Financial sector

Europe could have dealt with Cyprus cheaply and painlessly with a pan-European body able to recapitalize the country’s banks. Next could be Malta and Slovenia where the government is already making contingency plans for coping with bank losses…

 


Powered by Guardian.co.ukThis article titled “Eurozone crisis demands one banking policy, one fiscal policy – and one voice” was written by Larry Elliott, economics editor, for The Guardian on Monday 1st April 2013 13.24 UTC

It had all started to look quite promising. The US was picking up, China had avoided a hard landing and in Japan the early signs from the new government's anti-deflation approach were encouraging. Even in Britain, the first couple of months of 2013 provided some tentative hope – from the housing market and consumer spending, mainly – that the economy might escape another year of stagnation.

Then Cyprus came along. The last two weeks of March brought the crisis in the eurozone back into the spotlight, and by the end of the month the story was no longer rising share prices on Wall Street on the back of strong corporate profitability or the better prospects for Japanese growth. It was, simply, which country in the eurozone would be the next to require a bailout.

The past few days has seen what Nick Parsons, head of strategy at National Australia Bank, has called the "reverse Spartacus" effect after the scene at the end of Stanley Kubrick's epic in which captured slaves are offered clemency if they identify the rebel leader. All refuse.

In the aftermath of Cyprus, it has been a case of "I'm not Spartacus". Four members of the eurozone felt the need to issue statements explaining why they were different from the troubled island in the eastern Med. We now know that Portugal is not Spartacus, Greece is not Spartacus, Malta is not Spartacus and Luxembourg, which has the highest ratio of bank deposits to GDP in the eurozone, is not Spartacus. As Parsons noted wryly, Italy was unable to say it was not Spartacus because it still doesn't have a government to speak on its behalf. Otherwise it would probably have done so.

Few of the independent voices in the financial markets take such attempts at reassurance seriously. Another crisis in the eurozone could be avoided, but only if those in charge (sic) act more speedily and effectively than they have in the past. As things stand, another outbreak of trouble looks inevitable.

Cyprus has enough money to get by for a couple of months, but by then will be feeling the impact of a slow-motion bank run as depositors remove their money at the rate of €300 (£250) a day. The economy has been crippled by the terms of the bailout, a Carthaginian peace if ever there was one, and the country's debt ratio is bound to explode.

Investors are already casting a wary eye over Malta, which appears to have been the short-term beneficiary of capital flight from Cyprus, but the bookies favourite for the next country to need a bailout is Slovenia, where the government is already making contingency plans for coping with bank losses.

By focusing on the eurozone's minnows, the markets are in danger of overlooking a much bigger potential problem. If attempts to put together a new government in Rome fail, Italy will be facing a second general election and in such a scenario opinion polls currently put Silvio Berlusconi ahead.

It is not hard to sketch out a sequence of events in which Berlusconi completes a political comeback, the markets take fright, Italian bond yields go through the roof, the European Central Bank (ECB) under Mario Draghi says it will only buy Italian debt if Berlusconi agrees to a package of austerity and structural reforms, the new government refuses and then calls a referendum on Italy's membership of the single currency. Italy has already had six consecutive quarters of falling GDP and is on course for a seventh, making the recession the longest since modern records began in 1960. So when Berlusconi says he cannot let the country fall into a "recessive spiral without end", he strikes a chord.

If policymakers are alive to the threat posed by one of the six founder members of the European Economic Community back in 1957, they have yet to show it. The assumptions seem to be that Cyprus is exceptional, that the ECB will ride to the rescue if it proves not to be, and that Europe will be dragged out of the danger zone by the pick-up in the rest of the global economy.

This is the height of foolishness. The factors causing the crisis in Cyprus are replicated in many other member states. The ECB's "big bazooka" – buying the bonds of struggling governments without limit – has yet to be tested, and because Europe is the world's biggest market, the likelihood is that the re-emergence of the sovereign debt crisis will seriously impair growth prospects in North America and Asia.

Economists at Fathom Consulting draw a comparison between the eurozone today and the UK at the very start of the financial crisis. Mistakes were made with the handling of Northern Rock because of fears that a bailout would create problems of moral hazard – in other words helping a bank that had got itself into trouble through its own stupidity would encourage bad behaviour by others. The systemic risks were not recognised, with disastrous consequences.

Similarly, the eurozone has not understood the systemic potential of the current crisis, Fathom argues, not least the "doom loop" between fragile banks and indebted governments. Austerity is making matters worse because cuts to public spending and higher taxes hit economic activity by more than they reduce government deficits. Public debt as a share of national incomes goes up, not down.

Austerity can work, but conditions have to be right for it. It helps if a country's trading partners are growing robustly, because then the squeeze on domestic demand can be offset by rising exports. It helps if the central bank can compensate for tighter fiscal policy by easing monetary policy, either through lower interest rates or through unconventional measures such as quantitative easing (QE). And it helps if the exchange rate can fall. Not one of these conditions applies in the eurozone, which is why the fiscal multipliers – the impact of tax and spending policies on growth – are so high. Put bluntly, removing one euro of demand through austerity leads to the loss of more than one euro in GDP.

So what should be done? Clearly, the self-defeating nature of current policy needs to be recognised. Countries need to be given more time to put their public finances in order. The emphasis should be shifted from headline budget deficits to structural deficits so that some account is taken of the state of the economic cycle, and the ECB needs to be ready with its own version of QE.

Simultaneously, work needs to speed up on creating a banking and fiscal union. Europe could have dealt with Cyprus cheaply and painlessly had there been a pan-European body capable of recapitalising the country's banks. Delay in setting up such a body threatens to be costly.

Finally, the eurozone needs to start talking with one voice. A bit of "I'm Spartacus" would not go amiss.

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USA 

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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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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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 Guardian.co.ukThis article titled “Spain issues dramatic messages of impending eurozone doom” was written by Giles Tremlett in Madrid, for guardian.co.uk 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.

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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 Guardian.co.ukThis article titled “ECB dashes market hopes of fresh eurozone emergency measures” was written by Heather Stewart, for guardian.co.uk 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.”

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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 Guardian.co.ukThis 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.

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