April 10 2013

Cyprus debt sustainability assessment emerges. Fed minutes released 5 hours early. One committee member wanted QE slowed now. Inquiry into FOMC minutes leak launched. European Commission warning over Spain and Slovenia…


Powered by Guardian.co.ukThis article titled “Eurozone crisis: Cyprus economy to tumble as gold sale planned – as it happened” was written by Graeme Wearden, for theguardian.com on Wednesday 10th April 2013 13.44 UTC

5.45pm BST

Closing summary

Time to wrap up for the day. Here's a closing summary.

The scale of the financial troubles in Cyprus have been laid out by an official debt sustainability assessment. It predicts that its GDP will tumble this year, and not start growing until 2015 (see 4.20pm onwards).

Cyprus will also sell around €400bn of its gold reserves (see 4.12pm).

There was embarrassment at the Federal Reserve after it was forced to publish the minutes of its last meeting 5 hours early. The minutes show that one member of its monetary policy committee wanted to start slowing its QE programme now (see 2pm onwards)

• The Fed has launched an inquiry, admitting that it accidentally sent the minutes out yesterday (see 2.44pm)

Christine Lagarde has claimed tonight that the global economy is a little less dangerous than six months ago. She warned, though, that global growth in 2013 will be little better than 2012 (see 5.30pm)

The European Commission has warned that Spain and Slovenia's economies are significantly imbalanced. Another 11 countries also contain worrying imbalances, including France – who was urged to make more rapid and deeper reforms (see 12.17pm onwards).

Spanish industrial output data showed that its manufacturing base endured another dire month in February, shrinking by 6.5%. Italy also suffered a fall in industrial production. See 8.43am onwards.

Thanks all – I'll be back tomorrow. Goodnight, and thanks.

5.30pm BST

Lagarde: world looks a little less dangerous

Christine Lagarde, head of the International Monetary Fund,has declared tonight that the global economy looked slightly less menacing today than last autumn.

She warned, though, that economic growth this year is unlikely to be much stronger than in 2012.

Speaking in New York right now, Lagarde said:

Thanks to the actions of policymakers, the economic world no longer looks quite as dangerous as it did six months ago.

But she also pointed out that the 'real economy' had not yet felt the benefits of the improvements in the financial world.

In present circumstances, it makes sense for monetary policy to do the heavy lifting in this recovery by remaining accommodative.

That 'accomodative' policy has seen central banks swell their balance sheets and the monetary base, but Lagarde claimed that the risks "appear under control."

She also touched on the eurozone crisis, saying that euro area countries need 'collective policy solution' to strengthen their banks.

5.20pm BST

Ratings agency Standard & Poor's has raised its rating on Cyprus from negative to stable, and suggested that it believes the country will remain in the eurozone.

5.13pm BST

Europe's stock markets have rallied strongly today. They were helped by rumours that Portugal and Ireland would be granted more time to pay back their bailout loans (see 1.24pm), and strong import data from China overnight.

Here's the closing prices:

FTSE 100: up 74 points at 6387, +1.17%

German DAX: up 173 points at 7810, +2.27%

French CAC: up 72 points at 3743, +2%

Spanish IBEX: up 263 points at 8,136, +3.35%

Italian FTSE MIB: up 492 points at 15,928, + 3.1%

4.41pm BST

The Cypriot debt sustainability assessment also warns that the cost of fixing its banks could rise, due to the sharp slump in GDP forecast for this year and 2014.

Dow Jones Newswires has the details:

4.22pm BST

Europe's loans to Cyprus will have an maximum average maturity of 15 to 20 years, Reuters adds.

4.20pm BST

Cyprus’s bailout forecasts paint a grim picture

Cyprus's economy will tumble by a jaw-dropping 8.7% this year, according to the Debt Sustainability Assessment that just hit the wires (I don't have a copy, but Reuters and Dow Jones are flashing the details).

The economy is then expected to keep shrinking in 2014, before returning to growth the next year.

The DPA also reckons that the country's budget deficit will peak at close to 8% next year.

Here's the projections for GDP:

2013: – 8.7%

2014: -3.9%

2014: +1.1%

And for budget deficits:

2013: 6.0%

2014: 7.9%

2015: 5.7%

2016: 2.15%

Pretty gloomy, but some in the financial markets fear it is not realistic enough:

4.12pm BST

Cyprus to sell gold reserves

Back to the eurozone, and Cyprus is planning to raise €400m by selling some of its gold reserves.

The plan is contained in the official Debt Sustainability Assessment of the country's financing needs, prepared by the EC, which is emerging this afternoon

The document also shows that Cyprus will raise over €10bn through winding up Laiki Bank and imposing a haircut on Bank of Cyprus's large deposits.

It should also raise around €600m from raising corporation tax and capital gains tax.

More to follow

Updated at 4.46pm BST

4.00pm BST

Capital Economics: eurozone crisis wil flare up again this year

Here's some analysis from Julian Jessop of Capital Economics on today's minutes from the Federal Reserve Open Market Committee meeting last month. Among other points, he predicts more alarm in the eurozone this year.

The revelation (although hardly new) in the latest FOMC minutes that some members would favour at least a tapering of QE by the end of the year has refocused attention on the role that Fed buying has been playing in keeping Treasury yields low. (See US section below.)

The conventional wisdom appears to be that 10-year Treasury yields are only likely to remain below 2% if the US central bank maintains its current pace of buying. In fact, the launches of successive bouts of quantitative easing have seen yields rise, rather than fall. Instead, the prospects for Treasuries depend mainly on the outlooks for short-term interest rates, inflation expectations, safe haven demand and other overseas buying, which together should keep yields low for at least another year.

At first sight, it might seem obvious that the Fed’s purchases of government bonds under QE3 have been a key factor keeping their yields low, and hence that any scaling back of these purchases would inevitably see yields surge. But the reality is more complicated. Indeed, Treasury yields actually rose during most of the period when the Fed was buying government bonds during QE1 and QE2, and are higher now than when the Fed launched QE3.

There are several ways in which large-scale central bank purchases of government bonds can put upward pressure on their yields. One is by raising long-term expectations for inflation. Another is by improving the prospects for the real economy and increasing the appetite for risk, thus encouraging investors to buy assets such as equities or industrial commodities rather than safe-haven government bonds. (Correspondingly, these riskier assets might be the major casualties if the Fed stops buying Treasuries, rather than Treasuries themselves.) To the extent that QE succeeds in restoring confidence, it might lead investors to revise up their expectations for the average level of short-term interest rates over the life of the bond too.

The upshot is that we would not necessarily expect a sustained rise in Treasury yields even if the Fed, perhaps mindful of the implications for its balance sheet and eventual exit strategy, does scale back its purchases later in the year. These concerns may matter less for “conventional” monetary policy and high unemployment would still be likely to keep official interest rates on hold near zero. There is also now more room for inflation expectations to drop again, especially if commodity prices continue to fall.

 Finally, other investors might simply step up to take the Fed’s place. In particular, we expect a renewed escalation of the euro-zone crisis in the second half of the year to boost safe haven demand for Treasuries. And at the margin, the fact that the Bank of Japan will now be buying a lot more JGBs may encourage (or even force) some Japanese institutions to increase their purchases of Treasuries instead.

3.42pm BST

Esther George, president of the Federal Reserve Bank of Kansas City, could well be the member who wanted to start unwinding America's bond buying programme.

There are 12 members of the open market committee, and the minutes (reminder: there are here) don't identify individual views.

But it was George who, last week, described the Fed's current policies as "overly accommodative". She argued that such a large bond-buying programme actually threaten long-term growth by creating financial instability and driving up long-term inflation expectations. More here.

Reuters also reckons George is the one:

One member, likely Kansas City Fed President Esther George, who dissented at the meeting, judged the pace of purchases should be slowed immediately, the minutes said.

Updated at 3.44pm BST

3.19pm BST

S&P 500 hits another record high

The early release of the Federal Reserve's minutes has not caused much alarm in the markets. On Wall Street, the S&P 500 index has hit a new intraday record high.

It gained 7.62 points to 1,576.23, up 0.5% today.

S&P 500 over the last year, to April 10 2013
Photograph: Thomson Reuters

All the major markets are up today, while commodities are down. So is volatility:

Financial markets, April 10th 2013
Photograph: Thomson Reuters

2.44pm BST

Federal Reserve launches leak inquiry

There must be some seriously red faces at the Federal Reserve today, after its minutes were accidentally punted to various workers at Congress and at trade bodies. A whole day early.

US Treasury bonds have weakened in value slightly today, pushing up the yield on its 10-year debt by around 3 basis points (to 1.779%). Not a big move — but, heck, any market move means profits or losses for someone.

The Fed has said that its Inspector General has been asked to investigate the early release of minutes, and that it does not know if any insider trading rules have been breached….

The mistake has caused much excitement in the markets…

2.34pm BST

Fed minutes: early reaction

Here's some early reaction to the Federal Reserve's minutes (and their early release)

Chris Beauchamp of IG Index:

Those Fed minutes have rather caught markets on the hop, but it is perhaps unwise to attribute too much importance to them in the wake of Friday’s job numbers. Any comments about reducing QE before the end of the year now look somewhat out of place following the surprise weakness in the US economy.

Updated at 2.34pm BST

2.17pm BST

Fed: one committee member wants QE slowed now

The Fed's minutes show that one member of its committee wants its quantitative easing bond-buying programme to slow down now. Several more suggested that this should happen this summer….

Here's the key quote:

In light of the current review of benefits and costs, one member judged that the pace of purchases should ideally be slowed immediately.

A few members felt that the risks and costs of purchases, along with the improved outlook since last fall, would likely make a reduction in the pace of purchases appropriate around midyear, with purchases ending later this year.

As things stand the Fed's policy is to buy bn of mortgate-backed securities per month, and bn of longer-term Treasury securities.

However — this meeting took place before the latest, disappointing, US jobs data was released. The outlook doesn't look quite so improved today.

2.06pm BST

See the Fed minutes

You can download the minutes of the Federal Reserve's last meeting – rushed out five hours early after that leak – by clicking here (pdf).

2.00pm BST

Fed to release minutes early

Just in – the Federal Reserve has rushed forward the release of the minutes of its last meeting — apparently after accidentally leaking them.

They were due at 7pm BST (2pm Eaastern time), but instead the Fed will release them at 2pm BST. So right now…

It appears that the minutes were released yesterday to around 100 Congressional staffers and trade lobbyists. Curious…

Updated at 3.27pm BST

1.51pm BST

Eurogroup briefing underway….

Over in Brussels, officials are briefing the media about the next meeting of European finance ministers, on Friday.

The FT's Peter Spiegel is tweeting the highlights:

1.40pm BST

Sounds like we'll see a few parliamentary votes* on the Cyprus bailout next week:

* – not in Cyprus, of course….

1.24pm BST

Germany: Cyprus’s MOU is finalised

The conditions of Cyprus's bailout deal have been agreed, according to the German government.

Reuters has the details:

A final memorandum of understanding between Cyprus and international creditors on the island's bailout has now been finalized, a German finance ministry spokesman said on Wednesday.

Martin Kotthaus also told a regular news conference he expected the bailout package to remain at 10 billion euros.

Curiously, Finnish finance minister Jutta Urpilainen had suggested this morning that the Cyprus bailout programme could be tweaked, when EU finance ministers meet in Dublin on Friday and Saturday.

Urpilainen told reporters:

I think the final outcome is good and sustainable, and I think it is good to go forward with this but it is good to note that some details might still be changed on Friday.

There are also reports that ministers will be advised to extend the maturity on certain loans given to Portugal and Ireland by seven years.

According to Reuters, the Troika of international lenders believes it is right to lower both countries' debt repayment burdens by spreading payments over a longer time. (more here).

1.08pm BST

Here's a chart from Barclays comparing economic growth in Ireland, Greece and Portugal against Germany:

1.00pm BST

Those other imbalanced countries in full…

The other 10 countries identified as imbalanced by the EC (click through for full details) are Belgium, Bulgaria, Denmark, Italy, Malta, the Netherlands, Finland, Sweden and the UK.

The full report is here – here's the top-line reasons for each:


Macroeconomic developments in the areas of external competitiveness of goods, and indebtedness, especially concerning the implications of the
high level of public debt for the real economy, continue to deserve attention.

More specifically, Belgium has experienced a long-term decline in its export market shares due to persistent losses in both cost and non-cost competitiveness.

While Belgian goods exports are gradually being reoriented towards more dynamic regions, the specialization in cost-sensitive intermediate products is intensifying…


The impact of deleveraging in the corporate sector as well as the
continuous adjustment of external positions, competitiveness and labour markets deserve continued attention.

 More specifically, Bulgaria rapidly built up imbalances during the boom phase that coincided with its accession to the European Union. In a context of catching up, high foreign capital inflows contributed to the overheating of the domestic economy and a booming housing sector.


The continuing adjustment in the housing market and the high
level of indebtedness in the household and private sector as well as drivers of external competitiveness, deserve continued attention.

More specifically, there has been a weak export performance linked to a rise in unit labour costs due to high wage growth and, in particular, weak productivity growth.


Export performance and the underlying loss of competitiveness as
well as high public indebtedness in an environment of subdued growth deserve continued attention in a broad reform agenda in order to reduce the risk of adverse effects on the functioning of the Italian economy and of the Economic and Monetary Union, notably given the size of the Italian economy.

More specifically, in a context of elevated risk aversion in financial markets, Italy's high public debt weighs on the country's growth prospects through several channels, in particular the high tax burden needed to service the debt, funding pressures for Italian banks and thus for the private sector, increased macroeconomic uncertainty and a severely limited margin for countercyclical fiscal policies and growth-enhancing public expenditure.


On-going adjustment of the highly negative net
international investment position, largely driven by private sector deleveraging in a context of high public debt and a weak business environment continue to deserve very close attention so as to reduce the important risks of adverse effects on the functioning of the economy.


The long-term sustainability of the public finances warrants attention
while the very large financial sector, and in particular, the strong link between the domestically-oriented banks and the property market poses challenges for financial stability and deserves continued monitoring.

More specifically, the long-term sustainability of public finances is at risk due to the high projected cost of ageing and other sizeable contingent liabilities.

The Netherlands

Macroeconomic developments regarding private sector debt and deleveraging pressures, also coupled with remaining inefficiencies in the
housing market deserve attention.

Although the large current account surplus does not raise risks similar to large deficits, the Commission will also continue monitoring the developments of the current account in the Netherlands.

More specifically, rigidities and distortive incentives have built up over decades to shape house financing and sectorial savings patterns.


The substantial deterioration in the current account position and the weak
export performance, driven by industrial restructuring, as well as cost and non-cost competitiveness factors, deserve continued attention.

More specifically, the loss in competitiveness weakens the country's economic position and risks compromising future prosperity and living standards, especially as population ageing already poses a challenge in this regard.

Finland has rapidly lost world market shares and the current account balance has been on a downward trend, and even turned into a deficit in 2011, which is forecast to widen.


Macroeconomic developments regarding private sector debt and
deleveraging, coupled with remaining inefficiencies in the housing market deserve continued attention.

Although the large current account surplus does not raise risks similar to large deficits in other countries, the Commission will continue to monitor developments of the current account in Sweden.

The UK

Macroeconomic developments in the areas of household debt, linked to the high levels of mortgage debt and the characteristics of the housing market, as well as unfavourable developments in external competitiveness, especially as regards goods exports and weak productivity growth, continue to deserve attention.

More specifically, the UK faces tensions between the needs for deleveraging, maintaining financial stability and avoiding compromising investment and growth

Updated at 1.09pm BST

12.44pm BST

The EC's message to France is basically that its economy just isn't competitive enough.

Wages have risen fast and put pressure on prices and firms' profitability.

The low and decreasing profitability of private companies, in particular in the manufacturing sector, have not only weighed on their indebtedness, but more importantly may have hampered their ability to innovate and to strengthen their non-price competitiveness.

Other factors, including the decreasing number of exporting firms have aggravated these competitiveness issues.

12.28pm BST

EC warns France over pace of reforms

The EC has also warned France that it needs to go further to reform its economy.

Today's report on macroeconomic imbalances points to France's poor growth and rising debt levels. The EC fears that the eurozone's second-largest economy poses risks to the rest of the region.

The report says:

France’s public sector indebtedness represents a vulnerability, not only for the country itself, but also for the euro area as a whole.

So while Francois Hollande is refusing to slow down (see 11.51am), the EC wants him to move faster….

12.17pm BST

EC warns Spain and Slovenia are too imbalanced

Spain and Slovenia's economies are both worryingly imbalanced, the European Commission has warned in its official report into macroeconomic imbalances in the EU.

Both countries were picked out as having "excessive' imbalances.

Spain, the EC said, still suffers from "very high domestic and external debt levels continue to pose serious risks for growth and financial stability."

For Slovenia, it risks financial sector instability because of "corporate indebtedness and deleveraging". The EC also pointed to the close links with public finances — a nod to the face that most Slovenian banks are state-owned.

You can download the full report here.

Another 11 countries still show macroeconomic imbalances (just not as excessive as Spain and Slovenia). This excludes Greece, Ireland, Portugal and Cyprus – all now in bailout programmes.

I'll pop a list up…

Updated at 12.20pm BST

12.05pm BST

French President Francois Hollande attends a news conference following the weekly cabinet meeting at the Elysee Palace in Paris, April 10, 2013.
French President Francois Hollande at today’s news conference. Photograph: POOL/REUTERS

12.03pm BST

Hollande sticks to budget plans

French president Francois Hollande has declared that he will not change his economic plans and announced a new attack on tax havens.

Hollande, buffeted by a tax scandal, (and the news that his camel has been devoured by a family in Mali*) pledged to stay on his fiscal course – despite seeing his popularity slide in recent months.

In a speech in Paris this morning, Hollande insisted that he was delivering a "serious budget", while sparing France from true austerity. He claimed that the fiscal measures underway would allow France to help lead Europe back to growth.

It is by pursuing this policy, the reforms that have been initiated…that France will be best placed to redirect the focus on Europe growth.

(quote via Reuters)

Hollande also announced that French banks will be forced to declare all subsidiaries worldwide, part of a new clampdown on corruption.

* – about that camel. It's a sad tale – the beast was awarded to Hollande in recognition of France's role in repelling Islamic rebels this year. It was entrusted to a family in Timbuktu, and most unfortunately they killed and ate it.

However, it's not all bad news (except for the camel) – Mali is sending a replacement. A "bigger and better-looking camel" too, so that should stop Hollande getting the hump (You're fired. Ed.)

10.57am BST

Heads-up: the European Commission will release its latest report into the European economy at 11.30am BST.

Updated at 10.57am BST

10.22am BST

Juncker warns eurozone recession will continue

Jean-Claude Juncker, Luxembourg prime minister and former president of the Eurogroup, has urged European leaders to ease the pace of fiscal reforms in struggling members of the eurozone.

Speaking in the Luxembourg parliament, Juncker warned that Greece, in particular, should be cut more slack.

Bloomberg has the details:

Juncker also warned that the eurozone recession would continue (perhaps he saw this morning's dire economic data from Spain and Italy).

Luxembourg is also bowing to pressure to open up its financial system; after criticism that it allows wealthy depositors to avoid paying tax in their home countries.

From the start of 2015 it will exchange information about foreign bank account holders from the European Union with other EU countries, Juncker confirmed:

We can, without great damage, introduce automatic exchange of information as of Jan 1, 2015.

9.31am BST

Rajoy in the Spanish parliament

Spanish Prime Minister Mariano Rajoy delivers his speech during a plenary session at the Lower Chamber in the Spanish Parliament in Madrid, Spain, 10 April 2013.

Here's Spanish prime minister Mariano Rajoy in the Spanish Parliament this morning, where he updated MPs on the last EU council meeting (last month) (see 9.12am).

9.20am BST

Italian industrial output also falls

Italy's industrial output also shrank in February, data just released shows, in another sign that the eurozone periphery is suffering badly.

Industrial output fell by 3.8% year-on-year on a seasonally-adjusted basis (compared to Spain's 6.5% slump), but was down 7.6% in unadjusted terms.

Output was 0.8% lower than in January – worse than economists had expected – showing that the Italian economy continued to weaken.

Updated at 9.22am BST

9.12am BST

Rajoy appeals for Europe to help

Spain's prime minister has again urged Europe to use "all the tools" available to drag the region back to economic growth, in a speech at the Madrid parliament this morning.

Mariano Rajoy told MPs that:

We must prevent Europe falling behind.

We must do everything we can with all the tools we have.

El Pais has more details here (in Spanish).

Rajoy also appears to have criticised Eurogroup president Jeroen Dijsselbloem for saying last month that Cyprus's bailout showed how future bank rescues could be structured:

Hopefully have the full details soon…

Updated at 9.16am BST

8.43am BST

Spanish industrial production dives again

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

The economic crisis in Spain continues. Data released this morning showed that industrial production in the country tumbled by 6.5% in February, compared with a year ago.

That's the 18th monthly contraction in a row.

The slump was driven by a double-digit decline in production of durable goods for consumers, who are suffering badly as Madrid implements its austerity programme.

But production was also down across the board, from other consumer goods to large-scale industrial equipment:

Spanish industrial production, February 2013
Photograph: Thomson Reuters

Many Spanish factories have closed since the financial crisis struck, creating a vicious circle of rising unemployment and falling demand.

One example, thousands of people were employed at a door factory in the town in Villacanas, south of Madrid. In the good days they churned out products for Spain's property boom – but the plant is now closed, along with most of of the Villacanas industrial park:

The abandoned terrain of the Mavisa door factory is empty on November 22, 2012 in Villacanas, Spain.
The site of the Mavisa door factory in Villacanas, Spain, last November 22. Photograph: Jasper Juinen/Getty Images

No wonder Spain's prime minister, Mariano Rajoy, has been urging European policymakers to do more to drive growth (details here).

The picture is slightly better in France this morning, where industrial production only fell by 2.8% year-on-year in February, and actually picked up by 0.7% compared with January.

I'll be tracking the reaction to today's data, and watching developments across the eurozone — particularly Slovenia (whose PM yesterday rejected speculation that a bailout would be needed), and Cyprus (where time is running out to agree its bailout).

Updated at 8.53am BST

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