Banking

Capital controls in Cyprus will intensify the slump while severely damaging the credibility of the euro. The idea that the single currency would rival the US dollar as a secure store of wealth has taken a pasting as a result of the disastrous handling of Cyprus…



Powered by Guardian.co.ukThis article titled “Demolishing some myths about the single currency” was written by Larry Elliott, for guardian.co.uk on Wednesday 27th March 2013 22.29 UTC

The introduction of capital controls in Cyprus is a textbook example of shutting the stable door after the horse has bolted. Rich Russians and wealthy Cypriots knew the crisis was coming and have had the best part of a fortnight to spirit their money out of the country since it broke, even assuming they did not do so beforehand. The restrictions will intensify the slump Cyprus faces while not removing the risk of bank runs when branches finally open for businesson Thursday. What’s more, the controls severely damage the credibility of the euro.

That’s not to say the controls are unnecessary. Even with the severe restrictions announced in place, there is a possibility of bank runs. Without them, bank runs would be a certainty. Modern banking is essentially based on a sleight of hand under which banks have readily available funds that are only a fraction of their total deposits. If all the customers demand their money at once, as would be the case in Cyprus without controls, the banks go under.

The government in Nicosia insists capital controls will be removed within a week, but that looks as heroic an assumption as the idea that the economy will shrink by just 3.5% this year, the current EU forecast. Iceland introduced capital controls in 2008 and still has them in place. There will no doubt be pressure from Brussels on Cyprus to lift the controls as quickly as possible, but most analysts expect them to be in place for a minimum of six months.

As far as the real economy is concerned, Latvia – which had pegged its currency to the euro – suffered an 18% contraction of its economy following a banking collapse. And bank deposits were just 100% of GDP in Latvia; in Cyprus they were 800% of GDP before the crisis. To sum up, Cyprus is going to have a collapsing economy buttressed by capital controls, but unlike Iceland will not have the option of devaluation to make itself more competitive. Speculation that it will become the first country to leave the euro will not go away. Indeed, it will intensify the longer the capital controls are in place.

There are, of course, wider implications for Europe despite attempts over the last week to say that Cyprus is a special case. When the euro was created just over a decade ago it was supposed to embody certain principles. One of those principles was that a euro would be a euro anywhere inside the single currency zone. That has now been violated; a euro in Nicosia is not worth the same as a euro in Berlin.

A second trait of the single currency was that it was supposed to be a secure store of wealth. International investors would have confidence in it and it would rival the dollar as a global reserve currency. That idea has also taken a pasting as a result of the disastrous handling of Cyprus; the decision to make deposit holders pay a share of the bailout has been accompanied by a fall in the value of the euro against the dollar. That’s hardly surprising; savings in US banks are perceived as rock solid whereas those in eurozone banks are not.

A third core belief was that the euro would lead to economic convergence, with the weaker and poorer countries raising their performance to the level of the rich nations at the monetary union’s core. This has looked increasingly absurd against a backdrop of bailouts for Greece, Ireland and Portugal, and the chronic lack of competitiveness displayed by Italy, Spain and – more recently – France.

So Cyprus has put two myths to bed. One is the myth of convergence; the other is that the debt crisis is over. A new chapter has opened, that’s all.

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USA 

Restrictions on how much money can be taken out of the country, including bans on checks cashed. Will banks re-open on Thursday? More protests due this afternoon. Bank of Cyprus CEO ‘fired’. Malta and Luxembourg: we’re not like Cyprus…



Powered by Guardian.co.ukThis article titled “Cyprus crisis: tough capital controls agreed – live” was written by Graeme Wearden, for guardian.co.uk on Wednesday 27th March 2013 16.10 UTC

4.10pm GMT

We’re still waiting for an official announcement from the Cypriot government on the capital controls.

In the meantime, Greek newspaper Kathimerini (which broke the news of the decree alongside the WSJ/Dow Jones this afternoon) has this report:

Cyprus decides on capital controls, including ban on checks being cashed.

3.47pm GMT

And here’s more reaction:

3.45pm GMT

Hats off to Janine Louloudi, a freelance journalist working in Nicosia, for translating the government decree on capital controls into English (you can download it here).

3.16pm GMT

Nathan Morley, reporter at the Cyprus Mail, explains how the ban on cashing cheques will hurt people:

3.06pm GMT

The instant reaction to Cyprus’s capital controls splits into two camps — one warning that the new measures will have a chilling effect on its economy, and the other predicting that the measures will last much longer than seven days.

2.57pm GMT

There’s no information about restrictions on ATM machines (although here may be more details still to leak). But, of course, people are already limited to taking out just €100 per day.

2.50pm GMT

Capital Controls annouced

Details of Cyprus’s capital controls are now hitting the newswires.

Here are the key points (mainly via Dow Jones and Reuters).

• All savings accounts must run until their expiry date – with no early withdrawals allowed.

• Cashing of cheques will be suspended, but ‘cheque deposits’ will be allowed.

• Payments out of the country are suspended, with certain exemptions:

a) Individuals will only be allowed to take €3,000 in cash on each trip out of the country.

b) Import payments will be allowed when ‘the relevant documents’ are provided to the authorities.

c) Cypriots will only be allowed to transfer up to €10,000 per quarter for fellow citizens who are studying abroad.

• All credit/debit card transactions abroad will be capped at €5,000 per person, per month.

• The measures will apply to all accounts, regardless of the currency it uses.

• They will run for seven days

Reaction to follow

Updated at 3.25pm GMT

1.53pm GMT

We’re running a poll today, on how long it will take for the restrictions on Cyprus’s financial system to be lifted:

How long will the capital controls in Cyprus last?

12.22pm GMT

The cash-only economy

These photos from Cyprus today show how customers at at petrol station in Nicosia are only allowed to pay by cash.

11.55am GMT

Early details of capital controls…

Capital controls to be imposed in Cyprus will limit foreign transactions and capital outflows but not movements of money within the country itself, according to the head of its chamber of commerce.

Phidias Pelides made the comments to reporters after meeting government officials, saying:

We have been assured that limitations will not affect transactions within Cyprus at all.

Where there will be limitations is on what we spend abroad and also on capital outflows.

(via Reuters)

That would prevent the threat of capital racing out of Cyprus, draining its banks and creating a deeper liquidity crisis.

We still don’t have confirmation that the banks will definitely open on Thursday….

Updated at 12.04pm GMT

11.46am GMT

Over on Twitter, Economist Hulk is explaining the nitty-gritty of economics to the masses (once HULK gets his follower count-up, anyway):

Another distinguished fund manager with too much time on his hands? Or perhaps a journalist desperate to throw off the chains of impartiality and shout what s/he really thinks.

Updated at 11.51am GMT

11.31am GMT

Malta and Luxembourg are not Cyprus, say Malta and Luxembourg

Malta and Luxembourg have both denied claims that they could suffer the same fate as Cyprus as they both operate outsized banking sectors.

Malta’s banking sector is eight times its GDP — even more that Cyprus’s is was. But the governor of the Central Bank of Malta, Josef Bonnici, insists that it’s in much better shape.

Speaking to Reuters, Bonnini said Malta’s banks weren’t carrying the foreign sovereign debt that helped cause Cyprus’s crisis:

The problems facing Cypriot banks include losses made on their holdings of Greek bonds, whereas Maltese domestic banks have limited exposure to securities issued by the (euro zone bailout) programme countries.

Luxembourg’s banking sector is about 20 times its annual GDP, and is understandably worried by recent comments from Brussels. Its government said it is:

concerned about recent statements and declarations” on the alleged risks of outsized financial sectors.

Our Europe editor, Ian Traynor, wrote on Monday evening that Cyprus’s fate has alarmed Malta and Luxembourg:

Malta’s finance minister sat next to his German and Cypriot counterparts at the first Cyprus bailout meeting in Brussels 10 days ago and was extremely chastened by what he witnessed.

After experiencing Wolfgang Schäuble, the German finance minister, up close, he wrote an article in the Malta Times saying God help his country if it encounters similar problems in the eurozone.

Then there is Luxembourg, which along with Austria, is the eurozone’s biggest champion of banking secrecy.

Cyprus’s banks have been tamed – are Malta and Luxembourg next?

Updated at 11.35am GMT

10.51am GMT

Key event

The central bank of Cyprus has confirmed in the last few minutes that the draft capital controls are ready.

A spokesperson for the bank said it hopes to brief the public on the situation by the end of the day, and repeated the line that they will be kept flexible, if possible.

Banks to reopen tomorrow, then?….

10.32am GMT

Economic confidence across the eurozone and the EU was already low, by historical terms, before this month’s drop:

10.25am GMT

Economic confidence across the eurozone has fallen this month, reversing four months of gains and sending the euro sliding further.

The data suggests the Cyprus crisis has alarmed business leaders across the region, undermining efforts to bring the eurozone out of recession.

Economic sentiment slumped by 1.1 points to 90.0, according to the EC’s monthly measure, driven by falling optimism among manufacturers.

10.06am GMT

Protests planned in Nicosia tonight

Protests are mounting in Cyprus as the full extent of Monday’s EU-IMF bailout sinks in.

The communist Akel party, in collaboration with a group of private citizens, is planning a mass demonstration at 5.30pm local time, or 3.30 GMT, outside the offices of the European commission.

They will protest against policies that many fear have put the tiny nation state on the Greek path of economic self-destruction.

From Nicosia, my colleague Helena Smith reports:

“There is a lot of fury and growing fury,” said Giorgos Doulouka, the party’s spokesman. “We all know what awaits us, that these polices are going to lead to a huge decrease in the GDP of our country, recession and cuts in pensions and benefits because the government won’t be able to meet budget targets.”

The protest, which is expected to draw thousands, will move onto the presidential palace. Anger has been underscored by panic among employees over what awaits the Bank of Cyprus, following the Greek Cypriot finance minister’s announcement Tuesday that the lender will undergo restructuring and internal recapitalisation.

Helena has also just spoken to the former central bank governor Afxendis Afxendiou who says he thinks the banks, closed for the past 11 days, will re-open tomorrow.

9.55am GMT

Bank of Cyprus CEO fired – reports

Back in Nicosia, it appears that the chief executive of the Bank of Cyprus (BoC) has been dramatically fired.

Local media are reporting that Yiannis Kypri was ousted by the country’s central bank, following the appointment of a special administrator to run BoC.

Reuters’s Nicosia bureau has the details:

Cyprus’s central bank has fired the chief executive officer of the Bank of Cyprus, an official at the island’s largest commercial lender said on Wednesday.It follows the appointment of a special administrator to run the bank, which was saved from collapse this week under a painful European Union bailout for Cyprus.

The bank’s chairman, Andreas Artemis, submitted his resignation on Tuesday.An official at the bank, who declined to be named, said local media reports that CEO Yiannis Kypri had been removed from the post were “valid”.

The source was unable to confirm reports that the central bank had demanded the resignation of the entire board.

The reaction of BoC’s staff will be interesting. Yesterday, hundreds of employees held a demonstration at the bank’s HQ and were clearly furious with the actions of the central bank.

Updated at 10.04am GMT

9.44am GMT

UK GDP

A gobbet of economic news…. Britain’s economy only grew by a measly 0.2% during 2012, not 0.3% as previously thought. That’s according to new data from the Office for National Statistics, which also confirmed that GDP shrank by 0.3% in the last three months of 2012,

France’s economy also shrank by 0.3% in the last three months of 2012, separate data from Paris showed. Europe’s larger economies ended last year on a low.

9.30am GMT

Here’s a video clip of Paul Mason, Newsnight’s economics editor, holding a draft copy of the capital controls that should be announced in Cyprus today.

The document is littered with ‘xx’s, showing that bank managers (as of last night) didn’t have any clear idea what the capital controls would be. That doesn’t bolster confidence that they’ll all be ready to reopen tomorrow morning….

Updated at 9.35am GMT

9.25am GMT

Moody’s: eurozone overestimates its ability to curb contagion

Eurozone leaders and top officials may be kidding themselves if they reckon they’ve prevented the Cyprus bailout causing damage to other countries, a senior executive at Moody’s warned today.

Bart Oosterveld, managing director of sovereign risk at Moody’s, told Reuters that policymakers are overestimating their ability to contain the crisis.

Here’s the key quotes:

Policymakers appear very confident that market conditions are benign enough and that they have the tools to avoid contagion to other peripheral economies and their banking systems.

We think that that confidence may well be misplaced.

So far, Cyprus has remained largely a local difficulty – with the bond yields of Spain and Italy unaffected (so far). OK, the euro has lost ground – but that won’t cause alarm in Brussels (and will please countries with a strong export sector…. )

Updated at 9.28am GMT

9.06am GMT

Euro hits four-month low

The euro fell to a new four-month low against the US dollar this morning, to $1.2818.

Traders blamed the aftermath of the Cyprus bailout. Confusion reigns over whether Europe is moving towards a system where large depositors and bond holders, rather than taxpayers, will be tapped when a bank fails.

Kit Juckes of Société Générale explains:

Anger at the treatment of Cypriot depositors won’t abate and the damage to confidence in Europe’s financial system and leadership is done.

Updated at 9.10am GMT

8.46am GMT

Capital controls: further reading

The government of Cyprus said yesterday that capital controls could be lifted in a few weeks. But in the past, these restrictions have lasted much longer.

Here’s Bloomberg’s take: Cyprus Capital Controls First in EU Could Last Years

Cyprus is on the verge of an unprecedented financial experiment: imposing controls on money transfers in an economy that doesn’t have its own currency….

“Thanks to political mismanagement, we now have a first: capital controls in the euro zone,” said Nicolas Veron, a senior fellow at Bruegel in Brussels and a visiting fellow at the Peterson Institute for International Economics in Washington.

“How long is temporary? It could turn out like Iceland, extending to many years.”

The BBC has a handy explainer: Cyprus crisis: What are capital controls and why does it need them?

And there’s a good Q&A on the Wall Street Journal.

Updated at 9.10am GMT

8.29am GMT

Michalis Sarris: Capital controls will be within ‘realms of reason’

Good morning, and welcome to our rolling coverage of the crisis in Cyprus following its bailout.

A historic day looms, as Cyprus prepares to become the first member of the eurozone to impose restrictions on the flow of money in its economy.

Finance minister Michalis Sarris says the new capital controls should be ready by noon Cyprus time, or 10am GMT. He’s already defended them in a TV interview saying:

I think they will be within the realms of reason

Banks will open on Thursday … We will look at the best way to limit the possibility of large sums of money leaving, and not imposing punitive conditions on the economy, businesses and individuals.

The capital controls are meant to prevent hordes of savers descending on Cyprus’s bank branches and cleaning the vaults out. So what might they be?

Based on the legislation passed by the Cyprus parliament, and a report by the BBC’s Paul Mason (who’s seen a draft version), it will probably include:

* Limits on cash withdrawals (currently €100 at ATM machine),
* restrictions on access to savings accounts,
* limits on paying by cheques (possibly a ban),
* restrictions on the use of credit and debit cards,
* and a ban on taking large sums of money out of Cyprus.

We’ll get the details soon, along with other developments through the day…..

Updated at 8.32am GMT

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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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U.K. manufacturing is down, construction is struggling, exporters are having a torrid time – and then there’s the eurozone recession. Here is a view of the current conditions in the U.K. manufacturing, housing, construction and banking sectors…



Powered by Guardian.co.ukThis article titled “UK economy: the problem sectors” was written by Phillip Inman, economics correspondent, for The Guardian on Friday 7th December 2012 20.32 UTC

Manufacturing

Industrial output is now at its lowest level since May 1992 and manufacturing is 20% down on its peak. Latest figures showed a month-on-month fall of 0.8%, far worse than economists had expected and the 16th consecutive month when manufacturing output was lower than the same month a year earlier.

The Office for National Statistics found most areas of manufacturing were on the slide, with chemical production and wood and paper manufacture leading the downturn.

A fall in the value of the pound and the opening up of new destinations for UK exports – such as Indonesia and Columbia – have failed to lift the sector, which is far more dependent on trade with the euro area than ministers would like. The British Chambers of Commerce said the sector remained well managed and prepared for an upswing, but needed more government help to boost exports to fast developing countries.

Construction

There may be plenty of cranes on the London skyline, but the construction sector outside the capital is dead. Commercial building, the lifeblood of most large firms, has failed to recover from the financial crisis. The hole in the heart of Bradford, where a Westfield shopping centre is already four years late, is an example of building projects that have remained strictly on the drawing board.

Civil engineering has suffered from a lack of infrastructure improvements after a near-£30bn cut in public investment spending. The CBI has urged the government to use the downturn to upgrade the road and rail network. The Treasury encouraging upgrades to the broadband network has failed to counteract falls in investment elsewhere.

Banking

The Bank of England has become increasingly frustrated at the unwillingness of banks to increase their lending to businesses and households. In the summer it set up an £80bn Funding for Lending scheme that allows banks to offer cheaper loans to customers. Banks have reported using the money to lower mortgage rates, but anecdotal evidence suggest older, more creditworthy customers have gained while first-time buyers remain on the sidelines. More importantly, many economists argue the loans on offer are small in comparison to the size of the problem.

The UK’s major banks remain in a dire financial situation and need to build up their capital reserves to protect themselves against another financial crash. The central bank governor, Sir Mervyn King, insisted earlier this month that UK banks were well-capitalised but said it would be “sensible” to improve their resilience further. He warned “an erosion of confidence” was damaging economic activity, creating “a spiral characteristic of a systemic crisis”.

Trade

British exporters are having a torrid time battling the headwinds of the slowing Chinese economy, the eurozone crisis and uncertainty in the US over the fiscal cliff (the tax rises and spending cuts timed for January which could halt US economic progress in its tracks).

According to the latest figures from the ONS, in the three months to October the country racked up its biggest trade deficit since records began. The trade gap widened to a record £28bn, from £25bn in the quarter ended July, the ONS said, as sales of goods into the rest of the European Union declined sharply.

George Osborne promised more help for exporters with loan and credit guarantees through the government’s UKTI export arm. But the sums remain small compared to the size of export orders and firms seem reluctant to take risks in the current economic environment.

Housing

Housebuilders have largely shed the debts acquired in the crash and become profitable again. But building remains at historic lows. The last time the UK built so few homes was in 1931.

MPs and business groups have called for a 1930s-style house building boom, but with no success so far. Ministers are planning to rip up planning rules to allow developers a clear route on greenfield sites, but even if this plan goes ahead, it will be some time before there are any spades in the ground.

Developers, which already have several years of plots on their books with planning permission, have refused to increase the number of new homes while customers are constrained by high mortgage borrowing costs. They blame the banks for withholding credit or charging too much for credit as the main reason for their inactivity.

Prices are slipping, putting another brake on investment in the sector. Halifax said prices are likely to stay flat next year after a 1.3% fall in 2012. Most families are unwilling to buy homes in a market where prices are falling, though buy-to-let investors have snapped up thousands of homes since the downturn, increasing the size of the rental market.

The eurozone

The machine at the heart of the eurozone is spluttering: the Bundesbank has sliced more than 1 percentage point off its forecast for economic expansion in Germany next year – highlighting severe aftereffects of the sovereign debt crisis.

The German central bank revealed the crushing blow to confidence and growth that has struck the euro area when it cut its projection for growth in 2013 from the 1.6% it had expected six months ago to a grim 0.4%. It also said the German economy, Europe’s largest, will grow only 0.7% this year, down from its previous forecast of 1%. The downgraded forecast shows Germany is no longer immune from the downturn in the rest of the currency bloc.

Separately, the German finance ministry said industrial output fell 2.6% in October, while manufacturing crashed by 2.4%, providing “further evidence that the economy’s backbone is quickly losing steam,” said the ING analyst Carsten Brzeski.

Without an expansive and confident Germany, it is almost certain the eurozone’s double-dip recession will continue into 2013, dragged down by severe contractions in the southern states.

There is also a feedback loop into UK trade should Germany suffer a prolonged fall in demand. Germany and the rest of the EU still comprise over 50% of UK exports, despite the government’s emphasis on redirecting trade elsewhere to rapidly developing economies in Asia, Africa and South America.

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ECB Mario Draghi announced the details of the central bank’s bond-buying program. ‘Almost unanimous’ vote overrides German fear of inflation. Countries benefiting must enter bailout programs. Eurozone growth forecast downgraded…



Powered by Guardian.co.ukThis article titled “Eurozone crisis: ECB introduces unlimited bond-buying programme” was written by Josephine Moulds, for guardian.co.uk on Thursday 6th September 2012 13.48 UTC

Mario Draghi, the president of the European Central Bank, has pushed through a controversial scheme to save the euro, trampling over German opposition.

At the same time, the ECB said that the economic outlook for the eurozone had deteriorated. It now expects the eurozone economy to shrink by 0.4% in 2012 and grow by 0.5% in 2013, while inflation rises to 2.6%.

Draghi said the vote to start buying the bonds of crisis-hit states in unlimited amounts, in an attempt to bring governments’ borrowing costs down, was “almost unanimous”, with one exception.

The scheme has faced furious opposition from German central bank chief Jens Weidmann, who argues that it is tantamount to printing money in order to pay off a country’s debt, which is expressly forbidden by the ECB’s mandate. He also fears the measures will fuel inflation, ease the pressure on overspending governments to get their finances in order and erode the ECB’s independence.

Ranvir Singh, chief executive of market analysts RANsquawk, said: “Even by the inscrutable standards of Mario Draghi, the ECB president’s speech revealed little of huge tectonic pressure that has built up under the eurozone’s surface. To fly in the face of Germany’s wishes will not have been easy. For the Bundesbank, keeping inflation in check is an article of faith. Its president has made no secret of the fact that he regards the ECB plan to buy the debt of the eurozone’s weaker members as the road to perdition.”

Draghi said the buying-up of bonds, which will be known as outright monetary transactions (OMTs), would be unlimited and that countries benefiting from the scheme would need to submit to certain conditions. The ECB would seek the involvement of the IMF to design and monitor such programmes. Governments to benefit from the OMT would also have to be attached to a programme with one of the eurozone bailout funds. Draghi said the ECB would stop buying a country’s bonds if it failed to comply with the bailout programme.

The ECB said it would buy bonds with a residual maturity of one to three years. That means it can buy bonds with a longer maturity, as long as they only have three years remaining until they are paid back.

As expected, the ECB said the bond-buying programme would be “sterilised”. This means the central bank will not increase the money supply as a result of the bond purchases; instead it will take the equivalent amount of money out from other parts of the system.

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Mario Draghi seeks to reassure over future of euro, but financial markets are left disappointed with the lack of action today, Bank of England maintains the benchmark rate and the size of its Asset Purchases Program unchanged, Risk-off trading session ahead of the U.S. Non-Farm Payrolls tomorrow…



Powered by Guardian.co.ukThis article titled “ECB ‘willing to buy bonds of weaker EU nations’ says Draghi” was written by Larry Elliott, Economics editor, for guardian.co.uk on Thursday 2nd August 2012 13.58 UTC

Mario Draghi pledged that the European Central Bank would buy up the bonds of the weaker members of the 17-nation single currency, as he sought to make good on his pledge to do “whatever it takes” to safeguard the future of monetary union.

The ECB’s president said the governing council of the central bank would also consider other exceptional – but non-specified – steps to ease pressures that have led to speculation about a break-up of the euro.

In a press conference following an ECB council meeting, billed as one of the most crucial since the creation of monetary union in 1999, Draghi provided more details on how to bring down bond yields, as promised in a speech in London last week.

He said: “The governing council, within its mandate to maintain price stability over the medium term and in observance of its independence in determining monetary policy, may undertake outright open market operations of a size adequate to reach its objective.”

This was seen by markets as a sign that Draghi will reactivate the ECB’s Securities Market Programme, under which the bank buys up government bonds from financial institutions.

Private bond holders have voiced fears that a big bond-buying spree by the ECB would potentially leave them suffering bigger losses in the event of any sovereign default, because the Frankfurt-based central bank has insisted in the past that it will not take a “haircut” on its bond holdings. Draghi said these concerns would be addressed.

In addition, he said: “The governing council may consider undertaking further non-standard monetary policy measures according to what is required to repair monetary policy transmission.”

The ECB will also think about providing fresh cheap funds for European banks, following two injections of liquidity through long-term refinancing operations in December 2011 and February 2012. Relaxation of collateral rules for banks will be discussed next month.

Financial markets were left confused by Draghi’s comments. An initial rally in the euro against the US dollar quickly petered out, while in the bond markets yields of Spanish and Italian bonds moved higher after falling initially. Shares also moved erratically – having been about 45 points higher as the ECB president started speaking, the FTSE 100 later reversed that to show a 50-point loss on the day, a fall of almost 1%, as analysts were at odds about whether the ECB president would be able convert his tough talk into action.

Jason Gaywood, director at currency specialist HiFX, said: “Markets were disappointed today as the ECB fell short of taking action to rescue Spain. Instead, Mario Draghi merely stated that the euro is irreversible.”

Jeremy Cook, chief economist at foreign exchange company, World First, said: “The most important thing about the ECB press conference is the statement about the fact that they may undertake outright open market operations, ie buying of peripheral debt to reduce yield pressures, which were described as unacceptable.

“This is almost what the markets wanted, but the emphasis is on the fact that things ‘might happen’. The fact that they will have to discuss ‘modalities’ and ‘seniority’ suggests that they know what they want to do, but they’re really not sure how to do it.”

But Nick Parsons, head of strategy at National Australia Bank, said: “I think he means it. He has said he will intervene in unlimited size.

“The bazooka has yet to be fired, but Draghi hinted at its design this afternoon.”

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ECB will do ‘whatever it takes’ to preserve the currency said the European Central Bank President Mario Draghi easing market concerns about the escalating EU debt crisis after Draghi appeared to signal that the central bank is prepared to act to calm the bond markets…



Powered by Guardian.co.ukThis article titled “Euro is irreversible, declares European Central Bank president Mario Draghi” was written by Josephine Moulds, for guardian.co.uk on Thursday 26th July 2012 13.48 UTC

Mario Draghi, president of the European Central Bank, said on Thursday the euro was “irreversible” and promised to do everything within his power to save it.

Speaking at the UK government’s Global Investment Conference in London, Draghi said: “Within our mandate, the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough.”

The news sent the euro up 1% against the dollar, to $1.2315, and it also gained against other major currencies. Spanish and Italian borrowing costs eased, after Draghi appeared to signal that the ECB was prepared to act to calm the bond markets.

“If government borrowing premia hurt monetary policy transmission, they are in our mandate,” he said.

The yield on Spanish 10-year debt dipped to a whisker above 7%, at 7.009%, while Italian 10-year yields fell to 6.1%.

Draghi said the eurozone was much stronger than people acknowledged and progress over the last six months had been remarkable. “The last summit was a real success as it was the first time that all the leaders of 27 countries, including the UK, said the only way out of this crisis is to have more Europe. This means that much more of what is national sovereignty is going to be exercised at supranational level.”

Draghi was sharing the stage with Sir Mervyn King, governor of the Bank of England, who took the opportunity to deflect blame for the financial crisis from the banking sector. “Of course there was bad behaviour,” he said. “But this was a crisis which emanated from major mistakes in macroeconomic policy around the world, and fundamentally the inability to successfully co-ordinate macroeconomic policy so that globally you wouldn’t get the imbalances, the capital flows, that created the difficulties in the banking system.”

The day kicks off two weeks of investment summits aimed at attracting more foreign investment into the UK and promoting British business. Based in Lancaster House, the summit is taking place within earshot of the beach volleyball at Horse Guards Parade and aims to take advantage of the influx of foreign dignitaries for the Games.

The event offers some respite for trade minister Lord Green, who is under pressure because of his role as chief executive and then chairman at HSBC when the bank laundered money for Mexican drug barons and possibly even terrorists.

Green welcomed delegates to the conference and exchanged a warm handshake with King, among others. Green was promoting the UK as a great place to do business, alongside Lord Sassoon, commercial secretary to the Treasury, in a change to the schedule. He had been due to share the podium with Stuart Gulliver, current chief executive of HSBC, but Gulliver withdrew from the conference after the money laundering revelations.

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Leaders in Brussels divided over how to interpret summit accord aimed at easing pressure on highly indebted states, Spanish banking rescue was the main issue confronting ministers on Monday, but there were mixed signals over who would be liable…



Powered by Guardian.co.ukThis article titled “Eurozone talks stuck on detail of bank rescue fund plan” was written by Ian Traynor in Brussels, for The Guardian on Monday 9th July 2012 18.10 UTC

Eurozone leaders are meeting in Brussels to try to build on a “breakthrough” summit 10 days ago that agreed to ease the pressure on highly indebted states by injecting rescue funds directly into troubled banks.

But the meeting has been plagued by divisions over how to interpret the summit accord and how the decisions should be implemented.

The Spanish banking rescue was the main issue confronting ministers on Monday, but there were mixed signals over who would be liable for the mooted direct recapitalisation of the country’s financial sector.

The summit resolved to break the invidious link between failing banks and weak sovereigns by agreeing to use eurozone bailout funds to recapitalise banks directly, not via governments, to avoid pushing up debt levels. But since the summit, eurozone creditor governments have backtracked on the pledges over how the accord will be implemented.

While the Germans and other north Europeans insist that direct bank injections can be contemplated only once a new regime of banking supervision is in place (likely to take a year), senior Eurogroup officials signalled that even in the event of bailout funds going straight to banks, the host country would still be burdened. If the main bailout fund, the European Stability Mechanism, took equity in troubled banks, the host government would need to underwrite the risk and be liable if the bank went bust, the officials said.

“The ESM is able to take an equity share in a bank, but only against full sovereign guarantees. It remains the risk of the sovereign. There’s some degree of mystification going on here,” said a senior official.

That was contradicted by the European commission, which stressed there would be no liability for the host state if its banks were rescued.

With the troika of the commission, the European Central Bank and the International Monetary Fund scrutinising the performance of Greece, Cyprus and Spain, the senior official added that it would be the end of August before any decisions were taken on Greece and Cyprus.

Spain was expected to dominate Monday night’s session, the quandary made more urgent as the yield on Madrid’s benchmark 10-year bonds nudged 7.2%, past the point of the affordable.

The ministers were to try to reach a “political understanding” on a memorandum between the eurozone and Madrid to be finalised later this month. In Brussels there is talk of emergency Eurogroup talks around 20 July or an extraordinary summit. Ministers could also confer by videoconference before the August holiday.

In what appeared to be a reference to Spain, Draghi said last week that bailout funds to banks would burden the host country only temporarily since the money would come off the books once the new banking supervisory regime was in place. Eurogroup officials, however, cast doubt on whether Spain would benefit, pointing out that the memorandum of understanding with Madrid was likely to extend only until 2014 and it could take that long for the new procedures to be implemented.

On Greece, the officials said “there would be no more disbursement” of eurozone bailout funds until the current troika mission was complete and had assessed how far Athens’ austerity and structural reform programmes had been blown off track by the political turbulence of the last three months.

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



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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The two should not be on the same balance sheet.

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

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

10.58am: On Libor, King says:

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

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

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

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

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

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

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

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

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

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

How Italy and Spain Defeated Merkel at EU Summit

Carsten Vokery writes:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The EU summit that finally did not fail

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

I never speculate about financial markets or football.

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

Christian Schulz of Berenberg writes:

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

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

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

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

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

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

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

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

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

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

Michael Hewson at CMC markets writes:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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



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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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