Julia Kollewe

There are now 18.49 million people without jobs in the 17 countries sharing the euro. More than one in four people out of work in Greece and Spain as jobless rate rises to 11.6%. 25.751 million men and women were without jobs last month…

Powered by Guardian.co.ukThis article titled “Eurozone unemployment hits new high” was written by Julia Kollewe, for guardian.co.uk on Wednesday 31st October 2012 12.34 UTC

Unemployment in the eurozone has risen to a new high, with Spain recording the highest jobless rate with more than one in four out of work.

There are now 18.49 million people without jobs in the 17 countries sharing the euro, European statistics office Eurostat said on Wednesday, with an extra 146,000 joining the ranks of the unemployed last month. The jobless rate increased to 11.6% in September, the highest on record, from a revised 11.5% in August.

“With surveys suggesting that firms are becoming more reluctant to hire, the eurozone unemployment rate looks set to rise further, placing more pressure on struggling households,” said Ben May, European economist at Capital Economics.

The lowest unemployment rates were recorded in Austria (4.4%), Luxembourg (5.2%), Germany and the Netherlands (both 5.4%), which are near full employment. Spain (25.8%) and Greece (25.1% in July) had the highest unemployment in the eurozone, while France looks much like Italy (both at 10.8%), with a steady rise in joblessness. August data for Greece will be published next week, although the true picture is probably worse, as a growing number of Greek workers remain nominally employed but have not been paid for some time.

Howard Archer, chief European economist at IHS Global Insight, said the jobless data was “dismal”, adding: “Eurozone labour markets remain under serious pressure from ongoing weakened economic activity and low business confidence.”

Youth unemployment also hit a new high in Spain with 54.2% of under-25-year-olds out of work, up from 53.8%.

Across the whole European Union, 25.751 million men and women were without jobs last month – an increase of 169,000 from August – while the unemployment rate stayed at 10.6%.

By comparison, the unemployment rate was 7.9% in the UK, 7.8% in the US and 4.2% in Japan in September.

There was some good news for the eurozone though – inflation eased to 2.5% in October, from 2.6%. Energy prices continued to rise, by 7.8%, but by less than the month before, when they climbed by 9.1% year-on-year. Food became dearer, however, with prices up 3.2% compared with 2.9% in September.

Economists expect the European Central Bank to cut interest rates again before the year is out from the current record low of 0.75% to support the flagging economy, which probably slumped back to recession in the third quarter.

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Global stock markets and euro rise after ECB president Mario Draghi’s ambitious plan to keep the eurozone together. U.S. unemployment rate declines but job creation disappoints, raising the odds of additional easing by the Fed…

Powered by Guardian.co.ukThis article titled “Draghi’s eurozone rescue plan continues to boost shares and euro” was written by Julia Kollewe and Graeme Wearden, for The Guardian on Friday 7th September 2012 17.22 UTC

European Central Bank president Mario Draghi’s rescue plan for the eurozone brought cheer to financial markets for a second day, while pressure built on Portugal, which was expected to announce further austerity measures.

The Italian stock market added 2.1%, while the Dax closed up 0.7% and Spain’s Ibex, France’s CAC and the FTSE 100 in London all finished the day 0.3% higher after “Super Mario’s” ambitious plan announced on Thursday to keep the eurozone together by sanctioning “unlimited” bond buying by the ECB.

Asian markets also staged a strong rally, with Japan’s Nikkei index posting its biggest gain in five months, of 2.2%.

The euro rose against the dollar, climbing near the $1.28 level for the first time in three months.

Spanish and Italian borrowing costs declined sharply, with the yield, or effective interest rate, on Spanish 10-year debt dropping 0.4 percentage points to 5.6% – the first time it has been below 6% since May. Six weeks ago it had surged to 7.6%, deep in the danger zone where borrowing costs become unsustainable, and at the start of this week it was still around 7%. The Italian equivalent fell a quarter of a point to 5% – in late July before Draghi’s commitment to “do whatever it takes” to preserve the euro it was at 6.75%. The cost of insuring Spanish debt also tumbled.

The 10-year Portuguese yield was down 0.4 points to its lowest level since March 2011. Although as high as 8.1%, that compared with 18% in February.

The Dow Jones industrial average hovered between gain and loss after the US Labour Department said the US had added just 96,000 new jobs in August, far below expectations. The Dow hit its highest level since December 2007 on Thursday, but the jobs report focused investors on the US’s own problems.

The pound got a fillip from the weak US jobs data, climbing to above $1.6 for the first time since mid-May. Surprisingly strong industrial production data also brought some cheer to Britain. Factory production in Germany was also stronger than expected, rising by 1.3% in July.

The Federal Reserve meets next week and economists speculated that the poor jobs figures will add further pressure on the central bank to act. Chairman Ben Bernanke indicated in a speech last week that he was concerned about the slowing pace of the US recovery and the still high unemployment rate.

The Portuguese prime minister, Pedro Passos Coelho, was expected to set out fresh austerity measures last night in a televised address billed as a “declaration to the country”. Measures such as a VAT rise, cuts to the public sector payroll, or new tax measures were expected.

Spain gave no hints on when it might make a formal bailout request to trigger the bond-buying programme. Deputy prime minister Soraya Sáenz de Santamaría said the plan would be discussed at next week’s meeting of European finance and economy ministers in Cyprus.

“While markets are currently happy that the ECB’s bond purchase scheme stands ready to be activated, getting the Spanish and Italian governments to agree to programmes is likely to be fraught with difficulties,” said Grant Lewis at Daiwa Capital Markets. “Indeed, the positive market reaction makes their activation less likely by taking the pressure off the Spanish and Italian governments. So, it may well require a significant deterioration in market sentiment once again to ultimately trigger the programmes that lead to ECB purchases.”

German chancellor Angela Merkel expressed support for the ECB over the creation of the bond-buying programme, and said the central bank was right to insist on conditions in return for any assistance provided through the scheme. Meanwhile, the Bundesbank, Germany’s central bank, refused to back the plan, and it did not go down well in parts of the German media. Top-selling tabloid Bild led the way, warning that the ECB’s “blank cheque” could make the euro “kaputt”.

Handelsblatt criticised “the democratic deficit of the euro rescuers” and linked the ECB’s latest action to next Wednesday’s ruling by Germany’s Constitutional Court on the legality of the eurozone’s new bailout mechanism and budget rules. This is another crunch day in the euro – a rejection of the European Stability Mechanism and the fiscal pact would plunge the eurozone into fresh turmoil. A Reuters poll of 20 top lawyers found unanimous agreement that the court will throw out the request for a temporary injunction to halt the ESM and the pact. However, 12 of those questioned also expect the court to insist that German liability has to be limited.

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The German debate on the Spanish bank rescue begins, Bond yields jump, as demand for Spanish debt fades, Food prices at record highs, and Anxiety is growing in Athens over the pace of reforms being demanded by the country’s international creditors…

Powered by Guardian.co.ukThis article titled “Eurozone crisis live: Germany debates Spain’s bank rescue, after poor Spanish auction” was written by Graeme Wearden, for guardian.co.uk on Thursday 19th July 2012 06.44 UTC


Julia Kollewe, who is watching the debate, reports that Schäuble is keen to emphasise the progress made recently by eurozone leaders:

Schäuble said good progress had been made in solving the eurozone crisis in recent weeks, in terms of reducing government deficits and carrying out structural reforms. Apart from Spain, Ireland and Portugal get a namecheck.

Schäuble acknowledged that Germans needed reassuring, in view of the constant flow of crisis news.

On the issue of sovereign liability, he said that Spain will remain liable for assistance granted through the European Financial Stability Facility (As Ian Traynor commented at 13.29, the squabbling over this issue has rumbled on for several weeks).

He has finished speaking.


To watch the debate…

A reminder that you can watch the debate on the Bundestag web site.


Wolfgang Schäuble added that even the perception, in financial markets, that Spanish banks could become insolvent could lead to “severe contagion effects”.

He said without the “excessive nervousness in financial markets” Spain would be able to sort out its banking sector itself, and that by helping Spain, European governments were contributing towards stability in the entire eurozone. This was met with applause from MPs.


Kicking off the debate, German finance minister Wolfgang Schäuble said:

We have a strong interest in helping Spain continue with its fundamental economic reforms.

Schäuble lauded Spain’s structural reforms, but added that:

it can only work if the problems in the banking sector are solved. It’s a matter of breaking a vicious circle.”



The debate in the Bundestag over the Spanish banking rescue deal has just begun.

Wolfgang Schäuble, finance minister, is speaking first, and warns that Europe faces a long battle to win back confidence.


Here’s is an update from Greece. Helena Smith, our correspondent, says anxiety is growing in Athens over the pace of reforms being demanded by the country’s international creditors.

Helena writes:

At all levels there appears to be growing recognition among Greek officials that the debt-stricken country is facing what many describe as a “very last chance” to fix public finances that have gone from bad to worse.
A long-awaited report by representatives of Greece’s “troika” of creditors – the EU, ECB and IMF — has focused minds with finance ministry officials saying the race is now on to finally enact long-overdue reforms – starting with the sale of ailing state assets that, like much else in the bailed out nation, has been put on hold. The report is expected to be released sometime next month.
“We see the privatisation program as key to proving that we are serious about fulfilling our committments,” said one government-employed economist.
The Greek prime minister Antonis Samaras will also begin touring European capitals in a bid to claw back some of the country’s lost credibility as soon as doctors deem he is able to travel – probably towards the end of August. The leader, whose conservative party narrowly won elections in June, underwent emergency eye surgery days after being appointed to the job. “We recognise we’ve been given a breathing space, that this is our very last chance [to remain in the eurozone],” said one insider admitting that international patience with the loan dependent country was clearly on the wane.
“Once we have put some of the reforms in motion we will set about renegotiating the loan agreement in September,” he said referring to the latest 130 bn euro rescue package agreed for Athens in March.
Highlighting the difficulties that lie ahead, Fotis Kouvellis whose moderate Democratic Left party is participating in Athens’ three-party coalition, told Skai radio this morning that Greece might yet default on a debt load which even after a major restructuring and two EU-IMF sponsored bailout programs still accounts for 162% of GDP.
“Nothing is guaranteed,” he said adding that a worse- than-expected recession had made the situation “extremely difficult.” It was essential, he insisted, that international creditors extended the country’s fiscal adjustment program from two to four years.
But lenders, who are also anxiously awaiting a breakdown from Athens of the 11.5 bn euro in further savings, appear in no mood to be flexble. A Greek request for a bridging loan to cover 3.1 bn euro in maturing bonds in August was turned down flatly by officials in Brussels, Greek finance ministry sources confirmed today.
Instead, there is now discussion of prolonging the deadline for the repayment. “Everything will depend on the progress Greece is deemed to have made in the report the troika will issue,” said one official. “The troika is taking a very tough stance.”
It was confirmed this morning that while the Greek finance minister Yiannis Stournaras would meet visiting troika officials next Thursday, the representatives would return to Athens on Tuesday July 24th. “The Greek government has not implemented the program as agreed,” Euruogroup chairman Jean Claude Junker told the latest edition of Spiegel magazine in a rare bout of pique that showcased plummeting patience with the nation that triggered Europe’s debt crisis.


The latest weekly US jobless figures were just released, and they’re worse than expected.

The number of people signing on for unenployment benefit jumped by 34,000 last week to 386,000 – 21,000 more than economists had expected.

That’s sent the euro jumping over $1.23 against the US dollar, on speculation that the chances of the Federal Reserve launching another stimulus package have increased.


Ahead of the debate on the Spanish banking rescue (which should start in a few minutes), the German finance ministry has issued a FAQs on issue.

Ian Traynor, our Europe editor, has read it, and reports:

While stressing the €100bn is for Spain’s banks and that Madrid has not requested a sovereign rescue, Berlin reckons that Spain would need €300bn in “European refinancing funds” between now and the end of 2014 if it was cut out of the bond markets.

Amid endless bickering since last month’s EU summit over who is liable for the bank recapitalisation, the Germans make no bones about how they see it.

“The state is liable for repaying the aid. The Spanish government remains the interlocutor and contractual partner.”

Moreover, the debt taken up is “the debt of the Spanish state,
increasing Spain’s debt level.”

The finance ministry stresses that last month’s EU summit agreed “unmistakably at German insistence” that there could only be direct aid to banks once a new European banking supervisory authority was operating.

“Supervision on paper is not enough for that. It must be properly established and functioning. The initiative corresponds to the German demand that control and liability are inseparable. These conditions do not apply in the current case of Spain.”


Good news for Sweden: Fitch just affirmed its AAA rating, with a stable outlook.

Fitch said Sweden’s status as an “advanced, well-diversified, wealthy economy” meant it was still triple-A.


Heads-up: the German parliamentary debate on the €100bn banking aid package for Spain has been delayed by 30 minutes*, and will not start until 1.30pm London time.

You can watch it live here.

* – “So much for German punctuality”, sighs my colleage (and office Deutschelander) Julia Kollewe, who is on hand to watch the debate for us.


Italy gives green light to ESM

The Italian parliament has just given its approval to the creation of the European Stability Mechanism, by a resounding majority of 325 votes to 53.

Over to you, Germany!


Spanish debt remains in the danger zone, with the yield on 10-year bonds now trading at 7.02%.


Robin Bew, chief Economist at The Economist Intelligence Unit, agrees that this morning’s Spanish bond auction shows disappointment in the financial markets over the latest eurozone developments:


Reuters is confidently predicting that Angela Merkel’s government will win this afternoon’s vote on the Spanish bank rescue (debate starts at 1pm BST, with a result around 4pm BST).

Stefan Mueller of the Bavarian Christian Social Union reckons there will not be a large rebellion, saying:

I cannot rule out the possibility that some colleagues will not back the measures but my impression is that the numbers have not increased.

Last month, 26 members of Merkel’s coalition voted against the creation of the European Stability Mechanism.

Mueller continued:

It is clear that the question of liability was a concern for people and that this has been cleared up.

That’s a reference to German deputy finance minister Steffen Kampeter, who reiterated this morning that the Spanish state remains liable for the bailout money.

Germany’s refusal to let Madrid ‘off the hook’ on the issue of sovereign liability has helped to push Spain’s bond yields higher, and probably contributed to the poor Spanish bond auction this morning.


Interesting… a European Commission spokesman has rejected the claim that Spanish banking bailout funds could also be used to buy government bonds (see 11.27).

Speaking in Brussels, spokesman Simon O’Connor insisted that the eurozone governments had only committed €100bn of aid to Spain’s banks.

O’Connor said:

The up to €100bn, which the euro zone has undertaken to provide to Spanish banks is to do just that, it is only for that purpose and not for any other.

There is no link between assistance for bank recapitalisation in Spain and any other type of financial assistance, which might be requested at some further juncture by Spain or anybody else

A pretty definitive denial….


Could well be wrong, but I think this is the parapraph in question (on page 81 of the contract):

In the event that the Beneficiary Member State wishes to obtain financial assistance in the form of an additional or alternative form of Facility, it shall request such other Facility in writing by a letter addressed to the Eurogroup provided that the amount of such other Facility when aggregated with all other Financial Assistance that EFSF has made or is to make available to the Beneficiary Member State under this Agreement shall not exceed the Aggregate Financial Assistance Amount.


All should be clear by Friday, anyway, once the deal is signed off.

Open Europe has just published its own analysis of the situation, here.


As the Bundestag prepares to debate Spain’s €100bn euro bank bailout this afternoon (details at 11.07), El País newspaper has revealed that the 140-odd pages of documentation handed out to German deputies shows that this may evolve into something more than just a banking rescue.

Should the cost of rescuing Spain’s banks be less than €100bn, the cash left over could be used to mop up Spanish sovereign debt too, El País said.

Giles Tremlett reports from Madrid:

A draft contract with the European Financial Stability Facility (EFSF) – the rescue fund providing the money) includes plans for using whatever money is not given to Spain’s banks in order to buy sovereign bonds – in other words to lend money to the Spanish government or, at least, to keep pressure off Spain’s sovereign debt.

If this mechanism were activated (and it is not automatic), the EFSF could buy fresh debt being auctioned by Spain or go shopping in the secondary bond market.

In order for this to happen, Spain would have to comply with all the conditions that Brussels has been setting for its economy – basically meaning hitting deficit targets and implementing the reforms it suggests.
Spain would then be able to request that whatever is left of the €100bn euros after banks have asked for their share be used by the EFSF to buy bonds. Permission would have to be given by the eurozone’s finance ministers, the Eurogroup. Current estimates see banks asking for €65bn euros, which would leave up to €35bn for bond-buying, if Spain won permission.

The document warns, however, that direct buying of bonds from the Spanish government in the primary market would involve “a macroeconomic adjustment programme or a precautionary programme” – taking us closer to a full-blown bailout.

With the final deal due to be signed tomorrow, Spaniards complain they are still being given fewer details on the bank bailout than parliaments in other parts of Europe.

The El País piece is here, and the draft contract with the EFSF, dated July 16, is here (starting on page 65).

There is some surprise in the City that funds set aside to recapitalise Spain’s banks could instead be used to mop up Spanish government bonds…


A bit more detail on the German debate and vote on the Spanish banking package.

Germany’s Bundestag, the lower house of parliament, will debate the €100bn banking aid package for Spain this afternoon. The session is scheduled to start at 1pm and finish around 4pm UK time. Finance minister Wolfgang Schäuble will kick off the debate with a government statement.

Full details are here.



While Spain suffered in the bond markets, France managed to sell sovereign debt at remarkably low cost.

The French Treasury sold €4.5bn of five-year debt at an average yield of just 0.86%, a record low.

It also sold £1.8bn of bonds maturing in January 2015 at an average yield of 0.12%, and €2.6bn of four-year bonds at yields of 0.53%.

Analysts say its a solid results, and a sign that France (despite its econonic challenges) is still being treated as a safe haven.


Spain suffering from “a crisis of confidence in eurozone policymaking”

Analysts say that today’s poor Spanish auction shows there is an increased risk that Spain could be locked out of the borrowing markets.

Nicholas Spiro of Spiro Sovereign Strategy called the results “very poor”, adding:

Demand for Spanish paper is collapsing, even for shorter-dated debt which is very worrying and raises the spectre of Spain losing market access. The yield levels, particularly for the 5 and 7-year bonds, are prohibitive and reflect the deep scepticism about the Spanish economy’s ability to get out of the rut in which it finds itself.

It has been a rollercoaster at the shorter end of the Spanish curve over the past month or so. Yet now yields are moving back up to where they were just before last month’s EU summit. Sentiment-wise, we’re pretty much back to square one as far as Spain is concerned.

This is no longer about the Rajoy government bungling its reforms. This is about a crisis of confidence in eurozone policymaking – one which was underscored in yesterday’s IMF report on the single currency area.

Marc Ostwald of Monument Securities agreed that the auction was a disappointment, even though Spain did raise almost €3bn.

Ostwald added (via Reuters):

We’re still waiting for the bank bailout to be finalised and there’s no guarantee that Spain itself won’t need a bailout at some stage so why would people want to be charging in right now?


City traders have responded to the weak Spanish bond auction by sending the euro lower (to €1.226) , and pushing up the yield on Spain’s 10-year bond over the 7% mark.

The Madrid stock market also lost all its early gains, dropping into negative territory.


Spanish bond auction results

The Spanish bond auction is over, and it’s a bad result for Madrid.

Borrowing costs (yields) have jumped sharply, and demand for the debt (the bid-to-cover ratio) has fallen.

Here is the details, for the three different bond types on offer.

2014 bond: Yield rose to 5.302% vs 4.483% on June 7. Bid-to-cover ratio of 1.9, vs 4.3

2017 bond: Yield rose to 6.543% vs 6.195% on June 21. Bid-to-cover ratio of 2.1, vs 3.4

2019 bond: Yield rose to 6.798% vs 4.899% on February 16. Bid-to-cover ratio of 2.9, vs 3.3

The only glimmer of comfort is that Madrid did raise a total of €2.9bn, close to the maximum amount. But it has paid through the nose for it.


Correction: The debate in the Bundestag over the Spanish banking rescue package actually starts this afternoon (from 1pm BST). Not this morning, as I wrongly wrote earlier. Sorry for the confusion (and thanks to visiblehand for flagging up the error in the comments)


Spanish minister speaks

Spanish budget minister Cristobal Montoro has warned this morning that Spain’s economy would have collapsed if the European Central Bank had not bought up billions of euros of its debt this year.

Speaking in parliament, Montoro said the ECB had played a vital role by stopping Spanish bond yields spiking even higher.

According to Bloomberg, Montoro also warned MPs that “there’s no money in the public coffers…there’s no money to pay for public services.”


Worrying. The difference between the yield on Spanish five-year bonds, and the German equivalent, has hit a new record high of 612 basis points.

Not a great sign shortly before this morning’s auction results..,


Today the eurocrisis, tomorrow the food crisis?

The price of key food stuffs has been climbing steadily for weeks, as the worst US drought in decades fans fears of shortages.

Already this morning, the spot price of soybeans has hit a new record high, and the cost of a bushel of US corn has reached a new high over $8 a bushel.

Corn and wheat prices have jumped by nearly 50% in recent weeks, reports the FT’s Chris Adams:

The implications for the world economy are serious. For the eurozone, it means higher inflation at a time when many people are already struggling under austerity measures.

For developing countries, it means the awful threat of not enough food.

And politically, it could even spark unrest in certain countries. Analysts say one cause of the the Arab Spring was the steep rise in wheat prices, which helped to drive inflation in Egypt to over 18%…

All the more reason for politicians in Europe to make genuine progress in resolving the crisis….


Jeremy Cook, chief economist of World First, says it has become clear in recent days that the Spanish banking bailout is “nothing more than another Euro-fudge”

Here’s his morning romp through developments in the currency markets:


German politicians have interrupted their usual summer break for today’s special vote on the Spanish bank rescue.

It is taking place because, under German law, because the Bundestag must give its approval everytime the European bailout funds are used.

As Europe’s biggest economy, Germany will guarantee the biggest slice of the Spanish aid deal – around €29bn.

While the vote is likely to be approved (Angela Merkel’s government has a healthy majority), will any MPs rebel?

Deputy finance minister Steffen Kampeter argued last night that it was in Germany’s interest not to allow Spain’s troubled banks to collapse, reminding the German people about the events of autumn 2008.

Kampeter told ARD television:

We tried once, with Lehman Brothers, letting a system-relevant financial institute go bust — the result was the economy shrinking in Germany.

Associated Press has more details here.


City analysts fear that Spain will be forced to pay high borrowing costs at this morning’s auctions, and question how long the country can cope with such high bond yields.

Orlando Green of Credit Agricole says Spain is currently on an unsustainable path, telling Bloomberg that:

There needs to be action from politicians because these sort of yield levels certainly won’t help Spain to reduce its budget deficit.

Bloomberg’s Francine Lacqua agrees that the auction is that now-familiar battle – Spain against the financial markets.


This morning’s Spanish debt auction comes at a tricky time for Madrid, with the yields on its 10-year bonds hovering just below the crucial 7% mark (6.971% as I type).

Michael Hewson of CMC Markets says the auction of between €2bn and €3bn of debt will be:

a key test of investor sentiment towards Spain with once again, yields and bid to covers* under particular scrutiny.

* – how over-subscribed the auction was.

Data released yesterday showed that Spanish banks are suffering more bad debts, while the ongoing confusion over whether the Spanish government will be liable for the sector’s €100bn rescue deal is also worrying the markets.


The Agenda

Good morning, and welcome to today’s rolling coverage of the eurozone financial crisis.

Spain is in the frame today. It will hold an auction of between €2bn and €3bn of bonds (maturing in 3 years and 7 years) this morning – what prices will investors demand in return for buying the debt? The results could come around 9.30am BST.

Meanwhile, over in Berlin, the lower house of parliament will vote on whether or not to approve Spain’s banking rescue deal. The bill is expected to pass, but it will be interesting to see if many MPs rebel against Angela Merkel. <del>That vote is due from 9am.</del> The debate takes place this afternoon, from 1pm BST.

We’ll also bring you the latest news from Greece, as the government there tries to agree a spending cuts package before Troika officials return next week.

On the economic front, we have new UK retail sales data at 9.30am, and weekly US jobless data at (1.30pm BST).

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Monti warns of disaster if leaders don’t tackle rising debt costs, German official warns against “exaggerated panic mongering”, Italian borrowing costs hit six-month high, Spanish yields back above 7%, markets turn negative as summit gets underway…

Powered by Guardian.co.ukThis article titled “Eurozone crisis live: Italy debt warning ahead of summit” was written by Julia Kollewe and Nick Fletcher, for guardian.co.uk on Thursday 28th June 2012 14.11 UTC

3.11pm: Another voice has been added to those warning of the break-up of the euro, and it belongs to the president of the Spanish banking association.

As the EU summit meets to decide – among other things – what measures it can agree to help struggling Spain and Italy, Miguel Martin said a break up “is not only possible but also even probable.” Stephen Burgen in Barcelona writes:

Speaking at a conference in Santander, he said: “There are those who want a division of Europe between the good and the bad at a time when unity is not only desirable but essential and those with a surplus are just as guilty of errors in how Europe is organized as those with a deficit. Some want the ugly ones to leave, but we uglies want to stay in Europe.”

He said that Spain would not be given a cent because “none of the money we get will be free because they don’t give gifts,” adding that Spaniards should be grateful if the money was loaned with advantageous conditions. “We have to use it well,” he said, insisting that the government clarify its objectives otherwise it was impossible to know if they were attainable or not.

Martin said the financial system is worse than it was a year ago because “we still have unviable entities that prejudice the rest, the sovereign debt rating and the solvency of the state.” However, he said Spain’s real problem wasn’t its banks but the fact that it had ceased to be able to compete with Germany.

“In future we will have to do better than them, as I imagine we will in the final of the Euro 2012,” he said.

So no matter how apocalyptic you get about the current financial crisis, it seems you have to end with a football reference…

3.02pm: With David Cameron arriving in Brussels for the EU summit, the UK prime minister has said he was determined to safeguard Britain’s place in Europe.

But while he said eurozone members were right to press ahead with closer fiscal integration, Britain’s priorities were different:

Of course we are saying to the eurozone countries they do need to do more things together to strengthen the currency and make sense of their currency, but Britain is going to stay out of that.

We want Europe to work for us, as a single market, as a place where we trade, as a place where we co-operate, and I’m going in there so that we get the safeguards to make sure that can keep happening.

Meanwhile the UK’s Triple A rating looks in danger, according to M&G Investment’s bond experts in their latest blog. But in good news for Cameron and chancellor George Osborne, they say it may not matter much for UK bonds:

2.50pm: With European markets under pressure as the much anticipated EU summit gets under way, it’s no surprise that Wall Street has followed suit.

The Dow Jones Industrial Average is down around 100 points in early trading, despite the latest economic data coming in pretty much as expected. US first quarter GDP growth was confirmed at 1.9% quarter on quarter, in line with initial estimates. Annalisa Piazza Newedge Strategy said:

Looking ahead, we expect GDP to run at around 1.5% in the second quarter as the economy seems to have lost some momentum due to uncertainties surrounding markets and the debt crisis in the euro area.

Initial jobless claims fell by 6,000 to 386,000 last week, with the previous week revised upwards by 5,000 to 392,000. The forecast was for 385,000, so a little higher than anticipated.

But its the eurozone fears which are unsettling US investors, as official posturing continued ahead of the meeting.

2.29pm: Time for me to hand over to my colleague Nick Fletcher. Thanks for all your great comments.

1.49pm: A Greek banker fell to his death from the Acropolis this morning, the latest in a growing number of suicides in the debt-crippled country that has spiralled into a deep recession.

The man was in his 40s and worked at Greece’s troubled state-owned agricultural lender, ATEbank. Police said he took a break shortly after arriving for work in the morning but never returned.

A police official told Reuters:

Guards and tourists saw him at the spot before the jump. Others heard a loud scream and saw him lying on the ground. It could be suicide, but there’s no note.

1.15pm: Looks like we got it right [see post 12.26pm]. Germany’s finance ministry has denied a report in the Wall Street Journal that suggested it had softened its opposition to euro bonds.

A spokesman for the ministry, Martin Kotthaus, said:

This is not true. We’ve always said that we can talk about shared debt management only at the end of a process toward a genuine fiscal union.

The Journal article was headlined ‘Berlin Blinks on Shared Debt’. In fact, Schäuble said Germany could agree to some form of debt mutualisation once Berlin is convinced the path toward establishing central European controls over national budgets is “irreversible.” “There will be no jointly guaranteed bonds without a common fiscal policy,” he told the Journal. This has been the German position all along.

1.11pm: Meanwhile, the French president François Hollande said Paris and Berlin were in broad agreement on measures to stimulate growth, but admitted that they still needed to hammer out a deal on short-term steps to stabilise the eurozone, by helping Spain and Italy whose borrowing costs have soared to unsustainable levels.

He told France 2 television before getting on the train to Brussesls for the two-day EU leaders summit:

There are points in common on growth luckily, Merkel has moved in the direction I wanted. There is also an agreement on the financial transaction tax, but we still need one on stability. There are ongoing discussions; it’s normal. We need to act in support of the countries which need it: Spain and Italy.

12.26pm: There is some excitement about comments from the German finance minister Wolfgang Schäuble, who indicated that Germany is willing to negotiate on euro bonds. But at the same time, he is insisting on a European budget czar – which is something Germany has been pushing for all along. Fiscal union needs to precede jointly guaranteed eurozone debt, Merkel’s government has always argued – so it doesn’t look like Germany’s position has shifted.

12.00pm: The Irish finance minister just said that one of the main issues at the Brussels summit will be how to get Italian government bond yields to 4% or below – which seems rather specific. They are currently at 6.2%.

11.45am: Greek police have raided a warehouse churning out fake euro coins. Maybe they’d be better off making drachmas anyway.

Police in Thessaloniki said on Thursday that they had raided a workshop counterfeiting euro coins in the southeastern outskirts of the northern port.

The workshop, which appears to have been chiefly producing fake two-euro coins, is the first of its kind discovered in Greece to date.

Officers arrested two brothers who are believed to have been running the counterfeiting operation as well as a 59-year-old suspected accomplice who is said to have both Greek and Bulgarian citizenship.

Full story on eKathimerini

11.39am: There are renewed rumours that Monti is about to resign as Italy’s PM.

But these rumours have been around for a while.

11.01am: In case you’re still hoping that something substantial might actually happen at today’s summit, it won’t. Barclays said today:

We expect these discussions to draw a roadmap for fiscal, financial and political union but we do not anticipate any major decisions on concrete short-term measures to reduce market stress beyond what has already been agreed.

10.32am: Earlier today, German unemployment dropped by a non-seasonally adjusted 46,200 in June, bringing the number of unemployed people to the lowest since December last year. However, this is the weakest June improvement since 2002. In seasonally-adjusted terms, unemployment increased slightly, leaving the jobless rate at 6.8%.

ING economist Carsten Brzeski said:

Over the last two years, the strong performance of the German labour market has had some positive impact on the often-mentioned rebalancing of the eurozone. According to Eurostat data, German labour costs have increased slightly faster than in the entire Eurozone, outpacing countries like Spain, Portugal or Italy but staying behind France. As differences, however, have remained rather small, this development should rather be called correction than rebalancing. Much more would be needed. Obviously, an end of the German job miracle and weaker external demand for German products would make recent wage increases one-offs and consequently Eurozone rebalancing even more difficult.

At first glance, today’s numbers illustrate the strength of domestic demand, at least partly cushioning the German economy against the negative impact from the debt crisis. At second glance, however, signs are increasing that the resilience of the German labour market is slowly cracking up. The German labour market is losing momentum. This might not be a cause for concern for the German economy, yet, but definitely for the rest of the eurozone.

10.20am: Italy’s borrowing costs have jumped to the highest levels since December at a €5.4bn auction of 5- and 10-year government bonds. Its Treasury got the bond sales away, but the 10-year yield leapt to 6.19% from 6.03% at the previous auction at the end of May. The 5-year yield rose to 5.84% from 5.66%.

10.02am: The debt crisis continued to sap business confidence in the eurozone this month. The European commission’s economic sentiment index slipped by 0.6 percentage points to 89.9, leaving sentiment at its lowest level since October 2009.

Martin van Vliet at ING says:

June’s decline in eurozone economic sentiment adds to growing evidence that the eurozone economy contracted pretty sharply in the second quarter.

On past form, the index is now consistent with quarterly falls in eurozone GDP of around 0.3%. The weakness in overall sentiment was driven by a sharp drop in both industrial and services confidence (which have the largest weights). Consumer confidence saw a smaller decline, and retail and construction confidence actually registered an improvement.

9.55am: Our man in Brussels, Ian Traynor, says the real story will be the eurozone lunch summit tomorrow after the main summit ends, when we get the Monti-Merkel clash over short-term market relief action. Monti wants some kind of automatic trigger on secondary market bond purchases when spreads go too wide, provided said country is not behaving badly. Doubt he’ll get it, but…

Ian adds from Brussels:

Berlin stuck to a hard line on the euro this morning hours before chancellor Angela Merkel arrives in Brussels to fend off pleas for help from much of Europe. “All eyes are on Germany,” she said yesterday.

Briefing from Berlin, senior government officials dismissed concerns about the rising costs of borrowing for Spain and Italy as “exaggerated panic-mongering.” They criticised a 10-year eurozone federation blueprint being discussed this evening as imbalanced, too much emphasis on pooling liability in the eurozone and not enough attention paid to fiscal discipline and democratic legitimacy.

There was scant sign of any concessions to Mario Monti, the Italian prime minister who is pleading for help in the bond markets to cut the cost of borrowing.

The eurozone could only use the instruments already established, the bailout funds – European Stability Mechanism and European Financial Stability Facility – according to the rules and with the usual very tight strings attached – conditionality. You can’t change the rules for each possible bailout every time something new happens, the Germans stressed.

There was little sign of any breakthrough last night in Paris where Merkel had dinner with President Francois Hollande. One thing that was certainly discussed was when Hollande would get Merkel’s fiscal pact ratified (the Germans do it tomorrow). Asked about this, a senior German said you will have to ask the French. Playing with a ratification delay may give Hollande a little leverage as Merkel is keen to get the pact up and running. Otherwise Hollande’s armoury looks rather bare in the contest with Berlin.

All the signs are that the Germans are absolutely in no mood for turning, but Brussels is awash with rumour that Merkel might turn a blind eye to a move by Mario Draghi (Italian) at the European Central Bank to intervene on the secondary markets to buy up Italian bonds. If this is to happen, it will be at lunch tomorrow following the end of the EU summit when Draghi joins eurozone leaders for a separate session. Tomorrow’s lunch looks like being the crunch bit of the two-day summit.

9.53am: Belatedly, here is today’s agenda. All times are BST.

• Eurozone business confidence for June at 10am
• Italian debt auctions between 10am and 10.30am
• US GDP figures for the first quarter at 1.30pm
• EU leaders summit in Brussels begins at 2pm

9.50am: Italy’s employers lobby group Confindustria has slashed its growth forecasts for this year and next, and once again warned that the economy – the eurozone’s third largest – had fallen into an “abyss”.

The group now estimates the Italian economy will shrink by 2.4% this year, rather than the 1.6% decline forecast in December. Next year, it is set to contract by 0.3%, compared with a previous prediction of 0.6% growth.

Luca Paolazzi, head of Confindustria’s research unit, said:

It seems to me we’re in the abyss. We’re not in a war, but the economic damage caused so far is equivalent to a conflict and the most vital and valuable parts of the Italian system have been hit: manufacturing industry and the young generations.

9.36am: The detail of the UK GDP figures reveals how much pressure most people are under: they are dipping into their savings to pay for food and utility bills. The household saving ratio has tumbled to the lowest level in a year, at 6.4%. Take-home pay, adjusted for inflation, is down by 0.9%.

Some economists say the UK is probably still in recession.

9.30am: Britain’s economy shrank by 0.3% between January and March, leaving the nation in its second recession in four years, the Office for National Statistics has just confirmed. But the contraction in the fourth quarter was worse than previously estimated, at 0.4% rather than 0.3%. This means the double dip recession is deeper than people thought.

9.26am: Spanish 10-year government bond yields are back above 7%. And the Italian equivalent is also up, at 6.28%. Italy will be holding bond auctions again today, with the €3bn 10-year auction expected to receive special scrutiny.

9.04am: Stock markets have turned negative: the FTSE is down 40 points at 5483, a 0.7% drop. Germany’s Dax has lost 20 points, or 0.3%, to 6208, while France’s CAC has shed more than 14 points, or 0.5%, to 3048. Spain’s Ibex is off nearly 50 points, or 0.7%, at 6617 and Italy’s FTSE MiB has tumbled 145 points to 13158, a 1% fall.

8.38am: In a jab at the Italian and Spanish leaders who have warned their countries’ rising borrowing costs are unsustainable, the German government source warns against “exaggerated panic mongering” over the surge in interest rates on Spanish and Italian government debt.

8.28am: More from the German government source, who expresses scepticism that a new instrument can be developed to tackle Italy’s problems. The source reiterates that it’s up to the governments themselves to decide whether, when and how to use the available instruments.

Seeking to dampen pre-summit expectations, the source also says that “the question of progress towards a fiscal union cannot be resolved in one day”. He reiterates Germany’s opposition to using bailout funds to recapitalise banks while supervisory controls remain at the national level.

8.19am: A German government source is briefing journalists. Reuters reports him as saying that with the EFSF and ESM bailout funds, the EU already has all the necessary instruments at its disposal to deal with the crisis. The source also highlights the need to come up with precise, quick, appropriate help and a reform programme for Spain.

8.13am: Stock markets are more or less flat now. The consensus view seems to be that because expectations for the EU summit are so low, we could easily get a positive surprise if anything gets done.

Markus Huber at ETX Capital says:

European equities are trading slightly higher this morning receiving a modest boost from growing expectations that the ECB might be lowering interest rates next week in light of an ongoing worsening economic situation across Europe especially with also Germany, Europe’s biggest economy starting to show pronounced weakness in economic activity as some of their main trading partners outside Europe, like China and USA are struggling themselves with the fallout of the European financial crisis.

Besides the approval of some growth measures already indirectly agreed on last week during a meeting in Rome between Merkel, Hollande, Monti and Rajoy it seems to be the case that barely anybody is expecting the EU summit to yield any substantial progress in regard to issuing Eurobonds and bringing down periphery interest rates to more sustainable levels. Therefore with expectations are already very low and a disappointing outcome likely similar to how it has been most times during countless meetings during the past couple of years, some speculate that there is plenty of room for a positive surprise.

8.11am: Over here in the UK, the row over Barclays’ bid to manipulate interest rates is gathering pace. The bank’s boss, Bob Diamond, finds himself under mounting pressure to resign in the wake of the Libor scandal. The bank was fined £290m for its “serious, widespread” role in trying to manipulate the price of key interest rates that affect the cost of borrowing for millions of customers around the world. More here.

8.03am: European shares are tentatively edging higher, as expected, but it ain’t much of a rally. The FTSE in London is about 7 points ahead at 5531, a 0.1% gain. Germany’s Dax and France’s CAC are also up 0.1% while Spain’s Ibex is flat and Italy’s FTSE MiB has added 0.3% in the first few minutes of trading.

7.52am: On the corporate front, National Express’s Spanish bus division is doing well despite the eurozone crisis. The company also said this morning that it’s getting back money owed by Spanish municipal authorities. Transport revenues at the Spanish bus business, Alsa, climbed 5% in the last six months on a year ago, with intercity coach revenues up 3% while urban bus revenues were 6% ahead.

National Express said:

Alsa’s performance has continued to be resilient… we continue to manage outstanding receivable balances from Spanish state bodies effectively, whilst also benefiting from the central government scheme to clear the backlog of municipal debts. By the end of May, state receivables had reduced by €12m since the end of 2011 to less than €45m.

7.48am: Stock markets are expected to open slightly higher. GFT Markets sees the FTSE up 12 points to 5535; the DAX up 2pts to 6230 and the CAC up 10pts to 3073 on yesterday’s close.

Andrew Taylor at GFT says:

The European session should kick off the day on a positive note albeit with many participants willing to remain on the sidelines waiting for a clear outcome to this much anticipated risk event. There will be a raft of high end data being released from Europe and US today which will add to its edginess, and with the current low liquidity levels, moves will be swift and exaggerated.

7.40am: Here’s a link to the EU summit agenda (click on Provisional agenda on the European Council page). Gary Jenkins of Swordfish Research says:

So we come to yet another summit where the whole world waits on anxiously to see if Europe can make any progress to resolve its crisis. We face the mother of all binary outcomes. The good news is that this time around expectations are very low; the bad news is that the main players seem to be diametrically opposed when it comes to a strategy for ending the crisis.

In a statement to Germany’s lower house of parliament Ms Merkel repeated many of the comments that she made earlier in the week regarding the fact that Eurobonds etc. are unconstitutional in Germany and are also economically wrong and counterproductive. She added that “There can only be joint liability when adequate oversight is ensured…our work must convince those who have lost confidence in the eurozone, not by self-deception and sham solutions but by fighting the causes of the crisis.”

Comments from other senior German officials repeated this mantra and it is clear that if the rest of the Eurozone does want mutualisation of debt then they must pay for it via a loss of sovereignty. Germany wants a fiscal union to be organised properly with controls and checks in place before they accept responsibility for everyone else’s debts. Of course the obvious problem with this approach is that there may not be time to organise a fiscal union and perhaps more pertinently they do not have a mandate to do so.

The uncertainty that would be caused by referendums across Europe would probably lead to a withdrawal of funding from the likes of Spain at the first sight of any opinion poll suggesting that a country was going to veto the plan. Thus just to give themselves the opportunity to put such a scheme to the test they would have to be some form of further financial co-operation in the interim period. One problem is that politicians are only prepared to accede sovereignty when all other options have been exhausted, and then it’s too late.

7.14am: Good morning and welcome back to our rolling coverage of the eurozone debt crisis and world economy. In Brussels, the long-awaited two-day summit of European leaders begins at 2pm BST today. It will be preceded by a German chancellery background briefing at 8am, and pre-summit meetings by the EU socialist, conservative and liberal leaders, according to news service RAN Squawk.

Italy’s prime minister, Mario Monti, has warned of potential disaster if Europe’s leaders don’t club together and find a way to keep interest rates on Italy’s debt down.

If Italians lose hope, this could unleash “political forces which say ‘let European integration, let the euro, let this or that large country go to hell’, which would be a disaster for the whole of the European Union,” Monti said.

In another stark warning, his Spanish counterpart, Mariano Rajoy, reiterated yesterday that the EU must use all available instruments as “we can’t fund ourselves at the prices we are paying for very long”.

Italian borrowing costs surged yesterday after German chancellor Angela Merkel once again ruled out jointly guaranteed eurozone debt. The yield on the 10-year government bond rose to 6.226% this morning, while the Spanish equivalent is once again approaching 7%, climbing to 6.961% this morning.

guardian.co.uk © Guardian News & Media Limited 2010

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The German Chancellor Merkel maps out position ahead of summit, statement to be issued later today, Germany to ask EU for financial transaction tax, Italy’s borrowing costs rise at €9bn auction, and anti-austerity protests sweep across Europe…

Powered by Guardian.co.ukThis article titled “Eurozone crisis live: Merkel reiterates opposition to euro bonds” was written by Julia Kollewe, for guardian.co.uk on Wednesday 27th June 2012 10.58 UTC

1.16pm: Merkel and Hollande are making a statement at 7.15pm tonight so we might get some idea of how their pre-summit summit is panning out.

12.45pm: Germany is going to ask the EU commission to introduce a financial transaction tax.

Such a levy has long been championed by Merkel who will be supported by Hollande. But it’s strongly opposed by the British government who think that it will harm the competitiveness of the City. The argument is that you can’t introduce a tax on transcation in Europe because the business would just go to the US or Asia.

12.28pm: Merkel also praised Spain and Italy for making important reforms and as she was speaking Italian prime minister Mario Monti won a confidence vote on labour reform.

The law aims to make it easier to sack workers, broaden unemployment benefits from 2017 and crackdown on employers who avoided taking on full-time workers.

Monti hopes the approval of the measure will strengthen his bargaining position at the EU summit starting tomorrow in Brussels.

12.18pm: Merkel reminded everyone that eurobonds are in any case constitutionally impossible in Germany and was also very clear on the linkage Germany expects if there is to be any movement on this in future.

“Supervision and liability must go hand in hand,” she said, and could only be considered if and when “sufficient supervision is ensured”. That means, of course, countries ceding control of fiscal policy to Germany/Brussels/ECB.

12.08pm: Merkel says there are no “quick and easy solutions” to the euro crisis and that leaders should beware of making rash promises they could not keep.

Addressing members of the lower house of parliament, the Bundestag, Merkel repeated her opposition to eurobonds and said that Germany, Europe’s biggest economy, had finite resources. She said:

It is imperative that we don’t promise things that we cannot deliver and that we implement what we have agreed. Joint liability can only happen when sufficient controls are in place.

11.57am: Merkel says that if Germany is overburdened, it would have unforeseeabale consequences for Europe.

11.52am: The German chancellor reiterates her position that euro bonds are economically wrong and counterproductive.

11.46am: Merkel is pleased that at least nine EU countries are ready to go ahead with the financial transactions tax. She has also called for new incentives to tackle youth unemployment in Europe.

11.42am: Chris Williamson, chief economist at Markit, has crunched the CBI retail sales data and the UK mortgage lending figures.

The survey suggests that official retail sales data will show a further rise following the solid gain seen in May. The message from the official and survey data combined is that retail sales may have risen by at least 1% in the second quarter, which should have provided a welcome boost to the flagging economy and may even help the country lift out of its double-dip recession.

While the May rise was attributable to a rebound in clothing and footwear sales from April, when bad weather had hit sales of seasonal items, the CBI linked the June increase to higher spending around the Queen’s Diamond Jubilee celebrations. The suggestion is, therefore, that the recent improvements in sales are due to temporary factors and that sales will weaken again in the third quarter. However, retailers reporting to the CBI survey grew increasingly optimistic in June, with the net balance relating to expected sales in the coming month rising to the highest since January 2011, up from +25% in June to +32% in July. It is possible, therefore, that we are seeing some upturn in consumer spending due to higher employment and lower inflation, which has reduced the squeeze on incomes that dampened spending so severely last year.

It has not been all good news today, though, with new data showing net mortgage lending dropping in May for the first time since records began in 1987. Lending fell by £73 million as people paid off mortgages.Mortgage lending has failed to show any real signs of gaining momentum over the five years since the financial crisis struck, highlighting an important missing element from the UK’s economic recovery.

11.34am: Speaking to the Bundestag, Angela Merkel reiterates that there are no quick or easy fixes for the eurozone crisis. Structural reforms must be at the centre of growth initiatives for Europe.

She praised Italy’s Mario Monti and Spain’s Mariano Rajoy for taking important reform steps.

11.17am: Just to remind people, late yesterday a small US ratings agency downgraded Germany due to its exposure to the European debt crisis. However, the three major assessors of creditworthiness – Moody’s, Standard & Poor’s and Fitch – maintain their faith in the country, rating it at AAA.

New York-based Egan-Jones cut its rating from A+ to AA-, arguing that Germany’s direct and indirect exposure to the financial problems in other parts of the eurozone would affect the country’s finances.

Our major fear is Germany will be expected to provide indirect financial support to weaker EU banks over the next couple of years to ameliorate asset quality problems and replace fleeing deposits.

Merkel continues to create tension with EU member states by resisting calls for EU bonds.

11.06am: Retail sales in Britain were really strong this month, according to the Confederation of British Industry’s latest monthly snapshot. Retail sales rose at the fastest pace in 1 1/2 years as Britons splashed out for the Queen’s Diamond Jubilee celebrations. The CBI’s sales balance doubled to 42 from 21 in May, the highest since December 2010.

Grocers enjoyed their strongest sales growth since February 2010, while shoe and leather retailers reported the strongest growth on record.

Judith McKenna, chair of the CBI’s survey panel, said:

The Jubilee provided a much needed boost to our high streets with many families and communities making the most of the bank holiday.

Howeer it is notable that sales were still considered below par for the time of year. Weak consumer confidence and uncertainty over the economic outlook are still putting a break on consumer spending across the whole retail sector.

10.23am: Back to the Italian €9bn bill auction, where the country’s six-month borrowing costs climbed to nearly 3%, the highest since December. Another test will come tomorrow when Italy sells five- and ten-year bonds for up to €5.5bn. Nicholas Spiro, of Spiro Sovereign Strategy, has provided this quick take:

1. It’s always a bad sign when the short end of the curve is being hammered. This is pure risk aversion. While demand from local banks continues to prop up Italy’s debt market, the concessions are becoming heftier and heftier with each passing week. While yields are not as high as they were in November, psychologically speaking things are almost just as dire.

2. The deterioration in sentiment towards Italy is externally driven. While Italy has serious domestic problems, what concerns the markets is Germany’s reluctance to do what is necessary in the short-term to shore up Spanish and Italian debt. This is not about the absence of a fiscal and banking union. Those are long-term solutions. Rather, this is about the lack of credible interim measures to bring down Spanish and Italian spreads.

3. The main worry in Italy right now is the position of Mr Monti. His premiership is being undermined by both the actions of Germany and the political gamesmanship of former premier Silvio Berlusconi. The ramifications of the fall of Mr Monti’s government don’t bear thinking about, frankly.

10.22am: Protests galore across the eurozone: Greek restaurant workers have called a 24-hour strike for today to protest against wage cuts and other austerity measures imposed by the government. The strike comes in one of the key months for tourism, the country’s biggest industry.

“Employers are blatantly using the avalanche of measures, which are crushing the human and social rights of workers, to violently demand submission to their demands,” the Panhellenic Federation of Catering and Tourist Industry Employees said on its website.

10.06am: At an Italian auction of six-month Treasury bills the yield has risen to 2.957%, from 2.104% at the last such bond sale at the end of May. It is the highest interest rate since December.

9.53am: Nicosia ‘the dog in charge of the sausages’?

Cyprus taking over the rotating EU presidency on Sunday after it sought an emergency bailout has been likened to putting a dog in charge of the sausages.

Kurt Lauk, president of the economic advisory board linked to Merkel’s center-right Christian Democrats, said:

This is the paradox of the European Union, that the dog should be put in charge of the supply of sausages!

Cyprus, which is due to take over the six-month presidency from Denmark, has a banking sector heavily exposed to debt-crippled Greece and said on Monday it was formally applying for help from the EU’s rescue funds.

Lauk called for all countries which have received bailouts – which also include Spain, Portugal, Ireland and Greece – to be barred from holding the EU presidency, which helps to set the agenda of the 27-nation bloc.

9.46am: Back to Spain, where the recession is deepening. The Bank of Spain warned in its monthly bulletin that the eurozone’s fourth-largest economy would contract at a faster rate between April and June than in the first three months of this year, when it shrunk by 0.3%. Spain has slid back into recession for the first time in three years.

9.44am: Another one bites the dust. The head of Greece’s privatisation fund, Yiannis Koukiadis, has resigned, citing personal reasons, according to Greek daily Kathimerini.

It was revealed on Wednesday that Koukiadis tendered his resignation to caretaker Finance Minister Giorgos Zannias. In his letter, Koukiadis said his decision to leave the post, which he has held since July last year, were purely personal.

Greece’s coalition government has backed the privatisation process, although some reservations have been expressed about selling off so-called strategic assets.

TAIPED suspend the implementation of its sell-off program due to the political uncertainty caused by the two recent general elections.

Executive director Costas Mitropoulos told Kathimerini in a recent interview that the decision has harmed the credibility of the fund, which according to the law is independent from the government, while it also renders the target of 3 billion euros in revenues nonfeasible for this year.

Sources suggest that other members of TAIPED are also prepared to step down.

9.38am: The Italian business confidence figures, which were delayed by a staff protest, are out. Morale unexpectedly improved in June, with the index rising to 88.9 from 86.6 in May.

9.34am: Even emerging markets bank Standard Chartered isn’t immune to Europe’s woes. Its finance director Richard Meddings said this morning:

My numbers show we can hit double digit income growth, the issue is in a world like this with the eurozone pressures and exchange rates, there’s more risk to the downside.

The bank is still expecting to hit its target of growing income by 10% or more this year. In its first half, profit growth slowed to less than 10% as Standard Chartered earnes less from wealth management and Asian currencies weakened against the dollar.

8.55am: Meanwhile in Greece, Microsoft’s head office in Athens has been seriously damaged after armed arsonists drove a stolen truck through the entrance overnight and set fire to it. The office, where more than 100 people work, will be shut today. The fire brigade estimated the damage at about €60,000.

“It was very lucky that no personnel were in the building at the time,” said a police source. “We’ve had drive-by attacks but nothing like this. In style it is unprecedented.”

Arson attacks against banks, foreign firms and local politicians have become more frequent in Greece in recent years amid public anger against the government’s harsh austerity policies. Police said it was too early to say who was behind the latest attack. In February, a small bomb was left on an empty subway train in Athens which a far-left group fighting the austerity measures claimed responsibility for.

8.51am: Here’s an amusing tale from Italy. A protest by Italy’s number crunchers has delayed the release of Italian business morale data.

Some 42 statisticians, researchers and computer technicians from ISTAT, Italy’s national statistics office, have occupied the room where the data are normally handed out and are holding a labour union assembly. They won an internal promotion two years ago that has not yet been recognised.

The protest means the business confidence figures for June will be published half an hour later than scheduled, at 9.30am BST. They are expected to show a worsening in morale.

Francesca Taratamella, who works in the national accounting department, said staff were protesting against the stats office’s failure to award promotions to those who were entitled to them. She said she and her colleagues had been given extra work and responsibilities without any promotion or increase in wages.

“More in general, we are here to lament the freeze on new hires, on salary increases and on promotions…in the public sector,” she told Market News International.

8.47am: It’s ‘Waiting for nothing,’ says Paul Donovan, managing director of global economics at UBS.

Markets are waiting for nothing to happen, with the euro heads of government summit looming on the horizon. Expectations have been lowered so much that it is just possible that markets react positively to any decision. Alternatively, markets look at the broken structure of the Euro and ask “is that it?”.

Weidmann of the Bundesbank keeps going on about how he does not want a debt union. We get the message. The point is that a fiscal union (as a long term end game) is all about shared tax revenues and shared spending. Eurobonds are a side issue.

There are reports of a eurogroup finance ministers’ meeting to discuss Spain’s request for money and Cyprus’s request for money (Cyprus is refusing to indicate how much money it would like to get from the dwindling number of liquid and solvent Euro economies).

The travails of the euro seem to be infecting even the irrepressible optimism of the US consumer, whose expectations have taken a turn down. The situation feels similar to last year – soft data like consumer confidence weakens, hard data like housing stats hold up.

8.39am: Here is today’s agenda:

• Italy to auction €9bn of Tresury bills
• Angela Merkel is due to speak to the Bundestag, Germany’s lower house of parliament, about the EU summit at 11.30am BST, according to news service RAN Squawk. This is ahead of her meeting with the French president in Paris.
• Eurogroup conference call at midday to discuss Cyprus bailout and Spanish request for banking aid
• German inflation numbers for June at 1pm BST

8.33am: Spain’s prime minister Mariano Rajoy said this morning he would ask other EU leaders at the upcoming summit in Brussels to use existing EU instruments to stabilise financial markets.

Speaking in parliament, Rajoy said access to financial markets was Spain’s top priority, and warned the country would not be able to to continue financing itself at the current high bond yields for a long time.

I will propose measures to stabilise financial markets, using the instruments at our disposal right now.

The most urgent issue is the one of financing. We can’t keep funding ourselves for a long time at the prices we’re currently funding ourselves.

8.10am: European stock markets have opened higher:

• The FTSE 100 index in London is up 25 points at 5472, a 0.5% gain, lifted by banking stocks Barclays, Lloyds Banking Group and Royal Bank of Scotland
• Germany’s Dax and France’s CAC have both risen 0.4%
• Spain’s Ibex has climbed 0.8%
• Italy’s FTSE MiB is up 0.7%

Spanish and Italian ten-year government bond yields are flat at 6.885% and 6.19% respectively.

7.53am: Ian Traynor, our Europe editor, reports ahead of today’s Merkel-Hollande meeting in Paris:

Chancellor Angela Merkel goes to Paris on Wednesday to try to strike a Franco-German deal with President François Hollande amid deep-seated differences at what has been described as Europe’s defining moment.

With the two key EU countries split for the first time in 30 months of single currency and sovereign debt crisis, José Manuel Barroso, head of the European Commission laid bare the high stakes in play at an EU summit in Brussels on Thursday as well as the high frictions between Germany and France.

Merkel’s first visit to the Élysée Palace under its new occupant has been hastily arranged and comes on the eve of what is being billed as a crucial Brussels summit which, apart from the immediate financial dilemmas, is to wrestle with a radical blueprint aimed at turning the 17 countries of the eurozone into a fully-fledged political federation within a decade.

“We must articulate the vision of where Europe must go, and a concrete path for how to get there,” warned Barroso. But he was unsure “whether the urgency of this is fully understood in all the capitals of the EU”.

Since his election last month, France’s socialist leader has quickly emerged as the most formidable challenger to German formulas for Europe’s salvation after two years of Berlin largely dictating the EU response to the crisis.

Merkel is feeling bruised, having just withstood two unusual attempts by fellow leaders to ambush her and get Berlin to hand over its credit cards to write off what they see as other countries’ profligacy.

In Mexico last week at the G20 and then in Rome at two bad-tempered summits in recent days, the Americans and the British – in cahoots with the leaders of France, Spain and Italy – sought to press Merkel into bankrolling fiscal stimulus and bank recapitalisation policies that would cut the vulnerable eurozone countries’ cost of borrowing.

The pressure on Merkel may have backfired and reinforced German resistance to the ideas. The view in Berlin is that Hollande will have to back down amid the relative weakness of the French economy.

7.51am: EU president Herman Van Rompuy published the leaked report for a path towards deeper economic and monetary union yesterday. Elisabeth Afseth, fixed income analyst at Investec, says:

The timeframe for achieving this is a decade, which is ambitious given the lack of agreement after well over two years of dealing with the crisis. Van Rompuy (in collaboration with ECB President Mario Draghi, EU Commission President Jose Barroso and the leader of the Eurogroup, Jean-Claude Juncker), sets out broad plans for further integration of fiscal policy as well as banking regulation, maintaining national decision making, but with the overriding control moving to the EU level.

It proposes upper limits on national budgets (in line with the fiscal compact) and moving towards joint bond issuance. The plan will be discussed at the European leaders’ summit tomorrow and Friday, I expect there might be some general agreement in the direction of need for further integration, but the plan includes a lot of measures that Germany has rejected firmly in the recent past and it is unlikely it will change its tone much.

7.21am: Good morning and welcome back to our rolling coverage of the eurozone debt crisis and world economy.

Expectations for the EU summit, which starts tomorrow, are getting lower by the day.

Angela Merkel’s comments today when she speaks to the German parliament will be closely scrutinised, after she reportedly ruled out the idea of jointly guaranteed eurozone debt for “as long as I live” at a closed meeting with her coalition partners yesterday. Later today the chancellor is due to meet French president François Hollande, her first visit to the Élysée Palace since the Socialist leader was elected.

Gary Jenkins of Swordfish Research said:

If she really did say that then it is difficult to see how this week’s summit can be anything other than a disaster and it may well be that the eurozone is heading into the abyss. Meanwhile it was reported that Mario Monti had threatened to resign unless common euro bonds were introduced, although this was denied by a spokesperson for the PM. Interesting that as far as I am aware Ms Merkel’s comments have not been denied…

Italian and Spanish borrowing costs surged at auctions yesterday, when the Italian government bought €2bn of bonds from its oldest bank, Monte di Paschi, in an attempt to shore up its capital cushion.

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European shares fall for third day as Spain formally requests a bailout ahead of the EU Summit, Spanish and Italian bond yields rise, and Cyprus gets downgraded to junk by Fitch at the start of a crucial week for the euro and the euro-area…

Powered by Guardian.co.ukThis article titled “Eurozone crisis live: Spain formally requests banking aid” was written by Julia Kollewe and Simon Neville, for guardian.co.uk on Monday 25th June 2012 15.03 UTC

4.02pm: Thanks to those who pointed it out. Yes, Italian 10 year bonds were last above 6% two weeks ago, not January as suggested. Today, they have now fallen back below 6% to 5.98%.

3.51pm: Italian journalist Chiara Albanese has just tweeted this message from one of the largest Swiss banks

3.39pm: Ouch. We’ve not even made it to Thursday’s EU meeting, but Italian 10 year bonds have gone above 6%. Up 19bps today.
Spanish bonds up 27bps at 6.62%.

3.25pm: Over to Wall Street, with the Dow Jones opening down 166 points, 1.3%, at 12472, following in the footsteps of Europe where markets are also down

Thanks Julia.

Over to Luxembourg:
The EU has confirmed a formal embargo on Iranian oil starting on July 1.
The original plans had been drafted in January but came under pressure from Greece who wanted an exemption or extension in the hopes of easing its economic problems. Athens asked for credit guarantees that would help it to buy crude elsewhere, but this was rejected.

2.41pm: I’m handing over to Simon Neville now. Thanks for all your great comments and see you soon.

1.37pm: Over to Ireland, where house prices have risen for the first time since 2007 in May – a sign the country’s troubled housing market is starting to stabilise.

House prices, which slumped 50% between their peak and trough, rose 0.2% in May from the previous month. They were down 15.3% in the year to May, but the rate of decline is easing.

1.33pm: Greece’s new prime minister Antonis Samaras has been released from hospital, two days after undergoing eye surgery that will prevent him from travelling to the EU summit in Brussels at the end of this week. The newly appointed finance minister Vassilis Rapanos cannot make it either – he collapsed on Friday and is due to leave hospital tomorrow.

The summit will be critical for Greece, coming just a week after its new coalition government was formed following months of political turmoil and two inconclusive national elections.

Samaras underwent an operation to repair a detached retina on Saturday morning, and his doctors have said he will have to remain at home for several days to recover, although he can accept visits.

1.18pm: Time for a lunchtime round-up. European stock markets are down for a third day amid worries over Spain.

FTSE 100 index – down 35 points at 547, a 0.6% fall
Germany’s Dax – down 108 points at 6154, a 1.7% drop
France’s CAC - down 58 points at 3032, a 1.9% decline
Spain’s Ibex – down 165 points at 6711, a 2.4% fall
Italy’s FTSE MiB – down 359 points at 13303, a 2.6% drop

On bond markets, Spanish and Italian yields are moving higher again. The Spanish ten-year is up 18 basis points at 6.537% while the Italian yield has climbed 12 bps to 5.928%.

The euro has hit a near two-week low of $1.24713.

1.02pm: Rating agency Moody’s is poised to downgrade nearly all Spanish banks later today, according to reports from the country.

Spanish financial daily Expansion believe there will be downgrades of two to three notches most likely after Wall Street closes – although it could be earlier.
It would follow the downgrade of Spain’s sovereign rating by three notches earlier this month.

Moody’s, you may remember, downgraded 16 banks worldwide last week, including RBS, HSBC, Lloyds and Barclays, but with little impact.

12.43pm: One winner in the current crisis appears to be Russia’s biggest lender Sberbank. Deputy Chairman Andrey Donskikh told Reuters:

We are seeing loan requests from abroad, which is quite unusual for Sberbank, as the European financial system is not showing very positive signals

A bit of an understatement perhaps?

The bank recently bought Turkish lender Denizbank for $3.5bn and Austrian bank VBI’s eastern europe arm for $630m, but Donskikh says the bank has no plans to snap up any Greek or Spanish institutions.

12.32pm: He’s coming out!

Greek finance minister, Vassilis Rapanos (who has still not been officially sworn in), will leave hospital tomorrow, according to an official at the Hygeia Hospital. The official said: “Mr Rapanos had a gastroscopy and colonoscopy, which showed everything is completely normal.”

However, following his collapse on Friday, Rapanos is still unlikely to make the European summit starting on Thursday.

11.28am: Vincent Forest, economist at the Economist Intelligence Unit, has sent his thoughts on the Spanish request for banking aid:

Although no document has been signed yet, it is now official that Spain will request aid from the euro zone institutions to shore up its banking sectors. Many details are already known, such as the necessity for the funds to be channelled through the Fund for Orderly Bank Restructuring, also known as FROB.

This implies that, ultimately, the burden and risks associated with helping the Spanish banking sector will be shouldered by the Spanish government. Whatever the amount requested, it will add up to the already rising public debt. This bail out will come with less strings attached than the ones received by Greece, Portugal and Ireland. The conditions attached to the deal will apply only on the Spanish banking sectors, whereas the other countries had to accept an almost complete takeover of public finances.

Such conditions would have cast even more serious doubts on the Spanish finances, resulting in an escalation of the crisis that the euro zone could not afford. Furthermore, given the strong commitment by M. Rajoy’s government to fiscal discipline, the need for fiscal monitoring was less prevalent. Spain has therefore so far been able to retain national sovereignty, at least in the eyes of the general public.

The origin, and especially the amount of the bailout will be of prime importance. It is essential that the loan provided exceeds by a certain margin the estimated capital requirements for the banks. Anything too far from the announced €100bn could fail to reassure investors, and create further volatility and instability.

The biggest problem associated to this bail out is that it is merely a reshuffling of debt in Spain, therefore tackling more the liquidity crisis than the solvency crisis that is getting more acute every week. Further developments at the euro zone level are essential to solve Spain’s problems, and will be discussed during the next summit on Thursday and Friday.

11.23am: The Spanish banking bailout – which Spain pointedly refuses to call a ‘bailout’ – is likely to be concluded in a matter of weeks. EU economic and monetary affairs commissioner Olli Rehn said this morning, in response to Spain’s formal request for aid of up to €100bn:

I am confident that we can conclude an agreement on the memorandum of understanding in a matter of weeks, so that we can proceed with the restructuring effort.

The policy conditionality of the financial assistance, in the form of an EFSF/ESM loan, will be focused on specific reforms targeting the financial sector, including restructuring plans which must fully comply with EU state aid rules.

Eurozone finance ministers gathered in Luxembourg last Thursday said an agreement with Spain should be ready and signed by their next meeting on 9 July.

11.11am: Chances are you’ve never heard of Maria Dolores de Cospedal. She is president of Castilla-La Mancha and inherited the biggest deficit of Spain’s 17 regional governments – which she is determined to tackle ruthlessly. Read more in the Wall Street Journal here – ‘A Spanish Leader Emerges as a Crusader for Austerity’.

10.51am: Following this morning’s request by Spain for a rescue package for its banks which could total up to €100bn, Open Europe has published a new briefing looking at the funding needs of Spanish banks and the Spanish state. The think tank argues that, taking into account that Spanish house prices may drop another 35%, the country’s banking sector could need an immediate €110bn capital injection to withstand potential losses – substantially above the recent official estimates. Without substantial banking reform and an upturn in the state of the Spanish economy this amount could increase further. Open Europe estimates that total exposure of EU countries to the Spanish economy is around €913bn.

Open Europe’s head of economic research Raoul Ruparel says:

Funding for the Spanish banking sector is an incredibly fluid target and could go well beyond €100bn if the situation in the Spanish and eurozone economy continues to deteriorate. Though it comes with merits, if not carefully managed and subject to the right conditions, this package could merely serve to deepen the dangerous loop between Spanish banks and government without offering a clear solution to the crisis. In turn, if more pressure is piled on Spanish banks and therefore government debt, it could force Spain into a full eurozone bailout.

With Spain facing funding costs of €548bn over the next three years, the eurozone’s bailout funds are not equipped to handle a Spanish rescue. To avoid such a scenario, the current bank bailout plan just has to come with the right conditions – including losses for bank bondholders and bank wind-downs.

Everyone agrees that the IMF estimates of €40bn for Spanish bank recapitalisation look too low. Open Europe estimates that the banking sector needs between €90bn and €110bn, meaning even the €100bn rescue package currently being discussed may not be enough. The amount needed could further increase if banks struggle to raise provisions against losses on top of their capital requirements. The external stress tests announced last week – which concluded that Spain’s banks need €62bn – are equally too low given that they worked from current data, which may be insufficient or incorrect, the think tank reckons.

It expects that the rescue package currently on the table, along with higher borrowing costs, could increase Spanish debt to 94% of GDP in 2013 and 112% in 2015 (with only slightly lower growth than expected).

10.45am: Fitch has cut Cyprus’ credit rating to junk status – to ‘BB+’ from ‘BBB-’, with a negative outlook. It’s down to the island’s banks. Here is a bit from the statement:

The downgrade of Cyprus’s sovereign ratings reflects a material increase in the amount of capital Fitch assumes the Cypriot banks will require compared to its previous estimate at the time of the last formal review of Cyprus’s sovereign ratings in January 2012. This is principally due to Greek corporate and households exposures of the largest three banks, Bank of Cyprus, Cyprus Popular Bank (CPB) and Hellenic Bank and to a lesser degree the expected deterioration in their domestic asset quality.

10.27am: As mentioned earlier, the Greek government has been thrown into disarray as to who should represent the crisis-hit country at the crucial two-day EU summit that begins in Brussels on Thursday.

Helena Smith in Athens writes:

Senior sources say the leaders of the coalition’s two junior partners – the Socialist Pasok and small Democratic Left – may well attend in addition to a four-strong team lead by the new foreign minister.

“It looks very likely that [Pasok leader] Evangelos Venizelos will attend as he will be anyway for a meeting of the European Socialist parties,” said one source. Venizelos, who was finance minister when the €130bn rescue package was agreed, has called renegotiation of the deal a “national priority” with Athens announcing a list of steps to soften the impact of accord over the weekend.

“These unexpected illnesses couldn’t come at a worse time. We need the strongest team possible to revise the memorandum,” said another government source.

The heat is already on. Leading EU figures, starting with the Germany finance minister Wolfgang Schäuble, have announced that Greece is way off –track in its reform program.

At the very least, Greek officials say they want to extend the timeframe in which the country is allowed to meet fiscal targets so that spending cuts and structural reforms can be relaxed. Athens wants another two years, taking the program through to 2016. EU partners are already saying the extension will be costly and likely amount to creditors being forced to cough up as much as €20bn in extra funds.

Postponement of an inspection tour by Troika monitors – until early July – exacerbated the sense in Athens today that economic recovery of the eurozone’s weakest link is off course and likely to remain so for some time yet. On the basis of their findings, Troika officials from the EU, ECB and IMF will decide whether Greece is deserving of its next injection of cash. Public coffers are set to dry up completely by mid-July.

More here.

10.23am: Our man in Madrid, Giles Tremlett, says about Spain’s formal request for banking aid:

Spain’s bland, formal letter requesting aid of up to €100bn for its banks fits perfectly in what seems to be a Spanish strategy of dragging the bailout process out as long as possible. Mariano Rajoy’s government refuses to even call this a bailout and may muddy the waters further by avoiding ever giving a definitive, overall sum of how much money it wants.

El Pais suggests today that it will dip into the €100bn credit line bit by bit, depending on the needs of individual banks – but figures for some of their needs will not be available until September.

Both the government and the Bank of Spain have repeatedly said that the money is not needed urgently. Spain still believes – or it did on Friday, according to finance minister Luis de Guindos – that it might be able to get the European rescue funds to give money directly to Spanish banks, without it counting as national debt.

By stretching the whole process out as long as possible, while avoiding detailed explanations of exactly what is needed and when, there is a chance that clear rules might eventually be introduced to allow this – or so Madrid seems to think.

Germany disagrees and the risk is that other eurogroup countries may become inreasingly frustrated with prime minister Mariano Rajoy, especially as his government publicly insists that it wants to clear the bank business up as soon as possible.

9.37am: More on the Spanish aid request. The country has requested aid of up to €100bn for its banks. Spain’s economy minister Luis de Guindos wrote in a letter to eurogroup chairman Jean-Claude Juncker that the final amount would be determined at a later stage, but should be enough to cover all banks’ needs plus an additional security buffer. An independent report put the cost of bailing out Spain’s banks at €62bn last week.

My colleague Jo Moulds has provided a speedy translation. Re the amount, de Guindos requested “an amount sufficient to cover the capital requirements, plus a margin of additional security, up to a maximum of €100bn”.

The Spanish authorities will offer all their support in evaluating the eligibility criteria, the definition of financial conditionality, the monitoring of the implementation of measures, and the definition of the contracts for financial aid, with the aim of finalising the memorandum of understanding before July 9, so it can be discussed at the next eurogroup.

9.34am: News in from Athens where our correspondent Helena Smith says although officials are putting on a brave face the inability of the prime minister and his finance minister to perform their duties is causing ructions. There is even speculation that newly appointed finance minister Vasillis Rapanos, who is still in hospital, may have to turn down the job.

Greek media are full of it this morning: the sudden illness of Antonis Samaras and his finance minister Vasillis Rapanos is “disharmonising” the government. There is mounting speculation that before he is even formally sworn in, the highly regarded Rapanos may be forced to turn down the job of finance minister because of frail health. “It will be decided in the coming days whether he will stay on in the role,” Flash radio announced.

The 65-year-old technocrat, the head of the National Bank of Greece, the country’s biggest lender until last week was rushed to hospital after suddenly collapsing on Friday. It is unsure when he will be released although doctors say it “could be tomorrow”. The Canadian-trained economist who has long battled health problems spent the weekend undergoing a battery of tests after complaining of acute abdominal pain and dizziness.

Noone is denying that the post of Greek finance minister is possibly the worst job on the continent of Europe. With the economy shrinking for a fifth straight year, with a record 1.2 million Greeks out of work and the easing of Greece’s latest EU-IMF sponsored bailout agreement now seen as vital if the debt-choked country is to get out of its economic death spiral, the workload, both at home and abroad, could not be greater.

9.28am: Lee McDarby of Investec looks ahead to the EU summit:

It looks like we are heading for another week focused very much on the eurozone. Germany’s chancellor Merkel, France’s president Hollande, Italy’s prime minister Monti and Spanish prime minister Rajoy met as planned in Rome on Friday. All sides appear to be converging towards the creation of some kind of growth package worth in the region of €130bn, or 1% of EU GDP. However it should be noted that so far there is no indication for now as to how this programme will be funded.

Hollande said that commonly issued Eurozone bonds will be needed but that it shouldn’t take 10 years to create these – a remark that seems to suggest progress on common issuance at the upcoming summit seems very unlikely. Overall, the Summit should move leaders a few steps further in the right direction but hopes of anything more are likely to be met with disappointment.

9.25am: Spain has formally requested European aid for its banks, Reuters is reporting – and it looks like it has asked for a blank cheque. The news agency quotes an economy ministry spokeswoman as saying that the country hasn’t asked for a specific number.

9.20am: Greek journalist Efthimia Efthimiou has just tweeted that Greece’s Socialist leader Evangelos Venizelos and Democratic left leader Fotis Kouvelis are due to meet this afternoon, perhaps to discuss whether to attend the EU summit at the end of the week.

8.47am: Billionaire investor George Soros has once again turned up the pressure on Germany, saying it needs to step up to the plate to save the eurozone. He has blamed Angela Merkel for the crisis in the past. More here, from my colleague Josephine Moulds.

8.25am: And @zerohedge tweets:

8.22am: Eusebio Garre, banking and capital markets professional in Frankfurt, tweets (@xgarre):

8.18am: This tweet from the ECB last night, congratulating the four winning teams who remain in Euro 2012, has raised some eyebrows:

8.11am: European stock markets have opened slighty lower, for a third day: The FTSE 100 index in London is down nearly 20 points, or 0.4%, at 5495. Germany’s Dax has lost 0.7%, France’s CAC has shed 0.6%, Spain’s Ibex is down 0.4% and Italy’s FTSE MiB has edged 0.2% lower.

On bond markets, the Spanish 10-year government yield is up 7 basis points at 6.423% while the Italian equivalent has climbed 4 bps to 5.856%.

8.01am: The Bank of England needs to pump at least another £50bn into Britain’s “stalled” economy, says MPC member David Miles. He warns in an interview with the Financial Times that only a “substantial” third round of QE will kickstart recovery. He sees the Bank’s new liquidity support for banks under the ECTR as a “complement” to QE rather than a substitute, rejecting the view that the MPC “has run out of effective levers”. He also explicitly rejects the argument that it is better to wait and see how effective the new liquidity and funding measures are before acting. Finally, Miles reckons the economy’s recent unexpected weakness can’t be attributed to the fiscal austerity measures, instead blaming commodity price increases and, more recently, elevated bank funding costs.

Chris Crowe and Blerina Uruci at Barclays Capital say:

Mr Miles has been one of the most consistently dovish members of the MPC, voting for additional easing at the June policy meeting along with three other members including Sir Mervyn King. His comments are therefore unsurprising. Nevertheless, they highlight the range of views on the MPC on the need for further easing, a question complicated by the growing range of policy tools available to policymakers given the potential for complimentarity and substitutability between the different measures.

7.56am: Looks like the GfK confidence number for Germany has been postponed until tomorrow.

7.51am: A light day for data, with new home sales from the US and GfK consumer confidence figures from Germany.

Gary Jenkins of Swordfish Research has sent us his morning musings:

So we commence yet another week that could determine the future of the eurozone with the big event being of course the summit that will take place on Thursday and Friday. However the most likely outcome is that the summit will end with the now normal comments about the unstinting determination to keep the eurozone together, some small moves towards putting a growth agenda and other various policies that are unlikely to make any significant difference in the medium term. To be fair it is difficult to agree any substantive measures when there is such a fundamental difference regarding the way forward.

At the heart of the matter is Germany’s refusal to contemplate mutualisation of debt without traditional sovereignty decisions being removed from member states and even this after some form of national referendums to enable any such move to have some legitimacy. If I was a German politician I guess that would be my approach too. Meanwhile the likes of Spain and Italy would prefer some form of joint borrowing to allow their own borrowing costs to be reduced and indeed ensure that they can borrow. The likelihood then is that the Eurozone will have to continue with its policy of “muddle through, and hope for the best.”

7.09am: Good morning and welcome back to our rolling coverage of the eurozone crisis and world economy.

Greece got knocked out of the Euro on Friday by Germany 4-2 in the quarter finals. England followed suit last night, yielding to Italy in a penalty shootout. That means Germany will face Italy on Thursday, while the night before the other two remaining teams Spain and Portugal battle it out for a place in the final.

The main event this week is the EU summit on Thursday and Friday. Today, Spain is expected to formally apply for its long awaited banking bailout. An independent report from consultants Oliver Wyman suggested lat week that Spanish banks only need €62bn – compared with the €100bn approved by the EU.

However, Michael Hewson, senior market analyst at CMC Markets UK, notes:

Given that economic activity in Spain remains muted, with rising unemployment and non- performing loans at a 20 year high, it seems likely that this so called adverse €62bn figure could well rise rapidly. In any case this lower than expected figure caused Spanish bond yields to slide back from their highest levels of the week but they still remain eye-wateringly high.

Furthermore uncertainty remains as to how the bailout will be applied and under what conditions, due to disagreements amongst EU leaders as to how the Spanish bank sector should be restructured.

Today’s meeting of ECB president Mario Draghi and French president François Hollande in Paris could turn out to be a short one, with the latter asking the central bank president to ease monetary policy and restart bond purchases under the Securities Markets Programme, while Draghi is likely to ask the French President to stop dragging his feet and work on a fiscal and banking union.

Turning to Greece, the troika of the IMF, ECB and EU were due in Athens today to assess how far Greece has fallen behind with its austerity proramme due to the elections. But their visit has been postponed after both the new prime minister Antonis Samaras and the finance minister Vassilis Rapanos were taken ill at the end of last week. Samaras is recovering from an emergency eye operation while Rapanos was rushed to hospital after fainting on his first day, hours before he was due to be sworn in.

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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 Guardian.co.ukThis article titled “IMF piles pressure on Germany to help struggling eurozone banks directly” was written by Julia Kollewe, for guardian.co.uk 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.

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Spain sells €2.2bn of bonds but at high cost, Eurozone surveys heighten fears of double dip recession, Eurozone finance ministers begin two-day meeting and Moody’s expected to downgrade U.K. banks…

Powered by Guardian.co.ukThis article titled “Eurozone crisis live: Moody’s expected to downgrade UK banks tonight” was written by Julia Kollewe, for guardian.co.uk on Thursday 21st June 2012 12.40 UTC

1.37pm: There is a growing expectation that Moody’s may downgrade its ratings on UK banks this evening. The Guardian’s banking correspondent Jill Treanor reports:

The market has been awaiting the news of a review by Moody’s ever since the agency first announced in February that it was looking at more than 100 financial institutions in Europe and a handful of US banks.

Back in February, Moody’s warned that Royal Bank of Scotland, 83% owned by the taxpayer, faced a one notch downgrade and Barclays and HSBC a downgrade of up to two notches. Lloyds Banking Group is also among those facing a downgrade.

A downgrade can raise the borrowing costs of banks (as they may be deemed slightly less likely to pay back any loans) and also require them to post collateral against existing positions. RBS, for instance, has already warned that a one notch downgrade by a ratings agency could cost it £12.5bn in having to post extra collateral to some creditors although analysts reckon that markets had been well prepared for any downgrades to the UK major banks.

The review took two formats. The one for investment banks – which covered Barclays, RBS and HSBC – looked at ” structural vulnerabilities in the business models of global investment banks, which include the confidence-sensitivity of customers and funding ounterparties, risk-management and governance challenges, as well as a high degree of interconnectedness and

There was also one for European banks
which looked at a number of areas including the “very difficult”
operating environment in Europe.

12.55pm: Greece’s new government wants to ask international lenders for an extra two years to meet its fiscal targets – with huge public pressure for a softening of the bailout terms.

Prime minister Antonis Samaras, leader of the conservative New Democracy party, is expected to unveil his cabinet today, but it is unlikely to include any big hitters from his leftwing allies – a sign of their reluctant support for the new government.

12.53pm: Moody’s is expected to downgrade its ratings on UK banks this evening, it appears.

Markets have been waiting for this move for a while, as the ratings agency goes round the world downgrading countries’ financial institutions in the wake of the current crisis.

Sky News is now reporting the downgrade will happen this evening. And just because it is expected, that does not mean it will have no effect, since it is likely to mean an increase in funding costs for the likes of Barclays, Royal Bank of Scotland etc.

12.21pm: What is the Federal Reserve and what does it do? – watch our animated guide.

The Fed could soon step in with a new round of actions to bolster the fragile American recovery as Europe’s woes continue to rattle the US economy. But how does the Fed regulate the world’s largest economy, and why are some people against it?

12.06pm: American economics professor Nouriel Roubini has tweeted this:

12.00pm: The Spanish government will hold a press conference at 4.30pm BST to present the results of the Spanish bank stress tests. Economy minister Fernando Jiménez Latorre and deputy governor of Banco de España, Fernando Restoy, will answer questions.

11.44am: Time for an early lunchtime round-up. Stock markets are still trading lower: the FTSE is down 34 points, or 0.6% at 5587; Germany’s Dax has lost nearly 0.4% at 6368; and France’s CAC is down more than 0.4% at 3113. Spain’s Ibex has is more or less flat at 6794 while Italy’s FTSE MiB has edged 0.25% higher to 13766.

Spain auctioned bonds worth €2.2bn, more than expected, but paid the highest interest rates in 15 years for five-year bonds.

On the open market, Spanish borrowing costs are falling, though. The yield on 10-year government bonds has dropped 23 basis points to 6.532%. The Italian yield is also down, to 5.718%.

The meeting of eurozone finance ministers in Brussels has got under way, with a press conference expected around 7pm London time.

Germany released disappointing manufacturing survey data this morning and eurozone business surveys pointed to a double dip recession, heightening expectations of an ECB interest rate cut and other action next month.

10.49am: My colleague David Gow has just tweeted this, ahead of the Germany-Greece game (Euro 2012 quarterfinal) tomorrow night:

10.10am: Nicholas Spiro of consultancy Spiro Sovereign Strategy, has sent us his thoughts on the Spanish bond auction.

1. While sentiment going into today’s auction was a tad more favourable, this is of little consequence to underlying concerns about Spain’s creditworthiness. The modest size of today’s sale helped domestic buyers absorb the supply. Spanish and Italian auctions are following a similar pattern: while demand is holding up, the concessions are becoming heftier and heftier. Indeed yields on Spain’s 3 and 5-year notes at today’s auction were at secondary market levels.

2. Spain’s decision to request external financial assistance for its banks was a game-changer. It has put the spotlight firmly on the sovereign and fanned concerns that a full-fledged bail-out will ensue. At the root of Spain’s woes is a vicious circle in which the severe problems of its savings banks, the weakness of its public finances and the sharpness of the economic downturn are all feeding on each other.

3. It’s very difficult to see how buying bonds on the secondary market could turn sentiment around. The scale of the purchases would need to be considerable to make a difference, and the effects would be short-lived. Buying on the primary market would prove more effective but would come with strings attached. The reality is that, without a clear path towards a fiscal and banking union across the eurozone, restoring confidence in Spanish debt will prove extremely difficult.

10.07am: Peter Chatwell, rate strategist at Crédit Agricole, told Reuters:

The auctions have all been well bid, particularly the 2014s [two-year bonds] which came through the market and was also very well covered. The rally over the past three days will have helped garner this strong bidding, seemingly with the market not wanting to be short given the pending talks regarding the EFSF/ESM.

10.04am: Demand was high at the Spanish bond sales, with bid-to-cover ratios rising on all three maturies from the last time each bond was sold. The Spanish Treasury sold €700m of two-year bonds, €918m of three-year bonds and €602m of five-year bonds, beating its €2bn target for the total amount auctioned.

9.59am: …and some instant reaction to that key bond auction in Madrid.

Nick Stamenkovic, rate strategist at RIA Capital Markets in Edinburgh, says:

Peripheral markets relieved that Spain managed to raise a tad above the upper end of the target. Demand was decent for all three auctions, probably driven by domestic investors, but yields significantly higher than previously, indicative of the rising risk premium demanded for purchasing Spanish government bonds. Against this backdrop short-dated yields should rally further near-term as shorts are covered amid rising hopes of policy action at next week’s key EU summit, steepening the yield curve.

9.51am: Spain has sold €2.2bn of bonds, more than it had targeted – but at a high cost. The average yield on the five-year bond has jumped to 6.072% against 4.96% at the last auction, reaching a 15-year high.

The yield on the three-year bonds rose to 5.547% from 4.876% at the previous auction, and the yield on the two-year bonds leapt to 4.706%, more than double that paid in 2.069%.

9.47am: It’s amazing what difference a little sunshine makes, says Alan Clarke at Scotia Bank, who has crunched the latest UK retail sales numbers.

Some decent news at last. Including auto fuel, sales rose by 1.4% m/m. Stripping that out, sales were up by 0.9% m/m.

Headline sales were always going to be supported by a bounce in auto fuel sales. However the strength was not all down to auto fuel. Clothing sales bounced by almost 3½%. April was a washout, so consumers’ appetite for spring fashion was dampened. By contrast, there were 60% more sunshine hours in May (and 10% more than the seasonal norm), and it was also a bit warmer, which helped to boost this component.

Food sales also did ok, probably for the same reason as there was opportunity for a bbq or two.

More generally, the trend in consumer spending should be improving as the burden from non-discretionary spending (i.e. food and energy) continues to ease, which makes more room for faster discretionary spending.

The trend in retail sales should therefore be upwards from here, helping to contribute to better news for growth as the year progresses.

9.37am: Meanwhile, in Britain shoppers turned out in force in May, splashing out on clothes and shoes as the weather improved (temporarily). Retail sales volumes bounced back 1.4%, although that was not enough to reverse April’s 2.4% fall.

9.28am: Here is some reaction to the PMI numbers, which painted a worrying picture of the eurozone economy.

Eurozone PMI signals double-dip recession, says Peter vanden Houte at ING.

All in all, today’s still dismal PMI figures show that even Germany is now starting to suffer on the back of the uncertainty created by the euro crisis and the clear deceleration of activity in the emerging economies. Our expectation of 0.4% contraction in second quarter GDP is starting to look conservative on the back of the latest figures.

It seems clear that no significant recovery can be expected as long as the future of the Eurozone remains in doubt. Therefore markets will be awaiting a strong commitment from European leaders at the summit next week to take the necessary steps to strengthen the monetary union in the coming years. Joint issuance of short term bonds, the establishment of a debt redemption fund and steps towards the creation of a banking union are likely to be on the agenda.

Since Treaty changes might be needed to implement some of these plans, which might take years, we expect more immediate action from the ECB after the summit. A 25 basis point rate cut for July now look all but sure, but additional liquidity injections (LTRO, liquidity access for the ESM) might also be contemplated if market tensions don’t subside after the summit.
The next few weeks will be crucial for the Eurozone. If anything, today’s figure can serve as a wake-up call for European leaders that decisive action is badly needed.

Stephan Rieke, economist at BHF Bank, reckons the ECB will spring into action next month:

This is not a surprise for the ECB or the market. The expectations were very negative before the publication of htese numbers and they are still quite negative. The ECB already pointed to heightened uncertainty and heightened downward risks to growth. I think they just wanted to wait with action until the whole package is prepared.

I’d expect the ECB to act in July at the latest. Which means on the one hand interest rate cuts, of course, combined with a package of measures that the eurozone finance minsters are preparing. I would expect more than just a rate cut. More non-conventional measures you might say.

Howard Archer, chief UK and European economist at IHS Global Insight, concurs:

The only remotely positive spin that can be put on the dismal eurozone purchasing managers surveys for June is that there was no further deepening in the overall rate of contraction in services and manufacturing activity. Hardly a cause for celebration!

The surveys reinforce pressure on the ECB to cut interest rates and we suspect a 25 basis point cut from 1% to 0.75% is very much on the cards for July. The lower price indices evident inthe PMI surveys add to the evidence that inflationary pressures are easing in the eurozone, giving the ECB ample scope to trim interest rates.

Dominique Barbet at BNP Paribas:

The picture is not changing, it is not improving, and the PMIs are still clearly in recession territory for the eurozone. For the time being, and if we cannot sort out the financial crisis especially with the summit at the end of this month, the eurozone is likely to remain in recession.

Peter Dixon at Commerzbank:

The ECB will do more, that will probably involve a rate cut, which is symbolic but is action. If the need arises they will come back into the market with more LTROs despite the fact it is something they said they were not considering.

9.24am: The eurozone private sector has taken another turn for the worse, according to the latest PMI business surveys. The composite PMI – made up of both manufacturing and services – was at 46 in June, unchanged from May – indicating further contraction. The 50 mark divides expansion from contraction. Services came in at 46.8 versus 46.7 in May, a tad better but still shrinking, while manufacturing was worse at 44.8 against May’s 45.1.

The manufacturing and composite PMI readings are the lowest since June 2009, which doesn’t bode well for the eurozone economies.

8.50am: Ilya Spivak, currency strategist at DailyFX, looks ahead to the eurozone finance ministers’ meeting, the Spanish bond auction and the publication of the Spanish bank stress tests:

Eurozone finance ministers begin a two-day meeting in Brussels. Coming on the heels of the G20 summit where EU policymakers faced heavy pressure from global leaders to step up crisis containment efforts, the sit-down may see the emergence of preliminary policy ideas. Concrete initiatives are likely to wait until the EU leaders’ summit next week, but traders will nonetheless pay close attention to sideline commentary for early clues.

Spain is also set to release the results of an audit meant to put a firm price tag on recapitalizing the country’s banking sector. A number above or uncomfortably close to €100bn – the upper limit of the bailout Madrid secured last week – is likely to rekindle sovereign risk jitters. The results of a bond auction offering 2014, 2015 and 2017 paper today will serve as an instant barometer of the fallout, with a pick-up in average yields and/or particularly weak bid-to-cover readings likely to compound pressure on risky assets.

8.43am: The French manufacturing PMI, by contrast, improved slightly, whilst showing further contraction. It came in at 45.3 for June compared with 44.6 in May, and was better than expected.

And the situation in the French service industries also improved, with the PMI rising to 47.3 from 45.1 in May – but remaining in negative territory.

8.39am: The euro has tumbled to a session low of $1.26573, following the weak German manufacturing figures.

8.30am: The PMIs are out – well on Twitter anyway. Terrible German manufacturing PMI of 44.7 in June versus 45.2 in May, the weakest since July 2009. Service industries are still expanding, but also weaker, with the PMI at 50.3, down from May’s 51.8.

The immediate reaction on Twitter was “horrid” and “yuck”.

8.16am: Brent crude has hit the lowest level in 18 months, tumbling to $92 a barrel, amid fears over world demand. China’s manufacturing sector continues to slow and the Fed’s latest measures dashed hopes for more aggressive steps to boost the world’s largest economy.

An unexpected rise in US crude inventories last week also hit Brent, which has slid 28% since reaching a peak above $128 a barrel in March.

China’s factories contracted for the eighth month in a row in June with export orders the weakest since early 2009, according to the HSBC flash Purchasing Managers Index, the earliest monthly indicator of China’s industrial activity.

“Obviously any indication that the Chinese economy is slowing more than expected will put further pressure on oil prices, and commodities,” said Michael Creed, an economist at National Australia Bank.

8.08am: European stock markets have opened lower, as expected. The FTSE 100 index in London is off 0.4%, or 23 odd points, at 5598. Germany’s Dax has started the day 0.5% lower while France’s CAC has shed 0.4%, Spain’s Ibex has tumbled 1% and Italy’s FTSE MiB has lost 0.6%.

Investors are cashing on on a four-day rally after the Fed stopped short of announcing a new round of quantitative easing and China released more weak economic figures.

On bond markets, the Spanish ten-year yield has edged down to 6.755%, below the 7% danger mark, while the Italian equivalent is at 5.76%.

7.45am: Here is today’s agenda. Spain is in the spotlight again: it will attempt to sell €2bn of two-, three- and five-year bonds around 10am. The expectation is that it will get it all away, but at high yields.

Two independent reports on the country’s banking system are expected a few hours later, whereupon Mariano Rajoy’s government will make a formal request for bank aid. How much of the offered €100bn will be needed? Some numbers that are being bandied around are in the region of €70bn. Certainly the IMF’s estimate of €37bn three weeks ago looks to be wide off the mark.

• Revised June manufacturing and services PMIs for Germany, France and eurozone
• Finland votes on ESM at 8am
• Spain holds €2bn bond auction around 10am
• Spanish bank stress tests
• Eurogroup press conference at 7pm
• Greek cabinet to be unveiled

All times BST

7.35am: Well, this promises to be an interesting day. Welcome back to our rolling coverage of the eurozone debt crisis and world economy.

Greece has a new Conservative-led government under Antonis Samaras, but the US Federal Reserve’s extension of Operation Twist last night seems to have fallen flat… To sum it up: Fed twists again, but no QE3 yet.

Andrew Taylor, market strategist at GFT, says:

The Fed delivered what the majority of the market had priced in but seems now that it is here markets seem unsure of how it was supposed to help.

Traders who enjoyed a rally on the hopes of Operation Twist are only now calculating that its affects are minimal if anything at all. This programme was definitely not pulled out of the Fed’s ‘stimulatory’ toolbox, in fact, it should have been in a box on the wall that says ‘break glass if you are out of solutions’.

Spanish bond yields fell sharply yesterday in the wake of speculation that Europe’s leaders were thinking about allowing bailout funds to buy bonds directly, even though German chancellor Angela Merkel poured cold water on the idea saying it was “purely theoretical”.

Michael Hewson, senior market analyst at CMC Markets UK, says:

The idea will certainly be on the agenda at the start of today’s two day EU finance ministers meeting, but it is a long way from being a work in progress, simply because the new ESM doesn’t even exist yet.

Markets are eagerly awaiting a Spanish bond auction of €2bn of two-, three- and five-year bonds later this morning, as well as two reports on Spanish banks that should shed light on how much of the mooted €100bn bailout will be needed to recapitalise the sector. The €37bn figure suggested by the IMF earlier this month certainly looks much too low.

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The Bank of England will make use of an emergency liquidity tool and will work with the Treasury to provide cheap long-term funding for banks to spur lending. Spanish and Italian borrowing costs pull back as the market eyes Greek election…


Powered by Guardian.co.ukThis article titled “Eurozone crisis live: Bank of England unveils £100bn to fight eurozone threat” was written by Julia Kollewe, for guardian.co.uk on Friday 15th June 2012 12.26 UTC

1.24pm: Cash-strapped Spaniards are ditching their mobile phones: Spanish mobile phone operators lost a record number of customers in April, led by an exodus from Telefonica and Vodafone, as they stopped cut-price deals for smartphones for cash-strapped consumers.

Spain’s telecoms watchdog said around 380,000 customers ditched their mobile phones, the third monthly decline in the austerity-crippled country where one in four is out of work. The prepay sector alone lost 297,984 customers.

1.02pm: German president Joachim Gauck said just now that Germany had no interest in splitting up the eurozone into stronger and weaker members – a two-speed Europe.

Speaking at a press conference in Rome with Italian president Giorgio Napolitano, he said a core group of stronger states was “the worst scenario” that could emerge from the current crisis.

I have never heard members of the federal [German] government discuss a two-speed Europe.

12.53pm: An amusing tweet from Barnaby Phillips, correspondent for Al Jazeera English.

12.46pm: David Cameron will hold a video conference call on Friday afternoon with European leaders attending the G20 summit in Mexico next week in a bid to forge a common position on the eurozone crisis.

The leaders will consider any emergency measures that may need to be taken when the markets open on Monday in the wake of the Greek elections on Sunday. More here.

12.05am: Here is our lunchtime round-up:

• European stock markets are up amid hopes that the major central banks are prepared to take concerted action next week to head off Armageddon – last night Reuters quoted a G20 source saying that the central banks of major economies stood ready to provide extra liquidity if needed.

The FTSE is 33 points ahead, or 0.6%, at 5500, led by banking stocks. Germany’s Dax has gained 1.1% to 6206, while France’s CAC has added 1.7%, to 3083. Spain’s Ibex is up 1.1% at 6768 and Italy’s FTSE MiB has leapt 2.27% to 13379.

• Spanish and Italian bond yields fall back: The Spanish ten-year bond has dropped to 6.9% while its Italian equivalent has fallen below 6%, to 5.99%.

• The Bank of England’s emergency package has been cautiously welcomed by the City

Harvard professor Niall Ferguson warns that a ‘Lehman moment could be close’

11.56am: Harvard professor Niall Ferguson told Bloomberg TV this morning that a Lehman moment could be close, with Greek elections on Sunday expected to determine the country’s fate in the eurozone. He talked of a 21st century Cuban missile crisis.

“If there’s going to be a Lehman moment in the crisis it’s going to be next week,” he explained, saying that the back-and-forth between Athens and Berlin is “a game of chicken” that will not be resolved until the power structure in Greece has been decided.

Another frightening analogy:

It’s not clear who’s going to blink at this point. My guess is that, in the end, there will be a bit of blinking on both sides. This is the financial equivalent of the Cuban Missile Crisis. And the missile is really a bank run, which ultimately even the Germans can’t be completely immune to. Not that there will ever be a run on German banks, but the effects of a bank run right across Southern Europe are going to be felt by the economy. German policymakers know that; they’re just having to say one thing to their own voters and another thing privately to other European leaders.

11.39am: A UBS note published today says the eurozone will continue to be a “rolling crisis” but a euro breakup is unlikely. Under a worst case scenario the FTSE 100 index could fall back to 3,500, from 5495 now.

Eurozone crisis: scenario analysis
Today, our global economics team has looked into the impact of an uglier default and exit scenario. Model simulations suggest a reduction in the level of Eurozone GDP by 4.8ppts after one year and UK GDP 2ppts lower than current estimates. Those same simulations suggest a Greek exit would produce a global recession, though not quite as deep as that of 2008 – 2009.

The ‘rolling crisis’ continues
We continue to see the Eurozone as a ‘rolling crisis’: we come to a crisis point and then there is policy response to bring us back from the brink. Our analysis shows that it is the policy response that allows markets to re-rate. We remain of the view that a Euro break-up is unlikely, given our economists’ work suggesting the cost is too large for both those leaving and those remaining.

A ‘black sky’ scenario could see the FTSE 100 back at 3,500
We continue to target the FTSE 100 at 5,800 by year-end, but under a ‘black sky’ break-up scenario the index could fall back to 3,500. This scenario is based on earnings down 20% (base case +7%) in 2013 derived from our economists’ new negative scenarios on a distressed P/E multiple of 8.5x (base case 10.5x).

11.28am: More reaction to the UK’s emergency package from two think tanks. The Institute of Directors doubts it will stimulate more business lending. The Centre for Economics and Business Research tends to agree but adds that it should help boost mortgage lending.

Graeme Leach, chief economist at the IoD, said:

Facing a bombardment from the eurozone the chancellor and governor are calling up the reserves. Defensive measures need to be put in place and they’re making sure everyone knows they’ve done it. The extended liquidity and funding for lending schemes are welcome, but limited.

The liquidity scheme will need to be massively expanded if break-up and contagion spread across the euro zone. The ‘funding for lending’ scheme helps the supply of money and the demand for it, by lowering the cost of borrowing. But the core problem remains. Companies alarmed by the euro crisis will not be eager to borrow regardless of the cost.

However, CEBR chief executive Douglas McWilliams said:

The governor of the Bank of England made the more important speech last night. Normally the chancellor takes the headlines. But his announcement that he is going to implement a watered down version of the Vickers report to regulate banks was hardly sexy. And it is not clear that a new framework which will cut bank lending and add to the costs of banking for each household by up to £250 a year is exactly what is required as the economy slithers into crisis.

So the governor indicated that up to £140bn of what is effectively another form of QE more closely targeted at bank lending would be made available.

The Treasury have indicated that they think that the scheme will be a success if it leads to an additional £80bn of lending. Although the BBC was full of siren voices this morning predicting failure, I am not so sure.

I doubt if the mechanism will have more than a marginal impact on most forms of corporate lending. But it might have an effect in two areas: commercial property and home mortgages.

The UK still has a lively commercial property market despite the state of the economy and this additional access to money looks to be highly suitable to provide additional finance for the sector.

And by making mortgage lending more easily available, it will be possible for lenders to edge up loan to value ratios which could slash the deposits required from first time buyers by as much as a quarter.

11.20am: Following news that French supermarket giant Carrefour is pulling out of Greece, Italian carmaker Fiat said it was cutting its investment in new products because of the eurozone crisis.

The company has reduced its capital expenditure target by half a billion euros to €7bn. A spokesman said:

There are no programme cancellations, just a slowdown in development. That’s obviously due to the European car market is which continuing to slip.

10.44am: Merkel also took a swipe at the new French president François Holland’s pro-growth policies, saying Europe needs to discuss the widening economic divergence between France and Germany.

She told a meeting of German entrepreneurs:

Europe must discuss the growing differences in economic strength between France and Germany.

10.35am: Angela Merkel is speaking again. Echoing comments she made yesterday in a speech to the German parliament, she is once again drumming home the message that Germany can’t do much more in this crisis – despite huge pressure on Europe’s largest economy to ease its austerity drive in Europe and get its cheque book out. “Germany’s strength is not infinite,” she says. She also reiterated her opposition to quick fixes such as euro bonds.

10.13am: Turning to the ECB, its president Mario Draghi talked about “serious” risks to the eurozone this morning and said the eurosystem of eurozone central banks would “continue to supply liquidity to solvent banks where needed”. There are no inflation risks, he said, leaving the door open to further interest rate cuts. The bank left its main interest rate at 1% last week but expectations of more rate cuts have grown.

However, he also noted that the ECB had supported banks with €1 trillion in emergency credit, saying that now “political choices have become predominant over monetary policy instruments that we can use in the near future”.

Draghi told the annual ECB Watchers conference in Frankfurt:

There are serious downside risks here. This risk has to do mostly with the heightened uncertainty.

The ECB has the crucial role of providing liquidity to sound bank counterparties in return for adequate collateral. This is what we have done throughout the crisis, faithful to our mandate of maintaining price stability over the medium term – and this is what we will continue to do.

ECB policymaker Ewald Nowotny said the bank has the ability to lower interest rates if the eurozone economy continues to worsen, and could even slash the rate that controls money market rates to zero.

And ECB policymaker Peter Praet said eurozone countries need to surrender some of their sovereignty if the euro is to survive, adding that the central bank can only provide temporary crisis relief and that governments must tackle the underlying problems.

Further steps will need to be taken in order to supplement the single monetary policy with a more integrated framework for bank supervision, resolution and deposit insurance.

If we are to achieve this, euro area countries will inevitably need to surrender more national sovereignty.

10.03am: Throwing money at the banks won’t solve the economic crisis, says shadow chancellor Ed Balls – agreeing with our readers. The Guardian’s political editor Patrick Wintour reports:

The shadow chancellor said the Bank of England’s thinking still seemed to be driven by Montagu Norman, the governor who led it through the depression of the 1930s.

He said the measures announced on Thursday night at the Mansion House in London by the chancellor, George Osborne, and the bank’s governor, Mervyn King, should have been implemented two years ago and would not work if businesses were not investing.

9.54am: And Howard Archer, chief UK and European economist at IHS Global Insight, says the weak trade data heighten the risk of another GDP contraction in the second quarter.

The April trade data are very disappointing, increasing the risk that net trade will again be negative in the second quarter and that the economy will suffer further contraction, especially as it is handicapped by the extra day’s public holiday that resulted from the Queen’s Diamond Jubilee celebrations.

9.51am: Vicky Redwood, chief UK economist at Capital Economics, says the poor UK trade and construction figures out this morning will dampen any positive mood following last night’s policy announcements.

The deficit with the EU increased, but the main deterioration was actually outside the EU. The driver was a plunge in exports – exported goods volumes to all areas fell by 7.7% m/m. The near-term outlook doesn’t look much better, either. Survey measures of export orders have fallen recently, with the CIPS measure now well below the 50 mark. Meanwhile, construction output dropped by 13% m/m in April (although the figures are not seasonally adjusted).

Overall, even if the measures announced last night succeed in easing strains in the banking sector, it is clear that rising bank funding costs are just one constraint on the economic recovery. With the eurozone economy still weakening, the trade figures are only likely to get worse.

9.47am: The latest UK trade figures are out. My colleague Josephine Moulds reports:

A drop in sales of chemicals and cars to non-EU countries left Britain’s goods trade gap wider than expected in April, cementing concerns that exporters face a tough year ahead.

The Office for National Statistics said the UK’s goods trade deficit widened to £10.1bn, compared with forecasts of a gap of £8.5bn and a deficit of £8.7bn in March. Exports to non-EU countries dropped 10.3%, while imports from those countries slipped back by just 1.9%. Exports to EU countries also dropped 6.8%, while imports fell 3%.

9.31am: Right, here is a round-up of readers’ comments on the UK’s latest emergency package. Needless to say most of them are sceptical…

josephinireland says:

What was announced at the Mansion House last night can be summed up in four words:

“It helps the banks.”

One thing is for sure though. If Mr King is this worried, he must know just how bad it really is in Euroland. So much gets hidden from us by TPTB and disables us from making good decisions to protect ourselves.

I’ve already moved half my savings to £. The other half is going to CHF as soon as I’ve opened the account today.

Anyone out there holding Euros, I suggest you move em. This is a red flag.

neilwilson adds:

The Bank will lend the money at a minimum of Bank rate, which is currently 0.5%, plus an additional 25 basis points. Which is exactly the same as the uncollateralised overnight facility that all clearing banks have anyway, and the interest rate has no prospect of going anywhere any time soon.

So again it is based on the belief that jiggling longer term rates will have some actual effect in the economy.

The Extended time period facility is only available to those banks hooked up to the Discount Window. Does anybody know if that is a wider set of banks and building societies than the Operational Standing Facility?

spiceof says:

So the Bank of England lends further monies to the private banking sector hoping that some of that cash might be lent out to the business sector. We’ve been here before, all smoke and mirrors, just another way of keeping the banks going.

Hyperzeitgeist adds:

This is just the beginning of the ‘endgame’. When all else has failed the central bankers and their political masters know no other solution than to print money. In a purely fiat based system the only outcome will be to carry on printing until that currency is worthless.

ayupmeduck2 has this:

The banks will find a way of using this 100 billion to simply rotate their portfolio. It will go something like this:

1. Give the BoE the most dodgy collateral you have, and swap it for that new solid cash.

2. As any refinancing etc. comes up assign the most dodgy loans to be part of this new scheme and therefore make the taxpayer liable for any losses while calling it “new lending”, thus if it goes well the bank can take the profit, if it goes bad then it will be the taxpayers problem.

If any of this seems too blatant, then I’m sure there is somebody at Goldmann Sachs that oil the wheels. They will create some sort of “product” that makes the whole process opaque.

This Extended Collateral Term Repo Facility, which is just like the EU LTRO, will become just another back door bank bailout program.

speedyp says:

What a fantastic idea. Give tons of money to your banker chums if they promise to share it out. Like they did last time…

Real out of the box thinking. As Rebekah said “we’re all in this together”.

Try dishing out 5 billion a week to the people who actually do all the living, working & dying in this country if you want to improve things.

And Slidewinder says:

Here’s to super-inflation in 2013!

9.18am: French supermarket chain Carrefour is pulling out of Greece ahead of Sunday’s elections. It said today it would sell its stake in a Greek joint venture to its partner there, Marinopoulos, taking a €220m hit. Who else will join the exodus from Greece?

9.16am: George Osborne was listening attentively to Sir Mervyn King last night, who said:

The black cloud has dampened animal spirits so that businesses and households are battening down the hatches to prepare for the storms.

9.04am: The Bank England’s new “funding for lending” programme is badly needed. Data from the Bank show that loans to non-financial companies – the backbone of the economy – have fallen by about £90bn, or 20%, since the peak in October 2008, as the Financial Times reported.

8.53am: Encouragingly, Spanish and Italian bond yields have fallen back this morning. Spanish ten-year yields, which breached 7% yesterday, are down 10 basis points at 6.85% in early trading while the Italian equivalent is just a shade over 6%, also down 10 bps.

European shares have moved higher, with Spain’s Ibex and Italy’s FTSE MiB now both up 1.3%. The FTSE has climbed 0.6%, Germany’s Dax is 0.8% ahead and France’s CAC 0.9%. Banking stocks were the main gainers on the FTSE, led by Royal Bank of Scotland, Lloyds Banking Group and Barclays.

The mood is being helped by persistent talk of further monetary stimulus from the Fed and the ECB if there is a market meltdown following the Greek elections on Sunday. The Fed meets next Tuesday and Wednesday. Recent US figures have been weak, raising expectations of more quantitative easing. Industrial production data are out at 1.30pm today.

8.47am: Citi economist Michael Saunders notes that Sir Mervyn King last night abruptly shifted the Bank of England’s stance on the economy and policy outlook. Saunders reckons that the emergency measures as they are won’t be enough to tackle the growing crisis.

First, he acknowledged that the economy has underperformed and is likely to stay weak: “Instead of a gradual recovery, output has been broadly flat…Since our Inflation Report only four weeks ago, conditions have deteriorated with weakening business surveys, a downward revision to measured output, and further slowing in economies overseas.”

King stressed in particular the widespread adverse effects of the EMU crisis on the UK economy, hitting exports, raising bank funding costs and creating a general mood of caution that encourages firms and households to delay spending. The governor reiterated (a point he has made before) that the EMU crisis will not end until its underlying causes – deep economic problems in periphery countries and widespread weakness in euro area banks – are resolved: “Until losses are recognised, and reflected in balance sheets, the current problems will drag on. An honest recognition of those losses would require a major recapitalisation of the European banking system.”

Second, King made no mention of the inflation worries shared by some MPC members, moving straight from the weaker economic outlook to the case for extra stimulus – extra monetary stimulus plus measures to encourage bank lending. He stressed that both are needed.

In our view, these measures may not immediately be enough to fully insulate the UK economy from the EMU crisis, as well as to overcome the domestic drags from high household debt and tight fiscal policy. But more can be done: QE and the “funding for lending” scheme can be expanded markedly further, while the BoE also can cut Bank Rate. Moreover, if the EMU crisis remains severe or intensifies, temporary fiscal stimulus via tax cuts or extra public investment is likely later this year to negate the existing heavy restraint planned for 2013 and 2014. The authorities have options for stimulus, and these are now being mobilised.

8.45am: Manchester Business School’s banking expert Ismail Erturk is less enamoured with the new “funding for lending” scheme – describing it as “aimless fire power”.

The chancellor claims that the fire power of £80bn will protect the UK economy from the effects of the euro crisis. What UK needs is not some macho talk on fire power of monetary policy. The Bank of England has been doing this since 2008 and there is no evidence that it is working. Instead we are creating a new zombie institution Bank of England with unpredictable risky consequences. What the UK needs is an intelligent comprehensive policy to reform banking and to allocate capital to the right industries that can generate growth and employment. Aimless fire power will not work.

8.35am: Alan Clarke at Scotia Bank also likes the Bank’s new measures which he describes as “thinking outside the box”. Will it work?

On the plus side, it is timely. This comes at a crucial time ahead of the weekend elections in Greece. The Bank has hinted that it has contingency plans in the event of disaster, but has now started to flex its muscles and show that it means business. The tweaking in the FPC mandate is welcome. Not only will that committee be charged with taking away the punchbowl just as the party is getting going, it will also be on hand to provide pitchers of red bull and vodka if the revellers are failing to embrace the party animal spirit. The UK has had much higher Libor rates than elsewhere and the early market reaction has been to reverse that.

However, he identified a number of potential weaknesses in the plan.

1.) Incentive structure: “sustaining or expanding” loans. More specifically, the Bank will provide funding to banks “at rates below current market rates and linked to the performance of banks in sustaining or expanding their lending to the non-financial sector…”
Past schemes have been conditional on banks increasing their loan books, but we have hardly seen a dramatic rebound in lending. We need to hope that the incentive structure is better designed in this scheme to put less emphasis on the “sustaining” and more on the “expanding” loans.

2.) Targeting the flow rather than the stock of loans. The scheme appears to want to encourage the provision of new loans at more competitive rates of interest rather than alleviate the burden on existing borrowers. While it is admirable to want to help first time buyers and new loans to businesses, this is a much smaller group than were the Bank to explicitly target reducing costs of existing loans. Targeting new loans:
a.) Relies on there being sufficient appetite for new loans. Demand may be held back by risk aversion given the sluggish outlook for growth and storms in Europe, lack of deposit for a new home etc.
b.) An implicit assumption that the boost from new loans will work its way through the system and help kick start hiring and investment and wider domestic demand further down the road.

Our point is, it is a little indirect. Our preference has been to reduce the gap between the average mortgage rate paid by existing borrowers relative to Bank rate. To do so would immediately give a boost to household real disposable income growth, which would boost consumer spending which represents 2/3 of GDP by expenditure. It affects a much larger group of people and behaves like an old-fashioned interest rate cut. At the moment, the gap is far too wide and about to widen, with several banks announcing mortgage rate hikes.

He concludes:

Our hope is that it doesn’t repeat the Eurozone style announcement where initial euphoria is very quickly wiped out. In stark contrast to continental Europe, the UK government and central bank are acting in unison. Hence despite continued undertones of reluctance on Mervyn Kings’ part, there must be a greater chance that this scheme succeeds where others have failed.

8.21am: The immediate reaction from City economists to the Bank of England’s emergency package is positive. Malcolm Barr at JPMorgan Chase says the measures are “unambiguously positive” for the outlook:

The credit easing part of the above is the most significant, and newspapers cite aides to Osborne as speaking of measures that could boost lending to the private sector by £80bn (5.2% of GDP). That gives some sense of the potential size of the scheme, by way of comparison the ECB’s 3 year LTROs extended term lending worth near 10.7% of regional GDP. There is obviously significant detail still to be forthcoming.

Recent UK experience of attempting to set measurable targets for bank lending in return for forms of support for banks has not been a happy one. However, the initial scale of the scheme is significant, and it differs from the Osborne’s SME credit easing scheme by appearing that it will be funded by reserve creation and involve loans to the banks rather than providing a guarantee on bank issued debt.

Having expressed our concerns that the marginal impact of QE was fading, we regard these steps as unambiguously positive for the outlook, even as we are disappointed (thought not surprised) that the Chancellor continues to show little flexibility on the issue of infrastructure spending initially funded directly and undertaken by the state.

8.17am: European stock markets have opened higher. The FTSE 100 index in London has climbed 35 points, or 0.65%, to 5502, while Germany’s Dax is up 32 points, or 0.5%, to 6171 and France’s CAC has gained 16 points, or 0.5%, to 3048. Spain’s Ibex added 0.7% and Italy’s FTSE MiB was up 0.6%.

8.12am: The Bank of England hints that the new ECTR auctions – which are similar to the ECB’s LTROs – are aimed to protect British banks from the storm raging on the continent.

The ECTR Facility enables the Bank to ensure that the banking sector has sufficient access to sterling liquidity to mitigate risks arising from unexpected shocks.

8.05am: The Bank of England has announced that the first Extended Collateral Term Repo Facility auction will be next Wednesday and it will hold at least one such auction a month until further notice. The auctions are part of a new emergency package of measures to get more credit flowing through the UK economy as the eurozone crisis deepens.

At each auction, it will offer at least £5bn of cheap credit (six-month loans against collateral) to banks. The size will be announced on the day before the auction. The Bank will lend the money at a minium of Bank rate, which is currently 0.5%, plus an additional 25 basis points.

7.30am: Good morning and welcome back to our rolling coverage of the eurozone debt crisis and world economy. The weekend elections in Greece will continue to weigh on markets today, while Spain’s woes continue to worse, with its borrowing costs rising through 7% on the 10-year measure yesterday. They were at 6.9% this morning.

The Mansion House speeches in the City are usually a fairly boring affair. Not so last night. Bank of England governor Sir Mervyn King and chancellor George Osborne unveiled two new initiatives to help banks and boost business lending. The emergency measures are an indication of how worried they are about the economic situation. Osborne warned that the “debt storm” on the continent had left the UK and the rest of Europe facing their worst peacetime economic crisis.

The Bank of England will start pumping up to £100bn of cheap credit into the UK economy – at least £5bn a month – within the next few days. This is on top of its £325bn quantitative easing (QE) programme. The schedule for the Extended Collateral Term Repo Facility auctions – which are reminiscent of the ECB’s LTROs – will be set out at 8am. And under a new “funding for lending” scheme, worth up to £80bn, the Bank will provide cheap loans to banks for several years, at below market rates, in exchange for the banks lending the money to households and small and medium-sized businesses.

King also dropped a heavy hint that more QE could be on its way: “The case for further monetary easing is growing.” He rejected the suggestion, from monetary policy committee member Adam Posen earlier this week, that the Bank should move away from gilt purchases towards private sector assets. His argument is that the Bank does not have a mandate to put taxpayers’ money at risk by making outright purchases of risky assets.

Simon Hayes at Barclays Capital said:

It is clear from governor King’s speech that he has become more gravely concerned about the economic outlook, even over just the past few weeks. Heightened uncertainty about the euro area is increasingly infecting the UK outlook through tighter credit conditions and low confidence among businesses and households. Not only has this prompted the new announcements on banking sector support, but it also implies a much increased likelihood that the MPC will sanction more QE.

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Spanish borrowing costs surge through the 7% “breaking point”, Italy’s costs rise to the highest since December, and U.S. economic data disappoints again just days ahead of the FOMC meeting on June 19-20…

Powered by Guardian.co.ukThis article titled “Eurozone crisis live: Spanish borrowing costs hit record high” was written by Julia Kollewe, for guardian.co.uk on Thursday 14th June 2012 13.06 UTC

2.04pm: Official US figures have painted a picture of a sluggish economy: inflation eased in May while new claims for unemployment benefits unexpectedly rose last week. Consumer prices dropped by 0.3% last month – the sharpest decline since December 2008 – as households paid less for petrol, taking the annual rate down to 1.7%.

2.00pm: Some technical issues forced us to abandon the old blog and start a new one. Hence the radio silence. We’re back in business now.

In the meantime, Spain’s economy minister Luis de Guindos said the government would take further action to reduce his country’s debt risk premium that is seen as unsustainable.

As Spanish ten-year borrowing costs surged through 7%, the spread between Spanish bonds and benchmark German bunds hit a fresh euro era record of more than 550 basis points.

Guindos told reporters in the corridors of parliament:

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.

1.06pm: More on Spain. There is talk of an emergency cabinet meeting to discuss the crisis, which is not really surprising given the Moody’s downgrade and the rise in the country’s bond yields.

But it all adds to the sense of stumbling from one crisis to the next without a clear plan …

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