European banks

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 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. © Guardian News & Media Limited 2010

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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 article titled “Eurozone crisis live: Bank bailout throws lifeline to Spain and Italy” was written by Josephine Moulds, for 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.
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. © Guardian News & Media Limited 2010

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EU leaders draft federal plan to save the eurozone ahead of crucial summit, Moody’s downgrades 28 Spanish banks, and Cyprus becomes fifth eurozone country to need a bailout…

Powered by article titled “Eurozone crisis live: Markets cautious as politicians manoeuvre ahead of crucial summit” was written by Rupert Neate and Nick Fletcher, for on Tuesday 26th June 2012 16.39 UTC

5.54pm: It’s been another mixed day on the markets, with rumour and counter rumour ahead of the EU summit on Thursday and Friday.

A downgrade of 28 Spanish banks and talk of the country’s sovereign debt getting another cut by Moody’s helped push Spanish yields higher again, although still below the 7% level reached last week. Stock markets came off their worst levels despite some reported resistance to the EU’s draft federal plan to save the euro.

The FTSE 100 closed down 3.69 points at 5446.96, while Germany’s Dax was up 0.07%. France’s Cac slipped 0.3% but Italy’s FTSE MIB fell 1.11% and Spain’s Ibex 1.44% after German chancellor Angela Merkel supposedly said Europe would not have shared total liability for debt as long as she lives.

Eurozone finance ministers are expected to hold a conference call tomorrow to discuss Spain and Cyprus’s requests for financial help, and there will inevitably be a lot more posturing ahead of the summit.

So with that to look forward too, it’s time to close up for the night. Thanks for all the comments and we’ll be back tomorrow.

5.42pm: News from John Hooper in Rome to calm everyone’s nerves as the summit approaches …

As the Guardian reported a couple of days ago Silvio Berlusconi has been making noises about returning to government. Well, today he was reported to have added some clarification. The 75 year-old TV magnate was said to have told a meeting of his party’s MPs that he didn’t necessarily see himself as the next prime minister.

But he would be happy to serve in a future government as finance minister …

5.39pm: More on the resignation of deputy maritime affairs minister Giorgos Vernikos. Helena Smith in Athens writes:

It’s definitely NOT a good day for Antonis Samaras, who though at this early stage of his Greek premiership could be described as beleageured. After accepting the resignation of Vasillis Rapanos, his first choice for finance minister, the conservative leader has been forced to accept the resignation of Giorgos Vernikos, the deputy maritime minister.

Greece’s state-run news channel ERT is reporting that Vernikos announced the decision to step down following relevations – made initially by the main opposition far left Syriza party – of his ties with an offshore company in the Marshall isles. Under Greek law such ties are prohibited and in the new climate of post crisis Greece it would seem are being upheld.

5.17pm: Aside from the various Merkel and Monti comments ahead of the EU summit – which seem to follow the pattern of being made and then downplayed – there is a more positive tale doing the rounds.

According to Reuters and Bloomberg German sources are suggesting that the rules surrounding the forthcoming ESM bailout fund could be changed, allowing it to direct aid directly to national bank rescue funds. On top of that, the eurozone is apparently considering taking away preferred creditor status from the ESM.

That last point is important. One reason investors have been less than enthusiastic about, say, the Spanish bank bailout is that if the funds come from the ESM, they would rank higher than existing sovereign debt. That has helped push Spanish yields up and the price of its bonds down, since why would anyone invest if existing bonds rank lower in the pecking order.

A change to that seniority could prove a positive point for the markets, the euro and sovereign debt.

5.01pm: The Italian press are reporting that prime minister Mario Monti has threatened to quit unless eurobonds are introduced [report in Italian]. Germany’s Angela Merkel is of course dead set against eurobonds…(see the reported comments on shared liability at 4.13).

Earlier Monti told the Italian parliament that the forthcoming summit would not just rubber stamp pre-prepared documents, but needed to work towards a growth plan and “mechanisms to help control market tensions.”

4.23pm: But now comes the backtracking.

4.13pm: Markets are getting spooked again, and here’s one reason. According to Reuters, German chancellor Angela Merkely has said at a coalition party meeting that Europe will not have shared total liability for debt as long as she lives.

So is this a torpedo aimed at the earlier EU draft talking about turning the eurozone into a fully fledged political union within a decade?

Whether or not this is the case, the Spanish and Italian stock markets don’t like it – they are both down more than 1% now.

4.02pm: But don’t worry. The eurozone finance ministers are apparently due to hold another teleconference tomorrow ahead of the summit on Thursday and Friday. So that’s all right then.

4.01pm: Some nasty rumours about Spain, notably that Moody’s may soon cut the country’s credit rating to junk after last week’s downgrade.

As a reminder, Moody’s said when it cut the rating to Baa3 that the country was on review for another reduction. The agency has just reduced the ratings of 28 Spanish banks, and the cost of insurance against a default among Spain’s biggest banks is currently climbing again. A Bloomberg story quotes one analysts saying there was likely to be another downgrade of Spain’s sovereign debt within weeks.

All this – along with high yields Spain paid in its short dated bond auction today – has had a predictable effect on ten year yields. Michael Hewson at CMC Markets said:

Spain had to pay 2.36% for three month money, well above the previous 0.85% in May. Italy’s borrowing costs also rose at a two year auction today paying 4.71%, above the previous 4.04%.

Whispers in the market that Spain could well be cut to “junk” by Moody’s have seen Spanish yields once again edge back towards the 7% level, pushing above 6.8% again.

3.51pm: Being the world’s oldest bank and the producer of your own Chianti is no protection against the current financial crisis.

Italy’s Banca Monte dei Paschi, founded in 1472, is to receive a €2bn state bailout in the form of special bonds, to help plug a capital gap of between €1.3bn and €1.7bn. The new support brings the total level of state aid for the bank to €3.9bn. Here’s a Reuters piece looking at how such an institution ran into its present difficulties.

3.36pm: Meanwhile here’s a bit more about one Greek minister who must be expected to stay around for at least a little while, given he has only just been appointed.

According to our Athens correspondent Helena Smith, the new finance minister Yiannis Stournaras has strong views on liberalising the closed shop Greek economy. Helena says:

In many ways Stournaras is a replica of Vasillis Rapanos, who was forced to quit the job and may well have recommended the Oxford-educated Stournaras in his stead. A strong believer in reform, Stournaras is of the firm conviction that Greece’s myriad closed shop professions must be opened up immediately, along with the market, if the debt-choked country is to regain its competitiveness.

“He has very strong opinions on the need for reform and opening up the market,” said Pandelis Kapsis, a prominent political commentator and former government spokesman.

“In many ways he has exactly the same profile as Rapanos, both were top economic advisers to [former prime minister Costas Simitis] both headed banks, although in Stournaras’ case it was the commercial Emporiki Bank, were are university professors. In short both are excellent choices for the post.”

And an interesting fact:

3.29pm: The disruption of Greece’s new government continues, if current suggestions are true:

3.27pm: Yet more weak data from the US, on both the manufacturing and confidence front.

The Richmond Fed manufacturing index fell by 3 points in June compared to a 4 point rise in May. On top of that US consumer confidence fell for the fourth month in a row, down to 62 from 64.4 in the previous month. Analysts had expected the index to come in at around 63.5. Rob Carnell at ING Bank said:

US Consumer confidence has come in much weaker than consensus estimates. Together with a more downbeat Richmond Fed index, today’s data adds to the sense that the current run of soft US data is not just a temporary aberration, but something a bit more material. Not good news for risk assets.

Last week investors were betting that signs of weakness could prompt the US Federal Reserve to take aggressive measures to boost the world’s largest economy, up to and including further quantitative easing. In the event, the Fed merely increased its bond buying programme. But it left the way clear for further action if things deteriorated, and today’s data is certainly not showing any signs of improvement.

The news has done little to help the US market, with the Dow Jones industrial average currently down nearly 10 points.

2.39pm: It looks like Herman Van Rompuy, president of the European Council, significantly watered down plans to re-shape the Eurozone. The 7-page draft document released by the EC earlier today is significantly less ambitious than a 10-page version leaked to some media earlier this week.

The FT(£) says:

Herman Van Rompuy, president of the European Council, on Tuesday published a significantly scaled-back version of the highly anticipated plan for the future of the eurozone to be debated at a summit meeting this week.
The seven-page plan, which calls for progress towards commonly issued eurozone bonds and the eventual establishment of central EU treasury, is less ambitious and less detailed than earlier drafts, including a 10-page version circulated as recently as Monday.
That proposed giving EU institutions the power to rewrite national budgets and urged eurozone leaders to use their €500bn rescue fund to recapitalise European banks.
While earlier drafts of the report also contained detailed short-term measures that could be taken to address the current market upheaval, the draft published by Mr Van Rompuy on the website of the European Council contains far fewer details and suggests no timetable for implementation.

And with that, I’ll hand over to my colleague Nick Fletcher.

1.52pm: Finally we know who will be representing Greece at the Eu Summit on Thursday and Friday.

1.25pm: A much better profile by Reuters reveals that Stournaras, who was part of a team that negotiated Greece’s entry to the euro, has been dubbed “Mr Euro” in Greece.

Greece’s new conservative-led government scrambled to make a quick decision on the post after their first choice, banker Vassilis Rapanos, quit on Monday on the advice of doctors after spending four days in hospital suffering dizziness and abdominal pains.

His sudden resignation threw the government into confusion at a time when it faces the daunting task of trying to persuade sceptical international lenders to ease the harsh terms of a bailout that has enraged the population.

“Prime Minister Antonis Samaras has decided to name Athens University economics professor … Yannis Stournaras as finance minister,” Samaras’s office said in a statement. Party officials said the three Greek coalition leaders had quickly agreed on Samaras’s choice of Stournaras, 55, who is nicknamed “Mr Euro” in Greece.

1.09pm: Athens News has done a profile of Yannis Stournaras. It’s not hugely revelatory, but it does remind us that 55-year-old economist has written for the Guardian.

12.51pm: The Greek government has put out a statement on its new finance minister:

Prime Minister Antonis Samaras has decided to name Athens University economics professor and Director of (economic think-tank) IOBE Yannis Stournaras as Finance Minister.

Stournaras replaces Vassilis Rapanos, who resigned yesterday due to ill health less than a week after being appointed to the post.

12.29pm: Bloomberg’s Linda Yueh has tweeted the new Greek finance minister’s name:

Stournaras is an economics professor at Athens University and director of the economic thinktank IOBE.

12.05pm: More from Mervyn King.

In the last six weeks… I am very struck by how much has changed since we produced our May Inflation Report. I am pessimistic [about the eurozone outlook]. I am particularly concerned because over two years now we have seen the situation in the euro area get worse and the problem being pushed down the road.

11.48am: More details from European Commission President José Manuel Barroso’s press conference in Brussels.

11.36am: Some news in from Greece where our correspondent Helena Smith says while the quest for a new finance minister is ongoing, officials are promising that the holder of the post will be named today.

In the wake of the resignation of Vasillis Rapanos, it’s all steam ahead to find a new finance minister and, say, officials “as soon as possible.” Highlighting the urgency of the need for a replacement, prime minister Antonis Samaras, though still recovering from an emergency eye operation himself, met with senior aides at his home until late into the night to discuss the matter.
As head of a three party coalition whose junior partners are from the left, the conservative leader is keen to appoint a non-political figure to the post – the most crucial position in the Greek cabinet. “We will have a new finance minister,” the government spokesman Simos Kedikoglou said this morning adding that he expected his name (no women are being considered) to be announced “within the day.”
On the merry-go-round that is the great Athens rumour mill, the hum is that the new finance minister will be a banker or an economics professor who, like Rapanos, is well-briefed on the parlous state of the debt-choked country’s public finances. One name being considered is the Oxford-trained economist Yiannis Sournaras a choice that is known to be supported by the socialist Pasok party.
The minister is likely to be announced after a meeting that will take place at Samaras’ home at 7:30 PM Greek time between the prime minister and the leaders of his administration’s junior partners.
Rapanos, who has long suffered from frail health and is believed to have told Samaras of his intention to step down shortly after his fainting fit last Friday, may well stay on to give behind the scenes advice. The former head of the National Bank of Greece, who was released from the hospital in the last hour, will go down as the first minister to resign before even formally being sworn in. Although government officials are putting on a brave face, it is clear the high drama has cast a shadow over the new administration in the run up to Thursday’s critical EU summit.
Samaras’ inability to return to active duty has meant that the coalition, which controls 179 seats in the 300-member Greek parliament, will face further delays before it receives a vote of confidence after a parliamentary debate on its policy program as Greece’s constitution dictates.
The unexpected set-backs have meant that a visit by the inspectors from Athens’ troika of creditors at the EU, ECB and IMF has also been put on hold. Without their assessment of the state of Greek finances, EU mandarins have said it will be impossible to decide what the next steps will be in the Greek debt drama – and whether Athens should be given its next injection of cash or not.
Following weeks of political uncertainty in the wake of the country’s inconclusive election in May, reforms are “way off target” EU policymakers say.
After much to do, it has finally been decided that the country’s head of state president Carolos Papoulias will attend the forthcoming summit in place of Samaras who is under strict doctors’ orders to restrict his movement until next Monday at the earliest.

11.16am: The Spanish bank bailout will spark a firesale of the state’s stakes in the nation’s top businesses, according to this nice story from Reuters.

[It will end] a cosy culture of corporate-banking links and prompting a wider shake-up in ownership of the company landscape.
Spain formally requested euro zone rescue loans to recapitalise debt-laden former savings banks on Monday, but those who receive funds will be subject to European Union state-aid rules that include selling equity assets.
With the price of such assets languishing as the euro zone’s financial crisis drags on, that will involve the likely fire sale of big chunks of Spain’s corporate titans, including telecoms leader Telefonica, oil major Repsol and power firm Iberdrola.
UBS estimates 22 billion euros ($28 billion) of Spanish stakes could be up for sale, most of which is in the hands of savings banks. This represents as much as 9 percent of the capitalisation of the country’s blue-chip index.

10.59am: The results of Italy’s bond auction are also in. Two-year paper sold at 4.712% – the highest since December.

10.32am: Mervyn King has started speaking in front of the Treasury Select Committee. Heare are some key quotes. My colleague Phillip Inman will have a full story up shortly.

Monetary policy still does work by injecting more money into the economy

[British banks have] all been pre-positioning large amounts of collateral under the discount window facility and we welcome that.

There is nothing in principle against cutting bank rate further if that turns out to be necessary.

10.21am: Some expert comment on the dire public sector finances from Olann Kerrison, head of product management at the foreign exchange specialists Moneycorp:

Plan A, it would appear, is kaput. The spike in public sector borrowing, to £17.9bn in May, is a body blow to the Chancellor and the coalition government’s handling of the economy.
There is often a dip in tax revenues in May, following the end of the tax year, but this doesn’t hide the fact that borrowing is significantly higher than in May 2011 when it was just £15.2bn.
The simple fact of the matter is that tax revenues are down — and borrowing up — because the economy is weak. Unfortunately, there is every chance the economy will weaken further in the months ahead as the Eurozone unravels.
Domestic demand is weak, and so is demand from overseas, especially from the Eurozone. This is decimating tax revenues and forcing the Government to borrow more.
The Labour spin machine will be all over these numbers, reiterating that austerity doesn’t work.

10.15am: Ian Traynor has written a full story on the European leaders radical plan to reshape the eurozone.

[They] plan to turn the 17 countries of the eurozone into a full-fledged political federation within a decade in an attempt to placate the financial markets by demonstrating a political will to save the single currency in the medium-term.
The incendiary proposals for a banking, fiscal, and economic unions resulting in a “political union” are to be debated at an EU summit on Thursday and Friday. Following two bad-tempered meetings of European leaders in Mexico and Rome over the past week, the Brussels summit looks likely to see major clashes over the future of Europe as well as the immediate crisis surrounding sovereign debt, bad banks, and the euro’s survival.

You can read the whole of the report here.

10.06am: The results of Spain’s bond auction are out. Spain sold €3.0bn of short-term debt – but it came at price: the highest rates since November.
The yield on 3-month bonds was 2.362%, up massively from 0.846% last month. Six months bonds sold on a yield of 3.237% up from 1.737%.

9.53am: The ONS said public sector debt as a percentage of GDP (excluding financial interventions) now stands at 65% – the third highest on record.

9.41am: UK public borrowing figures for May are much higher than expected. The ONS said public sector net borrowing (excluding public sector interventions) came in at £17.9bn compared to £15.2bn last year.

9.11am: More details are coming through about the meeting between finance ministers of Germany, France, Italy and Spain in Paris later today.

“We want to work with Germany,” Moscovici told France Info radio, asked about the pressure on President Francois Hollande and German Chancellor Angela Merkel to reach an agreement on ways to curb the spiralling eurozone crisis.

“Tomorrow there is a meeting, which will be very important, between Francois Hollande and Angela Merkel and this evening I will receive the finance ministers: Mr. Schaeuble from Germany, Mr. Monti or Mr. Grilli of Italy and Mr. de Guindos of Spain along with the European Commissioner,” Moscovici said.

“We are in an active phase of preparation of this summit.”

Hollande wants measures like mutualised debt and joint bank deposit guarantees to be worked on at the same time as moves towards deeper fiscal integration, while Merkel, wants an accord on closer integration before any other steps are taken.

9.10am: We’ve got quite a busy day ahead of us, here’s a selection of the key events (all times are BST):

9:30am: Spanish and Italian bond auctions.
9:30am: Spain’s finance minister is up before parliament to explain the bailout.
9:30am: Public sector net borrowing figures for May are expected to have reached £16-16.5bn, compared with £15bn in May last year.
10:00am: Mervyn King is speaking in front of a Treasury select committee.
• Unspecified time: The finance ministers of Germany, France, Spain and Italy are meeting in advance of the EU summit on Thursday and Friday.

8.30am: The Greek English language paper Kathimerini reckons it knows who’s going to replace Vassilis Rapanos as finance minister.

Let’s hope the new guy lasts longer than Rapanos, who resigned yesterday due to ill health less than a week after being appointed to the post.

The Guardian’s Europe editor, Ian Traynor, has got hold of a copy of the gang of four’s master plan for the future of Europe and the Euro.

Ian says the seven-page document from the four presidents – Herman Van Rompuy of the European Council, Mario Draghi of ECB, Jose Manuel Barroso of the European commission, and Jean-Claude Juncker of 17-country Eurogroup – details a 10-year plan based on 4 “building blocks” – banking union, fiscal union, economic union, political union.

Ian’s writing up a full story now, but in the meantime, he’s posted the key points on Twitter.

8.05am: The BBC’s Gavin Hewitt reckons the finance ministers of the power players – Germany, Spain, Italy and France – are going to get down to business a couple of days early.

8.01am: As all eyes turn towards the Europe Union summit on Thursday and Friday, the FT claims to have seen a draft report which could give the EU sweeping powers to rewrite national budgets for eurozone countries that breach debt and deficit rules.

The proposals are part of an ambitious plan to turn the eurozone into a closer fiscal union, giving Brussels more powers to serve like a finance ministry for all 17 members of the currency union. They are contained in a report to be presented at the summit, which will also outline plans for a banking union and political union.

Read the full FT story here (£)

7.41am: Good morning and welcome back to our coverage of another day of high drama in Europe.

Last night Moody’s hit Spain, again. This time the rating agency downgraded 28 of the country’s banks. Moody’s latest salvo came just hours after the Spanish government finally formally asked for help from its European neighbours in cleaning up its stricken banking sector. It hasn’t said how much dosh it wants, but did stress that stressed that the €62bn top figure provided last week by two independent auditors of Spain’s banking system would cover against a severe downturn in the next three years – suggesting their request may not go much higher than that.

The world is also still reeling from the news that Cyprus has joined the unhappy club to ask for a bailout. To recap, that’s Greece, Ireland, Portugal, Spain and Cyprus – quite the Club Med special. Who’s going to be next, do you reckon? © Guardian News & Media Limited 2010

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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 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 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. © Guardian News & Media Limited 2010

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IMF urges eurozone leaders to ease ‘acute stress’ on euro as Moody’s downgrades 15 of world’s biggest banks and the Italian Prime Minister warns of “apocalyptic consequences” if next week’s summit of EU leaders were to fail…

Powered by article titled “IMF piles pressure on Germany to help struggling eurozone banks directly” was written by Julia Kollewe, for on Friday 22nd June 2012 07.59 UTC

The head of the International Monetary Fund has piled pressure on Germany by recommending a series of crisis-fighting measures that chancellor Angela Merkel has resisted.

IMF managing director Christine Lagarde warned that the euro is under “acute stress” and urged eurozone leaders to channel aid directly to struggling banks rather than via governments. She also called on the European Central Bank (ECB) to cut interest rates.

Her comments came as Italy’s prime minister, Mario Monti, warned of the apocalyptic consequences if next week’s summit of EU leaders were to fail.

The stark message from Lagarde, delivered to eurozone finance ministers who were meeting in Luxembourg, will increase pressure to come up with a unified approach to tackle problems including Spain’s struggling banks. She urged the 17 eurozone countries to consider jointly issuing debt and helping troubled banks directly. She also suggested relaxing the strict austerity conditions imposed on countries that have received bailouts.

“We are clearly seeing additional tension and acute stress applying to both banks and sovereigns in the euro area,” Lagarde said after the meeting.

“A determined and forceful move towards complete European monetary union should be reaffirmed in order to restore faith,” she said. “At the moment, the viability of the European monetary system is questioned.”

Asked what Germany would think of her suggestions, she smiled and said: “We hope wisdom will prevail.”

At lunchtime, Merkel will meet Monti and the leaders of France and Spain in Rome in an effort to forge a common strategy to save the euro. Some, Merkel included, consider the survival of the single currency essential to preserving the EU itself.

“It will be interesting to be a fly on the wall given that Mr Monti is fast losing support in Italy, due to the speed of his reform programme which is causing mutterings of discontent from all sides,” said Michael Hewson, senior market analyst at CMC Markets UK. “In any case, the German chancellor’s room for manoeuvre is limited, given the questionable legality of any form of debt mutualisation under German law, and voter discontent at home.”

Spain could make a formal request for financial assistance to bail out its teetering banks as soon as Friday. On Thursday, independent auditors concluded that Spanish banks would need up to €62bn (£49.8bn) to protect themselves from financial shocks. That is far below the offer of €100bn of banking aid Spain has received from the EU.

At the start of next week, officials from the IMF, the EU and the ECB will arrive in Athens to begin a review of Greece’s progress in reforming its budget. Some European officials have indicated that the harsh austerity measures that have sent Greece’s economy into a rapid downward spiral could be loosened.

One of Lagarde’s recommendations for Europe was that eurozone leaders should consider issuing bonds or debt “in some form” backed by the governments of all member countries. Berlin opposes the idea because it would put German taxpayers on the hook for foreign debts and increase the country’s cost of borrowing.

In addition, Lagarde said it was necessary to break “the negative feedback loop” that occurs when governments take on more debt to bail out their banks, and she called on Europe’s two emergency bailout funds to shore up shaky banks directly. © Guardian News & Media Limited 2010

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Spain’s foreign minister, José Manuel García-Margallo, said the EU’s future would be played out in days or perhaps even hours, adding to the EU debt crisis doom and gloom…

Powered by article titled “Spain issues dramatic messages of impending eurozone doom” was written by Giles Tremlett in Madrid, for on Thursday 14th June 2012 18.56 UTC

A panicky Spanish government issued dramatic messages of impending doom for the eurozone on Thursday as its borrowing costs reached unsustainable levels and foreign minister José Manuel García-Margallo claimed that the EU may need to act within hours.

“The future of the European Union will be played out in the next few days, perhaps in the coming hours,” he said, according to Spanish press reports.

The foreign minister, who was speaking as Spain’s long-term borrowing costs hit an unsustainable 7%, warned that other European countries would suffer dreadfully if they let Spain fall. ”If the Titanic sinks, it takes everyone with it, even those travelling in first class,” he said, in a warning clearly aimed at Germany and other eurozone countries.

The interest rate on the country’s benchmark 10-year bonds briefly hit 7% on Thursday, its highest level since the country joined the euro in 1999, after the ratings agency Moody’s downgraded Spain’s sovereign debt to just one grade above ”junk” status.

Moody’s said the downgrade was due to the offer from eurozone leaders of up to €100bn (£81bn) to Spain to prop up its failing banking sector adding considerably to the government’s debt burden.

García-Margallo’s comments contrasted with those of finance minister Luis de Guindos, who called for calm during an inevitably volatile period while Europe prepares to make key decisions on its future and waits to see how Greece votes on Sunday.

“It is not a situation that can be maintained over time … and I am convinced that we will continue to take more measures in the coming days and weeks to help bring it down,” De Guindos told reporters, referring to Spain’s borrowing costs, after senior cabinet members had met prime minister Mariano Rajoy.

Government sources said that the EU president Herman von Rompuy was set to meet Rajoy, Germany’s Angela Merkel, Italy’s Mario Monti and Frrance’s François Hollande in a five-way meeting during the G20 meeting in Mexico on Monday.

Barack Obama, who has been pressuring eurozone countries to act quickly in order to sort out the debt crisis, was also expected to meet the five leaders in Mexico. David Cameron may also join the meeting.

The EU competition commissioner, Joaquín Almunia, was expected to get a chilly reception in Madrid on Friday when he flies in to meet Rajoy to discuss the bailout of the country’s banks.

Rajoy’s conservative People’s party (PP) has called for Almunia, a Spanish socialist, to resign after he warned that some Spanish banks may have to be liquidated.

“Rajoy is head of the People’s party but, most importantly, he is the prime minister and in that role he will not be asking for Almunia’s resignation,” a government source said.

Almunia will be in charge of the EU inspectors who oversee the restructuring of the Spanish banking sector. The budget minister Cristóbal Montoro has called them the “men in black”.

Spain will next week be able to say how much of the €100bn its banks really need. Rajoy has said he will wait for the results of two independent valuations of Spanish bank assets before deciding on a final sum.

Those reports are due by 21 June, but Reuters reported that officials in Madrid already knew the contents of the reports and that Rajoy would have the figures with him when he travelled to Mexico.

The final figure was likely to be between €60bn and €70bn, according to Reuters, though officials in Madrid refused to confirm the amount.

Officials said that Spain wanted the banking loans to be delivered as soon as possible. “”No one is more interested than us in there being absolute clarity in our banking sector, and as soon as possible,” a government source said.

Madrid is pinning its hopes of avoiding a wider bailout of the country on an EU summit to be held at the end of this month.

“The government is seeking a declaration of the irreversibility of the single currency and of its willingness both to defend that and to create the necessary mechanisms,” a government source said. © Guardian News & Media Limited 2010

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Eurogroup finance ministers have agreed to lend Spain up to 100Bn bailout for its troubled banks. The fourth-largest economy in the eurozone now joins Greece, Ireland and Portugal in bowing to need for aid to survive European debt crisis…

Powered by article titled “Spain to get bank bailout that may run up to €100bn” was written by Giles Tremlett in Madrid, for The Observer on Saturday 9th June 2012 19.24 UTC

Spain has given up the battle to rescue its ailing banks alone and accepted a European bailout of up to €100bn to join Greece, Ireland and Portugal in requesting outside aid to survive Europe’s debt crisis.

European leaders hope a bailout will prevent a wider deterioration of the eurozone’s fourth largest economy, which is paying punishing interest rates on borrowed money and is key to the survival of the single currency.

“The Spanish government states its intention to request European financing for the recapitalisation of banks that need it,” the country’s finance minister, Luis de Guindos, said after an emergency video conference with fellow eurozone ministers.

It remained unclear, however, exactly how much of the €100bn Spain would need, with De Guindos saying it preferred to wait for two independent reports on its banking system before making a formal request. These reports would be ready within weeks or days, according to De Guindos, who implied that the final sum would be lower than €100bn. “The €100bn sum is a maximum figure,” he stressed. “It includes a considerable margin of security.”

Eurozone policymakers had been eager to shore up Spain’s position before 17 June elections in Greece that could push Athens closer to a eurozone exit and unleash contagion. Various estimates have put the outside capital needed by Spanish banks at between €40bn and €100bn. “The loan amount must cover estimated capital requirements with an additional safety margin,” the eurozone ministers said.

Mariano Rajoy, Spain’s conservative prime minister, left explanations of the dramatic request for outside help to De Guindos, who told Spaniards that this was a simple loan rather than a bailout. The prime minister will travel to Poland on Sunday to watch Spain play Italy in Euro 2012 as his government tries to project an image of business as usual. Spain’s acceptance of aid for its banks is an embarrassment for Rajoy, who said recently that the banking sector would not need a bailout.

There was confusion about conditions of the bailout. De Guindos claimed these required Spain to take measures in the finance sector but did not involve austerity.

Eurozone finance ministers, however, warned they would closely monitor Spain’s ability to stick to deficit targets and structural reforms. There were reports of heated arguments over the conditions, with several countries initially wanting Spain to be placed under far stricter controls.

The IMF said it would limit itself to helping monitor banking reform. The money will be funnelled through Spain’s existing bailout fund, called the Frob, and will add to the country’s modest but quickly growing national debt with the government “retaining the full responsibility”.

A bailout focused on its banks will ensure Spain can still borrow money on the markets to cover government spending. That makes the bailout very different from those of Greece, Portugal and Ireland. An IMF report estimated Spain needs at least €40bn for its banks to cover toxic real estate assets left over from a burst housing bubble.

Washington, which is worried the eurozone crisis could drag the US economy down in an election year, welcomed the measures. “These are important for the health of Spain’s economy and as concrete steps on the path to financial union, which is vital to the resilience of the euro area,” treasury secretary Timothy Geithner said.

Analysts said financial markets may also be calmed by the announcement. © Guardian News & Media Limited 2010

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Bernanke tells Congress that economic recovery remains fragile and warns that Europe’s woes pose significant risks to US…


Powered by article titled “Ben Bernanke offers no sign of stimulus but says Fed will step in if needed” was written by Dominic Rushe in New York, for on Thursday 7th June 2012 18.42 UTC

Federal Reserve chairman Ben Bernanke on Thursday stopped short of signalling any new action to help the fragile US economy, saying the recovery was continuing but warning of potential pitfalls ahead.

“Economic growth appears poised to continue at a moderate pace of over coming quarters,” Bernanke told the congressional joint economic committee. He said the Fed “remains prepared to take action as needed to protect the US financial system and economy.”

Bernanke was speaking after disappointing news in the jobs market. Last week the labor bureau reported that the US added just 69,000 jobs in May as the unemployment rate rose to 8.2%, the first rise in nine months.

The news and continuing fears that Europe’s economic woes are dragging on the US economy have led to speculation that the Fed will step in with a third round of financial stimulus known as quantitative easing, especially after officials hinted more action was being considered.

Fed vice-chairwoman Janet Yellen said in a speech this week that “scope remains for the [Fed] to provide further policy accommodation”. Atlanta Fed president Dennis Lockhart said in a speech in Florida that he was “giving more weight and higher probability to a negative influence on our economy coming from Europe”.

But while Bernanke said all options were being considered, he stopped well short of making any similar comments. He said the Fed was studying the situation but still had to “make difficult assessments” at its June 19-20 meeting.

“The situation in Europe poses significant risks to the US financial system and economy and must be monitored closely,” Bernanke said in testimony. He said that European policymakers had made moves to address their issues but that more action was needed. Bernanke said Europe’s problems were far more likely to affect the US than slowing growth in China.

The Fed chairman also warned that political in-fighting over the so-called “fiscal cliff” could hurt the US recovery. Bush-era tax cuts are set to expire at the end of December as a raft of budget cuts drawn up as a compromise between Republicans and Democrats are also set to be imposed. The two sides are now at loggerheads about how best to manage the situation.

A severe tightening of fiscal policy at the beginning of next year would “pose a significant threat to the recovery. Moreover, uncertainty about the resolution of these fiscal issues could itself undermine business and household confidence,” said Bernanke. © Guardian News & Media Limited 2010

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European Central Bank president Mario Draghi calls on Europe’s leaders to resolve situation as governing council rejects reducing rates or boosting liquidity…

Powered by article titled “ECB dashes market hopes of fresh eurozone emergency measures” was written by Heather Stewart, for on Wednesday 6th June 2012 13.28 UTC

Mario Draghi, president of the European Central Bank, has dashed investors’ hopes of fresh emergency measures to contain the crisis in the euro area, leaving borrowing costs across the 17 member countries unchanged.

Explaining at his regular press conference in Frankfurt why the ECB’s governing council had decided against reducing rates from their current level of 1%, or unleashing a new wave of cut-price loans for struggling banks, Draghi suggested it was now up to Europe’s leaders to resolve the situation.

“Some of these problems in the euro area have nothing to do with monetary policy,” he said. “I don’t think it would be appropriate for monetary policy to fill other institutions’ lack of action.”

Stock markets on both sides of the Atlantic had bounced in anticipation of ECB action; but share prices began falling as Draghi spoke.

Draghi initially insisted the decision to leave rates on hold had been taken through “consensus”; but admitted in response to a later question that, “a few members would have preferred to have a rate cut today,” sparking hopes that the ECB could decide to reduce borrowing costs at its next meeting, in July.

He said the ECB’s Long Term Refinancing Operation (LTRO), which offered €1tn (£805bn) worth of three-year loans to banks in December and February, in exchange for collateral, had helped to resolve some of the tensions in financial markets, but the key problem now is no longer liquidity.

Summarising the ECB’s expectations for the next 12 months, Draghi said, “we continue to expect the euro area economy to recover gradually” – though he also admitted that “economic growth in the euro area remains weak, with heightened uncertainty weighing on confidence and sentiment”.

The ECB is forecasting growth across the euro area for this year to be between -0.5% and 0.3%; and for next year, between zero and 2%.

However, Draghi said this outlook was “subject to increased downside risks, relating in particular to a further increase in tensions in several euro area financial markets and the potential for spillover to the real euro area economy”.

Spain is currently the focus of financial markets’ anxiety, after Madrid admitted it does not have the resources to rescue its stricken banking sector without external help.

Asked whether the eurozone’s bailout fund, the EFSF, should be allowed to help Spanish banks directly – an idea the Germans have been reluctant to sanction – Draghi said: “Any decision about the EFSF should be based on realistic assessment of the need for recapitalisation of the banks and the money available to the government without the need to ask for external support.” © Guardian News & Media Limited 2010

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Pressure on the ECB to ease increases as series of surveys show the eurozone economy shrinking and Spain admits for first time it needs help to recapitalize banks…


Powered by article titled “ECB under growing pressure to stimulate eurozone economy” was written by Graeme Wearden and Ian Traynor, for The Guardian on Tuesday 5th June 2012 19.42 UTC


The European Central Bank will come under renewed pressure on Wednesday to take new steps to stimulate Europe’s flatlining economy as economic surveys show that the eurozone is shrinking.

On another tough day for the eurozone, data from Markit showed that the output of Europe’s private economy shrank at its fastest rate in nearly three years in May. Retail spending across the eurozone also fell much faster than forecast, with sales down by 1% in April compared with March, and 2.5% lower year-on-year. German industrial orders dropped by 1.9% in April, driven by a slump in overseas business.

The news came as Spain admitted for the first time that it needs outside help to recapitalise its banks, but continued to resist seeking a formal bailout.

Economists said the dire data indicated that eurozone GDP will fall by as much as 0.5% in the current quarter, after stagnating in the first three months of 2012.

“Companies report business activity to have been hit by heightened political and economic uncertainty, which has exacerbated already weak demand both in the euro area and further afield,” said Chris Williamson of Markit.

Spain and Italy, the two countries battling to retain the confidence of the financial markets, saw the largest drops in private sector output as their austerity programmes continued to bite.

Jeremy Cook, chief economist at World First, said: “PMIs this morning from Europe confirmed what has become very evident of late; that the situation in Europe will get a lot worse before it gets better.”

The bleak outlook in the eurozone will weigh on traders in London, as they return to their desks after the four-day break to mark the Queen’s diamond jubilee. All eyes will be on the City to see how shares respond. There was little prospect of a rally on Tuesday night with the futures market predicting a 18-point fall on the FTSE 100, partly due to a number of stocks going ‘ex-dividend’.

The ECB general council will announce its decision on monetary policy at lunchtime after its monthly meeting in Frankfurt. It will also release its latest economic projections for this year and 2013, which are likely to paint a more downbeat picture.

Despite the mounting evidence that the European economy is in trouble, a majority of economists believe the ECB will vote to leave interest rates unchanged at 1% this month. The ECB has repeatedly argued that national governments must make the fiscal reforms needed to calm the crisis. But rates are still expected to fall soon.

“We doubt that the ECB will cut interest rates as soon as their June policy meeting on Wednesday – although it is not inconceivable given the Eurozone’s heightened economic and sovereign debt problems – but we do now think it is highly likely that the ECB will cut interest rates to 0.75% in the third quarter,” said Howard Archer of IHS Global Insight.

Christine Lagarde, head of the International Monetary Fund, added to the pressure on the ECB by saying it has room to cut rates.

With Spanish bond yields close to the “danger zone”, and Italy not far behind, the ECB is also facing calls to start buying both country’s debt in the bond markets again.

European stock markets experienced a mixed day on Tuesday. France’s CAC index ended 1% higher, but Germany’s DAX closed down 8 points at 5969, and the main Athens index fell more than 5% to a fresh 22-year low.

European markets will remain highly nervous until the deadlock over Spain’s banking crisis is resolved. Madrid’s government continues to resist pressure to seek a bailout, but many analysts believe its resolve must crack.

Germany’s governing Christian Democrats, and the opposition Social Democrats, are both adamant that EU rules cannot be bent for Spain. Volker Kauder, the CDU’s parliamentary leader in Berlin, said financial aid for Spain must be requested by the government itself.

Frank-Walter Steinmeier, former German foreign minister and current SPD parliamentary leader, took a stronger line, saying there was a risk that Spain could run out of time. “I see a risk that Spain will be too late in deciding to seek protection from the euro rescue umbrella,” Steinmeier said. © Guardian News & Media Limited 2010

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