…

Updated at 11.28am GMT

11.06am GMT

A quick chart of the European commission’s revised forecasts for 2013, from my colleague Nick Mead.

10.57am GMT

Here’s some early reaction to the EC’s predictions of a deeper eurozone recession:

10.40am GMT

And here’s our early news story on the EC’s forecasts: Eurozone economy to shrink again in 2013, EU says

10.34am GMT

This table compares today’s forecasts to the previous EC estimates (via Reuters)

10.26am GMT

The new EC forecasts

Bit hard to read, I’m afraid, but this table shows the EC’s new forecasts (you can see a clearer version on page 13 of this pdf)

10.18am GMT

EC: jobless crisis has grave social consequences

Marco Buti, the EC’s director general for Economic and Financial Affairs, warns in today’s Winter Forecasts that Europe’s unemployment crisis is deepening.

Buti wrote:

Employment is forecast to shrink further for some quarters, and unemployment remains unacceptably high in the EU as whole and even more so in the Member States facing the largest adjustment needs.

This has grave social consequences and will, if unemployment becomes structurally entrenched, also weigh on growth perspectives going forward.

The most recent data shows that the Eurozone unemployment rate is 11.7%.

10.11am GMT

See the Forecasts yourself

The EC’s new Winter Forecasts for 2012 to 2014 can be downloaded as a pdf here.

10.09am GMT

EC slashes growth forecasts

Breaking news: the European Commission has slashed its growth forecasts for the eurozone, and now believes the single currency region will not return to growth this year.

In its Winter Forecasts, the EC predicted that eurozone GDP would shrink by 0.3% during 2013, not manage the 0.1% growth pencilled in previously.

The EC warned that Europe’s unemployment crisis was a desperately serious problem.

It warned that Italy would shrink by 1% in 2013, not the 0.5% contraction it had expected. And for Cyprus, it now sees a 3.5% plunge in GDP, down from a 1.7% drop before.

Germany is expected to grow by just 0.5% this year, not 0.8%. While France will manage a measly 0.1% growth, not 0.4%.

More to follow!

9.57am GMT

In Germany, businesses are more confident

German business confidence has jumped this month, as Europe’s biggest economy shrugged off the suffering elsewhere in the eurozone.

The monthly IFO survey (which measures morale at 7,000 German firms), has risen to 107.4 for February, up from 104.3 in January.

That’s the biggest month-on-month rise since the summer of 2010.

Economists see it as another sign Germany has returned to growth after shrinking by 0.6% in the last three months of 2012. Extra information on that GDP decline was also released this morning – it showed that falling demand for exports knocked 0.8% off GDP, while domestic demand contributed 0.2% of growth.

9.29am GMT

Photos: The Grillo effect

Five-Star Movement leader Beppe Grillo held a rally in Viterbo, north of Rome, last night — and his supporters packed the place:

Grillo is the wildcard in the Italian election. He’s playing the game his own way — avoiding the usual round of TV interviews in favour of web campaigning and barn-storming rallies.

Grillo’s message is that the old politics is dead and must be chopped out, by a new wave of MPs untainted by sleaze and corruption. Alongside a euro referendum, he wants to give people more control over political decisions (allowing them to vote on whether a new road or hospital is built).

He also argues that Europe’s malaise is so great that radical measures – including rewriting all major Eu treaties – are needed.

Euronews has a decent explanation of Grillo’s policies here, concluding:

The comedian from Genoa is the figurehead leading a team of politically-untested candidates – and Italians have heard big promises so many times. Feeling terribly let down by the mainstream, many potential voters, undecided, seemed caught in the glare.

Bloomberg is unimpressed, warning in an editorial:

In his way, Grillo is a visionary, but he says Five Star won’t join any coalition government and he won’t serve in parliament. Instead, he promises to oppose and obstruct, and says his goal is to have enough legislators in parliament to topple the next government. If Grillo can suck enough votes away from other parties on Feb. 24-25, then he could make the formation of a stable government impossible from the outset, forcing new elections.

This would be a replay of the damage wrought by the upstart Syriza party in the first of Greece’s repeat elections last year. Think of the lost time and the instability that resulted, and then multiply that mayhem by eight to reflect the size of Italy’s economy.

The markets may not like it, but it’s called democracy.

8.55am GMT

Markets rise again

European stock markets are clawing back some of Thursday’s big losses, suggesting they’re not as nervous about Silvio Berlusconi romping to triumph this weekend.

FTSE 100: up 45 points at 6337, + 0.7%

German DAX: up 42 points at 7630, +0.6%

French CAC: up 38 points at 3662. +1%

Italian FTSE MIB: up 211 points at 16221, +1.3%

Spanish IBEX: up 109 points at 8123, + 1.35%

Yesterday’s selloff was triggered by the latest minutes from the US Federal Reserve, which showed concern over its quantitative easing programme.

Traders have now had more time to digest this, and concluded that there’s no risk of the Fed tightening policy soon.

As Chris Weston of IG explains:

We know there are hawks within the Fed’s ranks, many of them non-voters and what the minutes (as opposed to the actual FOMC statement) gives is a chance for non-voters to express their view….

while at the margin the minutes were hawkish there were still some clear dovish underlying themes that will see the Fed firmly in the market till the end of the year.

8.48am GMT

Italian election explainer

A quick run-through the details of the Italian election:

There are four groups fighting for votes in Italy.

1) The centre-left coalition led by the Democratic Party, and its leader Pier Luigi Bersani.

2) The alliance between People of Freedom, Silvio Berlusconi’s party, and The Northern League

3) Mario Monti’s centrist coalition — comprising MPs running under the Civic Choice with Monti for Italy banner, along with Christian Democrats Future, and Freedom for Italy./

4) The Five Star Movement — comedian Beppe Grillo’s group. He is winning popular support on a platform demanding fundamental changes on public water, transportation, development, internet availability, and the environment.

The far-left FARE party is also fielding candidates.

The political set-up

The parties are fighting for seats in the Chamber of Deputies (the lower house of parliament), and in the Senate (or upper house).

There are 630 MPs in the Chamber of Deputies, where Bersani is expected to win the most votes. The convoluted Italian political system ensures he’ll then get a majority of seats.

The Senate consists of 315 elected member. Here, the winning party in each region is guaranteed 55% of available seats, with the other parties sharing the remaining 45% of the seats based on voting share.

Given the Senate’s political power, the key question is whether Bersani wins an outright majority (158 seats), or can hit that total through an alliance with Mario Monti. This depends on the results of the four swing states – Lombardy, Campania, Sicily and Veneto.

Political commentator Alberto Nardelli reckons a centre-left majority can’t be ruled out, given “recent polling and trends in Lombardy and Sicily”.

Nardelli also predicts that Beppe Grillo’s Five Star Movement will come third with more than 15%, with Monti’s centrist coalition lagging behind.

8.14am GMT

Italian election looms

Good morning, and welcome to another day of rolling coverage of the latest developments in the eurozone, and the global economy.

Election fever is mounting as the Italian general election campaign enters its final couple of days. Voters head to the polls on Sunday, for a poll that has major implications for the whole eurozone.

If a clear winner emerges (most likely the centre-left group led by Pier Luigi Bersani), then Italy is likely to continue on the path of financial reforms and austerity set by Mario Monti – who could even join Bersani in a coalition.

But there’s a strong chance that the election will result in a divided parliament, leaving Italy’s next leader struggling to govern effectively.

With a ban on new opinion polls, speculation over the result is rife. Investors dread the prospect of a resurgent Silvio Berlusconi holding the balance of power, while analysts aren’t convinced that even a Bersani-Monti coalition could hold power for long.

As Eoin Ryan of IHS Global Insight puts it:

A surge in support for anti-austerity parties is raising chances of an indecisive election result and post-vote political instability.

Berlusconi’s breezy promise to eliminate Italy’s much-loathed new property tax has lured some floating voters back to his People of Freedom party.

There is also significant support for Beppe Grillo, the (professional) comedian whose radical manifesto includes a referendum on Italy’s eurozone membership. In the complex world of Italian electoral mathematics, a strong performance by Grillo’s Five-Star Movement could scupper Bersani’s hopes of winning enough seats to govern.

One thing is clear – it’s going to be fascinating to watch….

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In the broadcast today: EUR, USD and GBP New Trading Week Outlook. With the Italian election, coupled with a number of important economic reports from the euro-zone, the U.S. and the U.K., on the horizon, we focus on the EUR, the USD, and the GBP as the currencies in the spotlight next week and examine the outlook for these currency majors, we analyze the bearish breakouts in the EUR/USD and the GBP/USD currency pairs, we keep an eye on the pullback in the USD/JPY pair, we note the test of an important support level in the AUD/USD currency pair, we highlight the market’s reaction to the FOMC Meeting Minutes, the Euro-zone Composite PMI, the U.S. Jobless Claims, Leading Indicators and Existing Home Sales, we discuss new forecasts from Royal Bank of Scotland and Credit Suisse, and prepare for the trading session ahead.

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PMIs from the euro-zone’s largest economies point to widening gulf between France and Germany. Grim outlook for France’s economy. UK public finances better than expected. US jobless claims rise and existing homes sales inch higher…

Powered by Guardian.co.ukThis article titled “Eurozone crisis as it happened: French economy worsens as Germany powers ahead” was written by Josephine Moulds, for guardian.co.uk on Thursday 21st February 2013 15.02 UTC

2.58pm GMT

And with that I’m afraid we’re going to close the blog early today. Thanks for all your comments.

2.57pm GMT

Markets hammered by French data

European markets have been hammered today, on the back of data showing the French economy continues to falter, and fears that the US could switch off its stimulus programme.

  • UK FTSE 100: down 1.64%, or 105 points, at 6290
  • France CAC 40: down 1.87%
  • Germany DAX: down 1.68%
  • Spain IBEX: down 1.72%
  • Italy FTSE MIB: down 2.81%

2.47pm GMT

UK public finances disappointing – IFS

Back to the UK’s public finance data again (see 9.40am and following), which the highly-respected Institute for Fiscal Studies says will be a disappointment for George Osborne

Rowena Crawford at the IFS said:

As the chancellor prepares for his budget next month, he will likely be disappointed by today’s public finance figures. January is an important month for receipts but, although growth in income tax receipts was strong, this was partially offset by very weak growth in corporation tax receipts. Together this leaves tax receipts running below the growth forecast for the year as a whole. Spending continues to run higher than forecast, due to strong growth in spending on both welfare benefits and on the delivery and administration of public services.

As a result borrowing is now on course to be almost £7bn higher this year than the OBR forecast in December. Therefore borrowing is more likely to be slightly higher rather than slightly lower than last year’s level, although much uncertainty remains and things could still change in the final two months of the year.

What matters more than the level of borrowing this year is the outlook for revenues and spending in the medium term. Some of the extra borrowing so far this year is due to Whitehall departments underspending by less than assumed. This may not persist and therefore might not concern the chancellor – in particular if the money is being spent well.

Potentially more concerning is the low growth in tax receipts and the high growth in spending on welfare benefits: were these to persist into future years then the large planned fiscal tightening might need to be increased.

Updated at 3.02pm GMT

2.42pm GMT

Dutch consumer morale hits a low

There are clouds gathering over the Netherlands, with reams of data out today showing it could struggle to hold onto its prized triple-A credit rating. An unholy trinity of releases showed:

  • Consumer confidence hit its lowest point since records began in 1986, at -44 points
  • Unemployment hit its highest level in around 16 years
  • House prices dropped at their sharpest rate over a year since 1995

Updated at 2.44pm GMT

2.12pm GMT

Growth in US factory activity slows slightly

And here comes US manufacturing PMI data, which looks pretty good. The pace of growth of the factory sector slowed in February, but remained near a nine-month peak thanks to strong domestic demand.

Markit’s manufacturing PMI came dropped back to 55.2 from 55.8, still comfortably above the 50 mark that separates growth from contraction.

But job creation in the sector hit a three-month low. Chris Williamson at Markit said:

While the survey therefore paints an encouraging picture of the manufacturing sector, helping to drive a return to growth for the economy as a whole in the first quarter of this year, firms still need to see greater confidence in the longer-term economic outlook for employment numbers to pick up again.

2.06pm GMT

Ireland looks to issue 10-year bond before summer

Back to Ireland, which is apparently looking to issue a 10-year bond in the first half of this year.

Reuters reports that Irish finance minister, Michael Noonan, who is on a visit to London, said Ireland wanted to prove it is ready to exit its bailout programme.

I think the issuance will be 10-year and that will be one of the serious tests of market conditions and of our ability to get back into the market. I would like that we would be back in the markets fully by 2014… and at present I think we are on track.

2.02pm GMT

Panic-driven austerity could lead to eurozone breakup, say economists

Panic-driven austerity in the eurozone produced the double-dip recession and could have even more dire consequences, write two economists on the VOX blog.

Paul De Grauwe of the London School of Economics and Yuemei Ji of the University of Leuven argue that fear and panic led to excessive, and possibly self-defeating, austerity in the south while failing to induce offsetting stimulus in the north.

The conclude that resistance to austerity measures could once again raise the spectre of countries wishing to leave the eurozone.

The intense austerity programs that have been dictated by financial markets create new risks for the eurozone. While the ECB 2012 decision to be a lender of last resort in the government bond markets eliminated the existential fears about the future of the eurozone, the new risks for the future of the eurozone now have shifted into the social and political sphere. As it becomes obvious that the austerity programmes produce unnecessary sufferings especially for the millions of people who have been thrown into unemployment and poverty, resistance against these programs is likely to increase. A resistance that may lead millions of people to wish to be liberated from what they perceive to be shackles imposed by the euro.

Updated at 2.39pm GMT

1.52pm GMT

US jobless rise more than expected

More US data reveals that jobless claims across the Atlantic rose more than expected last week, but remain at levels consistent with a steady improvement in the jobs market.

Initial claims for unemployment benefits rose 20,000 to a seasonally adjusted 362,000, compared with forecasts of 355,000.

Ryan Sweet, a senior economist at Moody’s Analytics, told Bloomberg:

Businesses just seem to be sitting tight with regard to layoffs, which is reason for optimism. If we get through these hurdles over the next couple months the job market should begin to improve more noticeably.

Updated at 1.55pm GMT

1.47pm GMT

US inflation unchanged

US inflation was unchanged in January, which should make it easier for the Federal Reserve to maintain its ambitious stimulus programme.

Official data showed that weak petrol and food prices helped suppress annual inflation, which came in at 1.6%, down from 1.7% in December.

1.24pm GMT

French minister fights back

The French minister who recieved a letter lambasting the “lazy” French (see 8.50am) has retaliated, reports the Telegraph. Arnaud Montebourg, minister for industrial renewal in France, told Maurice Taylor, chief executive of US tyremaker Titan:

Your comments, which are as extremist as they are insulting, display a perfect ignorance of our country, France.

He pointed out that since Titan is “20 times smaller” than “French technology leader” Michelin, which is “35 times more profitable”, Taylor “could have learned and gained enormously from a French base.”

Updated at 2.10pm GMT

12.06pm GMT

UK back in the currency wars, says economist

The pound regained some ground today against the dollar, after the better-than-expected public finances data. But it is expected to stay weak, as a result of signs the Bank of England could expand the quantitative easing programme.

Sterling was down 0.1% on the day at $1.5223, recovering for a two-and-a-half-year low it hit earlier in the day.

But, says Nick Beecroft of Saxo Bank, the UK is very much back in the currency wars.

When the UK economy hit the doldrums in the wake of the credit crunch in 2008, authorities were left with two main weapons to fight their way out of recession: low interest rates and a weaker sterling to help boost exports. Given that, historically, low rates have failed to boost consumer spending by alleviating households’ debt burden, UK policy makers will be tempted to manipulate their currency.

When asked about the perceived potential benefits of QE, central bankers of the US, UK and the Eurozone will wax lyrical about some combination of improved monetary transmission, improved sentiment through higher asset prices, cheaper government bond rates, leading to lower mortgage rates and project discount rates, and fear of inflation which promotes near term consumption, but the one benefit that dare not speak its name is currency debasement. We’ll never hear an explicit admission from any of those central banks, that a major corollary benefit of their QE programme is a decline in the value of their currency. That would be tantamount to a declaration of economic war – a trade war – such as the one which so damagingly extended and deepened the 1930’s Depression.

The trouble is that, with the political uncertainty about the future of the UK’s relationship with the EU hampering investments and British export performances since 2000 being the worst among the G20 nations, achieving economic growth will be difficult. The question is: how long will the Bank of England be able to keep its powder dry and refrain from currency devaluation.

Updated at 12.25pm GMT

11.38am GMT

UK factory orders better than expected

Back to the UK, where factory orders improved more than expected in February.

The CBI’s industrial trends survey rose to -14 from -20 in January, beating expectations of a reading of -15.

Of the 436 manufacturers, 15% responded that total order books were above normal and 29% said they were below, giving a balance of -14%

The export order book balance also rose to -20 from -29.

Anna Leach of the CBI said:

The rebound in manufacturing orders and expectations for output growth provide some further signs of improvement in the outlook for the UK economy. However, exports order books are likely to remain relatively weak until global conditions, especially in the eurozone, improve more markedly.

11.28am GMT

Irish finance minister sees compromise on EU bonus talks

Sticking with Ireland, Irish finance minister Michael Noonan says he expects a compromise to be secured on a proposal to cap bankers’ bonuses.

His view is of particular interest as Ireland currently holds the European Union’s rotating presidency.

Negotiations to introduce a cap on bankers’ bonuses in the European Union stalled on Tuesday after EU countries and the bloc’s parliament clashed over how far to go in curbing pay for the industry’s top earners.

Noonan said on Bloomberg TV:

We think there is a median where a settlement can be reached without upsetting the cost base in the city of London or without depriving people of rightfully earned bonuses. But is has to be done in a new formulation.

Updated at 11.32am GMT

11.16am GMT

Spain bond sale sees good demand

Over to the debt markets, where Spain has sold more bonds than targeted, thanks to strong demand.

Madrid sold €4.2bn of debt due in 2015, 2019 and 2023, compared with a target of €3bn-€4bn, and borrowing costs eased.

The bond due in 2019 had an average yield of 4.275%, almost 2.5 percentage points lower than yields paid at its last outing in July, at the height of worries about the eurozone.

The bond due in 2015 had an average yield of 2.54%, compared with 2.82% in February.

The bond due in 2023 sold at a yield of 5.2%, in its first auction since it was introduced.

But traders said the sale was helped by the amount of money central banks are pumping into markets. Lyn Graham-Taylor at Rabobank said:

This is a strong set of results and continues the theme of decent demand for Spanish debt. We still believe this to be largely driven by the large amount of central bank liquidity in the system rather than an improvement in the fundamentals of Spain and major progress towards fiscal union being made by the eurozone.

Ireland, meanwhile, sold €500m of three-month Treasury bills at a yield of 0.24% – close to the lowest levels it has reached since Ireland returned to the debt markets last year.

Updated at 11.31am GMT

10.36am GMT

UK public finances flattered by one-offs, says economist

Here’s David Tinsley of BNP Paribas on the UK public finances data. It seems the longer the economists have taken to digest the figures, the gloomier they are…

The UK public sector finances get more confused with reclassifications by the month. But looking through the smoke, things don’t look too jolly.

The figures are being flattered by one-offs, but the big picture is the consolidation effort stalled in 2012/13. Indeed, the underlying deficit actually rose a little. The best one can say is that it is against a backdrop where the economy showed zero growth, so at least the rise wasn’t larger. But there may be a storm brewing if the economy doesn’t show some growth soon.

Updated at 10.39am GMT

10.29am GMT

EU parliament president tells Italians how to vote

The president of the European parliament has told Italians not to vote for Silvio Berlusconi in this weekend’s elections, in what looks like an unwise move that could easily backfire.

Martin Schulz – once compared to a Nazi concentration camp guard by Berlusconi – urged Italian voters to ‘make the right choice’. He said:

Silvio Berlusconi has already sent Italy into a tailspin with irresponsible behaviour in government and personal escapades.

Much is at stake in the forthcoming elections, including making sure that the confidence built up by (prime minister) Mario Monti is not lost. I am very confident that Italian voters will make the right choice for their country.

The fear is that his comments will prompt a backlash in Italy.

Updated at 10.34am GMT

10.11am GMT

Here’s Chris Williamson on the public finances data, which he says makes it likely the UK will lose its triple-A rating.

The government’s borrowing target for the year of £108.5bn is still looking unrealistic. Borrowing for the year is now looking likely to come in around £5-10bn higher than the government was hoping, and could easily end up higher than the £120bn seen in 2011-12 if tax revenues continue to disappoint.

With borrowing rising and the economy stagnating over the past year, the UK’s AAA credit rating is looking increasingly at risk. The spring budget will need to address the concern that more stimulus is needed besides central bank action in order to get the economy on a sustainable recovery path. Without a credible plan from the government to break the vicious circle of a sluggish economy, low tax revenues and rising public sector borrowing, the credit rating agencies are likely to lose their patience.

Updated at 11.14am GMT

10.02am GMT

QE ‘profits’ reduce UK deficit less than hoped

It should be noted, the UK public finances data enjoyed a £3.8bn boost from ‘profits’ from the Bank of England’s holdings in the gilt market, as a result of the quantitative easing programme.

But the ONS estimates that this interest income will only reduce the deficit by £6.4bn, significantly less than the £11.5bn the government’s independent budget watchdog estimated in December.

Reuters writes that this is because the ONS would not allow the full amount transferred to count towards reducing the budget deficit.

Updated at 10.10am GMT

9.58am GMT

UK data cuts threat of AAA downgrade – economist

The UK could escape the embarrassing fate of losing its prized triple-A credit rating, writes James Knightley of ING, following better than expected public finances data (see below).

This may be perceived as lowering the threat of an imminent AAA rating downgrade from one of the major ratings agencies and so is going to be a short term positive for sterling.

But George Osborne still faces a difficult decision at next month’s budget, writes Capital Economics:

With borrowing still very high and fiscal progress appearing to have ground to a halt, the dilemma faced by the Chancellor at next month’s Budget over whether to tighten fiscal policy, or loosen and go for growth, remains acute.

9.51am GMT

But UK borrowing still higher than last tax year

But it is still not clear whether the UK chancellor will be able to say that deficit reduction is on track when he presents his budget in less than a month.

Borrowing since the start of the tax year in April 2012 came to £93.8bn, excluding a one-off boost from the transfer of Royal Mail pension assets.

That is 1.6% higher than at the same point in the 2011/12 tax year, and Osborne faces a tough task to meet his target to bring full-year borrowing down to £108.5bn, from around £120bn in 2011/12.

Marc Otswald of Monument Securities says, leaving aside the slightly larger than expected monthly surplus, there is nothing to comfort Osborne in the data. He points out some of the low lights of the ONS report (citing figures for the tax year to date, compared with the same period in the previous tax year):

- Income Tax receipts a little lower but that is no surprise given
a weak economy

- Corporation Tax still very weak £36.8bn vs. £40.5bn

- VAT receipts up: £85bn vs. £83.8bn, but that is in fact
less than the pace of inflation… so weak

- Outlays – horrible, net departmental outlays £476.9bn vs.
£466.3bn, with some offset from Interest payments due to fall
in Gilt yields – so much for getting the budget under control

9.40am GMT

UK public finances show big surplus in January

There was good news for George Osborne this morning, with Britain’s public finances showing a bigger than expected surplus in January.

The government’s preferred measure of public borrowing, which strips out some of the effects of its bank bailouts, showed a surplus of £11.4bn in January.

That is up from £6.4bn pounds in January 2012 and above analysts’ forecasts of a surplus of £8.15bn. January is typically a good month for tax receipts, as it marks the deadline for self-assessed tax returns to be paid.

9.21am GMT

Eurozone data could push ECB to cut rates

The ECB’s bond-buying programme may have improved sentiment but it has not lifted economic activity, says Howard Archer of IHS Global Insight.

The purchasing managers survey reinforce concern that while the eurozone economic environment has been helped by a marked reduction in sovereign debt tensions, lower bond yields and improved business confidence since late-2012 (largely due to the ECB unveiling its bond buying policy) this is still not really feeding through to lift economic activity.

He says the data could push the ECB to cut rates.

The relapse in manufacturing and services activity in February puts renewed pressure on the ECB to cut interest rates, especially given the recent strength of the euro. We suspect that the ECB will remain reluctant to trim interest rates for now, but it could buckle if the eurozone continues to falter.

9.18am GMT

Here’s Capital Economics on the eurozone data.

The fall in the composite eurozone PMI in February puts a dent in hopes that the region would emerge from recession in the first quarter. On past form, the index points to a quarterly fall in GDP of about 0.3%, after Q4’s 0.6% fall….

The fall in the French PMI is more worrying – at face value the index is now consistent with a 1% quarterly fall in GDP. In all, then, the latest PMI number supports our view that the improvement in the financial markets will not be enough on its own to kick start an economic recovery.

Updated at 9.38am GMT

9.16am GMT

Eurozone services data dash hopes of recovery

Ouch. Eurozone PMIs do not look good, with services dropping in February, dashing hopes that the region could emerge from a recession soon.

The flash services PMI – one of the earliest monthly indicators of economic activity in the region – dropped from 48.6 to 47.3 in February, a big miss from analyst expectations of a rise to 49.

Chris Williamson of Markit highlighted the growing divide between Germany and France.

Digging into the data shows increasing schisms within the eurozone. National divergences between France and Germany have widened so far this year to the worst seen since the survey began in 1998. Germany is on course to grow in the first quarter. In contrast, Frances’s downturn is likely to deepen, bringing the euro area’s second-largest member more in line with the periphery than with the now solitary-looking German ‘core’.

9.06am GMT

Grim outlook for Europe’s second largest economy

Here’s Markit’s graph showing just how bad it looks in France. The composite PMI, which usually preempts GDP data fairly accurately, is sliding dramatically.

This morning the French media suggested the EU Commission is expected to cut its already grim forecast for France’s economy and budget deficit this year, citing a report due out Friday.

Le Monde and Le Point reported that the commission’s economic experts have reduced their forecast for France’s economic growth this year to 0.1% from 0.4%.

The country’s deficit is now forecast at 3.6% of GDP, up from a prior estimate of 3.5%, which would miss the Maastricht treaty target of 3%.

France is the second largest economy in the eurozone and problems there signal problems right at the very heart of the currency bloc.

8.50am GMT

French work ethic attacked

One man will be unsurprised by the miserable data out of France (see 8.20am) and that is Maurice “Morry” Taylor Jr, the head of US tyre company Titan International, which yesterday launched a blistering attack on the French work ethic.

My colleague Kim Wilsher in Paris reports:

Taylor, a 1996 US Republican presidential candidate, revealed he was no loss to the international diplomatic service in his letter to the minister, who had suggested he might like to take over a Goodyear tyre factory in the economically struggling industrial heartland of northern France, near Amiens.

“Do you think we’re stupid?” Taylor wrote to Montebourg in the letter, which was made public on Wednesday. “I’ve visited this factory several times. The French workers are paid high wages but only work three hours. They have one hour for their lunch, they talk for three hours and they work for three hours. I said this directly to their union leaders; they replied that’s the way it is in France.

8.39am GMT

Markets hit by Fed split

Over to the markets, which are suffering after minutes released last night showed signs of a split over the US Federal Reserve’s stimulus programme.

  • UK FTSE 100: down 1.2%, or 80 points, at 6314
  • France CAC 40: down 1.2%
  • Germany DAX: down 1.2%
  • Spain IBEX: down 1.75%
  • Italy FTSE MIB: down 2%

8.35am GMT

German data points to economic rebound

German business activity, meanwhile, increased for a third straight month in February, adding to signs the region’s largest economy is rebounding after GDP declined in the fourth quarter.

The data points to a widening gulf between it and the region’s second largest economy, France, which continues to flounder.

The German composite PMI, which accounts for more than two thirds of the economy, stood at 52.7 in February. That was down from January’s 54.4, but still comfortably above the 50 mark that separates growth from contraction.

Tim Moore at Markit said:

Despite the slight loss of momentum since January, the survey suggests that Germany can still be relied upon as an engine for the eurozone.

Updated at 8.52am GMT

8.29am GMT

The six problems with Italy and how to solve them

While we wait for Germany’s PMIs, check out the Guardian’s spread on Italy in the paper this morning.

My colleague Lizzie Davies in Rome numbers the six things wrong with Italy and how to solve them, starting with the effects of austerity.

She goes on to highlight the plight of women in the country run for years by Silvio Berlusconi, a man better known for his bunga bunga parties than anything else. She writes:

Held back by ingrained cultural attitudes, inadequate public services and political under-representation, they may have better educational qualifications than their male counterparts but they are significantly less likely to be in paid work.

8.20am GMT

French services sector shrinks at fastest rate in four years

The French data is predictably bad. The French services sector shrank in February at its fastest rate in nearly four years, suggesting it is far from a turnaround.

The services PMI came in at 42.7 in February, compared with 43.6 last month. The manufacturing index ticked up to 43.6, but remains well below the 50 mark that separates growth from contraction.

The composite PMI, which accounts for roughly two-thirds of French economic output, dropped to 42.3 from 42.7 in January.

Chris Williamson at Markit said:

There is a fairly consistent picture showing that the French business sector is suffering its worst downturn since the height of the financial crisis.

Updated at 8.22am GMT

8.13am GMT

Today’s agenda

A quick look at today’s agenda, before we plunge into the French PMIs.

  • France PMIs for February: 7.58am
  • Merkel addresses the Bundestag on the EU budget: 8am
  • Rajoy speaks in State of Nation debate: 8am
  • Italian election candidates hold press conference: 8.10am
  • Germany PMIs for February: 8.28am
  • Eurozone PMIs for February: 8.58am
  • UK public sector borrowing for January: 9.30am
  • UK CBI trends for February: 11am
  • US inflation for January: 1.30pm
  • US weekly jobless claims: 1.30pm
  • US PMIs for February: 1.58pm

In the debt markets, the UK is selling a £2.25bn of a 10-year gilt; while Spain is selling €3bn-€4bn of bonds maturing in 2015, 2019 and 2023.

8.05am GMT

Good morning and welcome back to our rolling coverage of the eurozone crisis and other global economic events.

The state of the French economy will be in focus this morning, with eurozone PMIs set to show a widening gulf between France and Germany.

UK chancellor George Osborne will also be in the spotlight when the public sector borrowing figures are released. These could offer some relief after the miserable 4G auction proceeds, as January is traditionally a strong month for tax receipts.

Later in the day, we’ve got a Spanish 10-year bond auction, as Mariano Rajoy’s government continues to take advantage of lower rates. And there’s a key UK gilt auction, which could suffer from the news that Mervyn King voted for more QE at the Bank of England’s last meeting.

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In the broadcast today: AUD and NZD: Are Currency Wars Spreading “Down Under”? As the Reserve Bank of New Zealand governor warns about currency strength and stands ready to intervene, we explore the potential for “currency wars” to spread “down under” and examine the outlook for the AUD and NZD, we analyze the latest trend developments in the AUD/USD and NZD/USD currency pairs, we take a look at the attempt for a bullish breakout in the EUR/USD pair, we continue to monitor the decline of the GBP vs USD, we highlight the market’s reaction to the RBNZ statement, the Bank of England Meeting Minutes, the U.K. Jobless Claims, and the U.S. Housing Starts, we discuss new forecasts from Bank of New York- Mellon and UBS, and prepare for the trading session ahead.

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