Slovenia

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

 


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

5.45pm BST

Closing summary

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

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

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

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

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

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

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

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

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

5.30pm BST

Lagarde: world looks a little less dangerous

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

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

Speaking in New York right now, Lagarde said:

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

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

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

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

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

5.20pm BST

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

5.13pm BST

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

Here's the closing prices:

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

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

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

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

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

4.41pm BST

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

Dow Jones Newswires has the details:

4.22pm BST

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

4.20pm BST

Cyprus’s bailout forecasts paint a grim picture

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

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

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

Here's the projections for GDP:

2013: – 8.7%

2014: -3.9%

2014: +1.1%

And for budget deficits:

2013: 6.0%

2014: 7.9%

2015: 5.7%

2016: 2.15%

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

4.12pm BST

Cyprus to sell gold reserves

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

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

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

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

More to follow

Updated at 4.46pm BST

4.00pm BST

Capital Economics: eurozone crisis wil flare up again this year

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

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

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

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

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

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

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

3.42pm BST

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

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

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

Reuters also reckons George is the one:

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

Updated at 3.44pm BST

3.19pm BST

S&P 500 hits another record high

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

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

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

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

Financial markets, April 10th 2013
Photograph: Thomson Reuters

2.44pm BST

Federal Reserve launches leak inquiry

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

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

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

The mistake has caused much excitement in the markets…

2.34pm BST

Fed minutes: early reaction

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

Chris Beauchamp of IG Index:

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

Updated at 2.34pm BST

2.17pm BST

Fed: one committee member wants QE slowed now

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

Here's the key quote:

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

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

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

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

2.06pm BST

See the Fed minutes

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

2.00pm BST

Fed to release minutes early

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

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

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

Updated at 3.27pm BST

1.51pm BST

Eurogroup briefing underway….

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

The FT's Peter Spiegel is tweeting the highlights:

1.40pm BST

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

* – not in Cyprus, of course….

1.24pm BST

Germany: Cyprus’s MOU is finalised

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

Reuters has the details:

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

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

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

Urpilainen told reporters:

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

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

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

1.08pm BST

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

1.00pm BST

Those other imbalanced countries in full…

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

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

Belgium:

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

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

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

Bulgaria

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

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

Denmark

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

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

Italy

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

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

Hungary

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

Malta

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

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

The Netherlands

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

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

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

Finland

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

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

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

Sweden

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

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

The UK

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

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

Updated at 1.09pm BST

12.44pm BST

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

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

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

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

12.28pm BST

EC warns France over pace of reforms

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

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

The report says:

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

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

12.17pm BST

EC warns Spain and Slovenia are too imbalanced

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

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

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

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

You can download the full report here.

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

I'll pop a list up…

Updated at 12.20pm BST

12.05pm BST

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

12.03pm BST

Hollande sticks to budget plans

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

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

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

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

(quote via Reuters)

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

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

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

10.57am BST

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

Updated at 10.57am BST

10.22am BST

Juncker warns eurozone recession will continue

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

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

Bloomberg has the details:

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

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

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

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

9.31am BST

Rajoy in the Spanish parliament

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

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

9.20am BST

Italian industrial output also falls

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

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

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

Updated at 9.22am BST

9.12am BST

Rajoy appeals for Europe to help

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

Mariano Rajoy told MPs that:

We must prevent Europe falling behind.

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

El Pais has more details here (in Spanish).

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

Hopefully have the full details soon…

Updated at 9.16am BST

8.43am BST

Spanish industrial production dives again

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

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

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

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

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

Spanish industrial production, February 2013
Photograph: Thomson Reuters

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

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

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

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

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

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

Updated at 8.53am BST

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USA 

Slovenia’s PM gives a press conference, insisting that her country is “strong and stable”, urging people to look at the “facts”. Risk of “severe banking crisis” in Slovenia, says OECD. Why the OECD is worried. German imports and exports fall in February…

 


Powered by Guardian.co.ukThis article titled “Eurozone crisis: Slovenia rejects bailout talk as Soros urges Germany to accept eurobonds – as it happened” was written by Graeme Wearden, for theguardian.com on Tuesday 9th April 2013 18.40 UTC

8.00pm BST

Closing summary

European Commission Chairman Jose Manuel Barroso (R) and Slovenian Prime Minister Alenka Bratusek (L) give a press conference on April 9, 2013 after their working session at EU headquarters in Brussels.
Slovenian Prime Minister Alenka Bratusek (left) with European Commission Chairman Jose Manuel Barroso today. Photograph: GEORGES GOBET/AFP/Getty Images

That's all for today, folks.

Here's a closing summary:

Slovenia's prime minister has denied that she will be forced to seek a bailout.

Alenka Bratusek said that fixing the Slovenian banking sector was her government's top priority, and could be achieved without international help.

She was supported by EC president José Manuel Barroso, who was adamant that Slovenia should not be compared to Cyprus. (see 2.58pm onwards for highlights of their press conference)

But the OECD has warned that Slovenia is on the brink of a serious banking crisis. It wants Bratusek to push on with recapitalising struggling banks and makes wide-ranging reforms (see 12.09pm for details and the report itself).

Slovenia also accepted higher borrowing costs at an bond auction today (results here)

George Soros, the billionaire investor and philanthropist, has given a speech in Frankfurt arguing that Germany should drop its opposition to eurobonds. If it cannot accept collective debt, it should leave the euro, he argued (see 5.25pm).

In Cyprus, officials warns that time is running out to get its bailout finalised (see here)

On the economic front… German exports and imports both fell in February (see here), and Britain's trade gap widened again…. (see here).

Let's do it all again tomorrow. Goodnight!

Updated at 8.04pm BST

7.13pm BST

Interesting piece by Jeremy Warner of the Daily Telegraph tonight: he's suggesting that Angela Merkel could actually make a dramatic conversion in favour of collective debt if she wins this autumn's general election.

The column doesn't actually appear to be linked to Soros's speech tonight (see 5.25pm), as it happens. But it's timely, and a good read – arguing that the German chancellor must consider the issue:

Let's just briefly consider what will in fact have to happen if Merkel is to save the euro and secure her position in history. The present approach amounts to just prancing around in front of the goal posts and won't anywhere near hack it.

The euro can never become a proper currency with a long term future unless it moves fairly rapidly towards A/ a fully fledged banking union, with common deposit insurance and resolution regimes, and B/ at least a degree of debt mutualisation, or fiscal union.

Warner also explains how it's possible to get some degree of shared debt without requiring a new EU treaty or being red-carded by the German constitutional court; although full-blown mutualisation would need major changes.

More here: It's not a question of if, but only when Merkel grasps the nettle of eurozone debt mutualisation.

7.03pm BST

Clock ticking for Cyprus

Over in Cyprus tonight, there is concern that the country is running of time, and money, to actually receive the first slice of its aid package.

My colleague Helena Smith reports that officials have said it is imperative a controversial €10bn bailout is approved by EU parliaments and sealed with international lenders by 24 April.

If an agreement fails to be reached by then – and bailout funds are not there to replenish dried up coffers – President Nicos Anastasiades' administration will face the daunting prospect of being unable to pay state salaries and pensions.

The full story is here: Clock ticking on Cyprus deal

5.25pm BST

Soros: Germany must pick eurobonds or euro-exit

George Soros, the billionaire investor and philanthropist, is giving a speech in Frankfurt now in which he is arguing that Germany must decide whether to embrace eurobonds or whether to leave the eurozone.

Soros's solution for Europe's debt crisis is collective debt backed by the whole of the eurozone not just individual countries. He's made the argument before, but this time his pitch is that the German people have never been given the option of choosing.

We have the full transcript of the speech here:

George Soros: how to save the EU from the euro crisis – the speech in full

So I won't attempt to summarise it.But here's the key paragraphs on eurobonds – which Soros admits are an unpopular idea in Germany today:

People don't realize that agreeing to eurobonds would be much less costly than doing only the minimum to preserve the euro. That is how misconceptions can become engrained in public opinion.

It is up to Germany to decide whether it is willing to authorise eurobonds or not. But it has no right to prevent the heavily indebted countries from escaping their misery by banding together and issuing eurobonds. In other words, if Germany is opposed to eurobonds it should consider leaving the euro and letting the others introduce them.

 This exercise would yield a surprising result: eurobonds issued by a eurozone that excludes Germany would still compare favorably with those of the US, UK and Japan. The net debt of these three countries as a proportion of their GDP is actually higher than that of the eurozone excluding Germany.

And this section, from earlier in the speech explaining why the centre of the eurozone needs to take new steps to ease the crisis:

The burden of responsibility falls mainly on Germany. The Bundesbank helped design the blueprint for the euro whose defects put Germany into the driver's seat. This has created two problems. One is political, the other financial. It is the combination of the two that has rendered the situation so intractable.

The political problem is that Germany did not seek the dominant position into which it has been thrust and it is unwilling to accept the obligations and liabilities that go with it. Germany understandably doesn't want to be the "deep pocket" for the euro. So it extends just enough support to avoid default but nothing more, and as soon as the pressure from the financial markets abates it seeks to tighten the conditions on which the support is given.

The financial problem is that Germany is imposing the wrong policies on the eurozone. Austerity doesn't work. You cannot shrink the debt burden by shrinking the budget deficit. The debt burden is a ratio between the accumulated debt and the GDP, both expressed in nominal terms. And in conditions of inadequate demand, budget cuts cause a more than proportionate reduction in the GDP — in technical terms the so-called fiscal multiplier is greater than one.

The German public finds this difficult to understand. The fiscal and structural reforms undertaken by the Schroeder government worked in 2006; why shouldn't they work for the eurozone a few years later? The answer is that austerity works by increasing exports and reducing imports. When everybody is doing the same thing it simply doesn't work.

Updated at 5.26pm BST

5.04pm BST

Key event

Slovenia Prime Minister Alenka Bratusek (L) and European Commission President Jose Manuel Barroso (R) shake hands as they pose for the media prior to their meeting at the EU Commission headquarters in Brussels, Belgium, 09 April 2013.
Slovenia Prime Minister Alenka Bratusek (L) and European Commission President Jose Manuel Barroso (R) shake hands as they pose for the media prior to their meeting at the EU Commission headquarters in Brussels, Belgium, 09 April 2013. Photograph: JULIEN WARNAND/EPA

Back in the eurozone crisis: here's a couple of stories about this afternoon's meeting between Slovenia prime minister Alenka Bratusek and European Commission President Jose Manuel Barroso.

Dow Jones: Slovenia PM Says Country Does Not Need Bailout

Europolitics: No bailout needed – Slovenian PM

5.02pm BST

Here's our story on James Crosby's decision to hand back his knighthood:

James Crosby to give up knighthood and 30% of pension

4.13pm BST

James Crosby to renounce knighthood and have pension cut

Big news in the UK – Sir James Crosby, the former chief executive of HBOS, has asked the UK authorities to take back his knighthood. He has also asked to surrender 30% of his pension.

This follows the official report into the collapse of HBOS in 2008, which was published last week, and was extremely critical of the bankers who ran the bank.

Here's the full statement:

A personal statement from James Crosby

Friday's report from The Parliamentary Commission on Banking Standards made for very chastening reading. Although I stood down as CEO of HBOS in 2006, some 3 years before it was taken over by Lloyds, I have never sought to disassociate myself from what has happened.

I would therefore like to repeat today what I said when I appeared in public before the Commission in December; namely that I am deeply sorry for what happened at HBOS and the ensuing consequences for former colleagues, shareholders, taxpayers and society in general.

Shortly after I left HBOS, I received the enormous honour of a Knighthood in recognition of my own – and many other people's – contribution to the creation of a company which was then widely regarded as a great success. In view of what has happened subsequently to HBOS, I believe that it is right that I should now ask the appropriate authorities to take the necessary steps for its removal.

During the course of my 30 year career, including 12 years at Halifax and HBOS, I both contributed to and built up a substantial pension entitlement. This pension entitlement is entirely contractual in nature. However I have decided to forego 30% of my gross pension
entitlement payable to me during the rest of my lifetime*. I will be discussing how this reduction is implemented, and whether the amount waived should go to support good causes, or benefit shareholders, with the pension scheme's employer and trustees.

It is with great personal sadness that I have decided to stand down from my voluntary position as a Trustee of Cancer Research UK. They do remarkable work and it has been a great privilege and pleasure to have played my part. However I want to put their interests firmly before mine and would wish them every success in the future.

Throughout my business career I have always tried to act with integrity and to the best of my abilities. I have had the enormous privilege of working with people and organisations about whom I cared deeply. I would like to express my sincere regret for events and my appreciation for the personal support I have been shown.

[end]

* The current annual pension payment amounts to c£580,000 per annum.

Updated at 4.14pm BST

3.34pm BST

Slovenia's PM also argued that the creation of a bad bank this summer would help address its problems.

Alenka Bratusak said she was aware that Slovenia's banking problems needed to be fixed (as the OECD identified today – see 9.04am)

Bratusek also warned, though, that balancing the country's budget may take longer than previously hoped.

Reuters has the quotes:

It is too optimistic to expect Slovenia to reach a balanced budget by 2015, the country's prime minister said on Tuesday.

"I personally have a problem with the fact that the date 2015 is mentioned in the constitution for the final consolidation of Slovenian public finances," Alenka Bratusek told journalists after meeting the President of the European Commission, Jose Manuel Barroso.

"I think this is too optimistic regarding the current economic situation and the current level of the deficit. But the consolidation of public finances is certainly one of our three priorities." She also said that fresh capital for the country's banks would be one of her government's first steps.

And as flagged up at 3.14pm, Bratusek insisted that a bailout is not needed.

3.23pm BST

Barroso: don’t compare Slovenia with Cyprus

Jose Manuel Barroso
Photograph: EC

European Commission president Barroso has firmly rejected any suggestion that Slovenia might see a repeat of the Cypriot bailout, in which large depositors were 'bailed in' to the rescue package.

Asked by the FT's Peter Spiegel if he had a message for savers in Slovenia, Barroso replied that he would "not engage" in any comparison with Cyprus.

It is a completely different situation in Cyprus and in Slovenia.

Barroso adding that it would be "abusive" to make a comparison between the two countries (Cyprus's banking sector being so much larger, as a percentage of its national GDP, than Slovenia's).

Updated at 3.47pm BST

3.18pm BST

Barroso: ‘no indication’ Slovenia will need a bailout

Barroso also told the press conference that there was "no indication" that Slovenia would require an aid package.

There's plenty of interest in the issue though — apparently Slovenia is getting more attention from the Brussels press pack than usual:

3.14pm BST

Slovenian PM Alenka Bratusek has insisted that her country is "strong and stable", and urged people to look at the "facts":

3.12pm BST

Key event

José Manuel Barroso told journalists at the press conference in Brussels that Slovenia faces a 'very demanding task' on reforms, but said he was confident it would achieve it.

He explained that Prime minister Bratusek had told him Slovenia has a "very strong commitment" to making the necessary reforms so that a bailout is not needed.

Barroso added that Brussels wants to see details of Slovenia's future reform plans, for its banking sector and the wider economy.

I'm confident that those reforms will be adequate…to pave the way to an economic recovery.

3.02pm BST

Alenka Bratusek, Prime Minister of Slovenia,
Alenka Bratusek, prime minister of Slovenia, speaking at this afternoon’s press conference in Brussels.

2.58pm BST

Alenka Bratusek, the prime minister of Slovenia, is giving a joint press conference with José Manuel Barroso, president of the European Commission now.

It's being streamed here.

Highlights to follow….

2.36pm BST

The International Monetary Fund is discussing the analytical data behind its World Economic Outlook at a press conference now – it's online here.

Update:

John Simon, senior economist at the IMF, told this afternoon's press conference that we're not likely to see a repeat of the inflationary 1970s.

He cited three factors; central banks are more 'credible' than in the '70s, public inflation expectations are lower, and there's a flatter Philips curve today (a measure of how prices rise in relation to falling unemployment)

Updated at 7.40pm BST

2.32pm BST

Slovenian bond auction results

Slovenia saw its borrowing costs rise, and sold less debt than hoped, at a bond auction today.

The OECD's warning over its banking sector, and speculation that it may require a bailout, may be hitting investor confidence.

Slovenia sold a total of €56m of debt, compared to a maximum total of €100m (it received offers for around €80m, but decided not to take the most expensive bids).

The yield on €32.3m of six-month bills rose to 1.7%, from 1.5% in an auction in March.

The yield on €23.8m of 12-month bills rose to 2.99%, up from 2.02% in February.

Updated at 2.32pm BST

1.49pm BST

Angry Cypriot MPs suspend probe into bank transfers

In Cyprus, a parliamentary probe into allegations that some wealthy depositors managed to whisk their money out of the country before accounts were frozen last month has been suspended.

MPs blasted the country's central bank, saying it had only supplied half a month of transactional data, not the year's worth it had asked for.

Reuters explains that deputy central bank governor Spyros Stavrinakis sent the MPs the limited amount of data in a list.

The head of the Cypriot parliament's ethics committee, which was due to look into a list detailing transfers of more than €100,000 from the two major banks – Bank of Cyprus and Cyprus Popular Bank – said on Tuesday that the list fell short of what he had requested.

"It was with great disappointment and anger that, when we opened the envelope, we realised it contained data for only 15 days even though we had asked for a year," lawmaker Demetris Syllouris told reporters. "This kind of behaviour is unacceptable."

In a letter to Syllouris, then central bank deputy governor Stavrinakis said he was only attaching a list of individuals and companies who transferred money out of Cyprus between March 1-15 this year.

"We believe your request would lead to a huge volume of information, which would possibly not help the aim of your committee," Stavrinakis said. This included foreign companies that transfer large sums of money each day, as well as Cypriots who bought property, he said.

Stavrinakis had been appointed by the previous government earlier this year. In another twist today, that appointment was reversed by the current administration.

Updated at 1.49pm BST

1.05pm BST

Austerity already underway in Slovenia

Slovenia is already going through an austerity programme – or a "front-loaded and mainly expenditure-driven consolidation", as the OECD style guide puts it.

Here's the details:

The generosity of social transfers was reduced. Subsidies for school and student meals were lowered, parents were required to cover 30% of childcare costs for the second child, the parental benefit for child care and nursing was cut, the indexation of child benefits was frozen and eligibility conditions were tightened for higher- income earners.

However, cuts in nominal public sector wages were 5%, somewhat less than what had been announced initially due to earlier commitments to increase wages.

Measures on the revenue side include, among others, a new tax on immovable property, a new higher marginal personal income tax, and increased taxes on motor vehicles.

Further cuts to wages, pensions and unemployment benefit are already 'pencilled in' for the next two years, the OECD adds (see page 17 of today's report for more).

12.36pm BST

Slovenia’s bad loan problem explained:

The OECD's report into Slovenia (pdf) paints a gloomy picture of a country badly hit by the financial crisis, and heading deeper into trouble.

The country's economy, for example, is enduring a double-dip recession, which has driven unemployment over 10% at a 14-year high:

Slovenian GDP & unemployment rates
Photograph: OECD (page 6 of today’s report)

This economic decline has driven up the amount of bad loans on the country's banks (The OECD criticises Slovenia's banks for being rather too lax about risk during the good times):

Slovenian banks are ranked fourth on this chart for bad debts, behind Greece, Ireland and Hungary (interesting to see Italy in 5th place too)

Nonperforming loans at Slovenian banks
Photograph: OECD (page 10 of the report)

Around 14% of loans on Slovenia's bank balance sheets are classed as 'non-performing' (as in at least 90 days in arrears). That is likely to get worse, the OECD says:

As the recession drags on, this is likely to deteriorate further.

The situation is particularly worrying in the non-financial corporate sector, where non-performing loans (NPLs) reached 24% of the portfolio. Construction companies are responsible for a large share, as 62% of their loans are overdue for more than 90 days and the largest companies are
insolvent.

The quality of the loan portfolio has deteriorated the most for large state-controlled banks, whose NPLs to private firms amount to 30% of their total loans to these firms in October 2012 (Figure 3, Panel B). In comparison, foreign banks in Slovenia have a NPL ratio of only 11% of their lending to private firms, suggesting that an increase in bad loans of state-controlled banks reflects not just the business cycle but also deeper governance problems.

12.09pm BST

Read OECD’s Slovenia report

The OECD has uploaded its report on Slovenia – you can see it here: Economic Survey of Slovenia 2013.

Here's the top line:

Slovenia has been hit hard by a boom-bust cycle, compounded by reform backlogs and the euro area sovereign debt crisis. The reduction of public and private sector indebtedness is significantly weighing on growth amid tight financial conditions, growing unemployment and stalling export performance. Although important reforms have been adopted in 2012 and early 2013, additional and far-reaching reforms are needed as soon as possible to restore confidence and head off the risks of a prolonged downturn and constrained access to financial markets.

And here are the key bulletpoints:

• The economy is in a deep recession.

• Slovenia is facing a severe banking crisis,

• The authorities have adopted an ambitious fiscal consolidation path, but the fiscal position is not yet sustainable.

• Restructuring welfare spending would help achieve fiscal sustainability.

• Potential growth has fallen significantly since the outset of the crisis.

There are some interesting graphics too — which I"ll upload now…

11.49am BST

De Guindos: Spanish slump is slowing

Over in Spain, the economy minister Luis de Guindos has said that economic output, which has been in shrinking steadily since mid-2011 fell again in the first quarter, but hinted the worst was over.

Martin Roberts reports from Madrid:

De Guindos estimated the drop in gross domestic product at 0.5-0.6%, ahead of official figures due out later this month.

“We are still in negative territory, but it should be recalled that the fourth quarter of 2012 – when GDP contracted by 0.8% — was the worst of the second dip,” he told a business conference, referring to Spain’s second recession since the economy entered crisis in 2008.

The government predicts the recession will bottom out later this year and the economy will grow again in 2014, but several economists are sceptical because demand is so weak.

Rating’s agency Moody’s is also dubious over government forecasts it can trim its deficit to 4.5% of GDP this year, and in a note this morning predicted the gap would actually be 6% in 2013, down from 7% in 2012. That would be someway short of Madrid's target of 4.5%.

Moody kept its 'negative' rating on Spain's bond rating, which at Baa3 is only one notch above junk.

11.15am BST

US Treasury secretary: America needs more growth in Europe

US Treasury secretary Jack Lew is continuing his trip to Europe, where he is pushing politicians and euro officials to adjust their austerity strategy and focus more on growth.

Today he's in Berlin, where he held meetings with German finance minister Wolfgang Schäuble.

They're now holding a joint press conference, where Lew explained that the US is banking on Europe to return to growth:

As we continue to address many of our long-term challenges, our economy's strength remains sensitive to events beyond our shores. We have an immense stake in a prosperous Europe.

Lew then nudged Germany to use its economic muscle to help its weaker neighbours, saying it would be "helpful" if countries with the ability to increase consumer demand did so.

Looking for Schäuble's comments now…

Updated at 11.24am BST

10.59am BST

OECD: no immediate need for Slovenian bailout

The deputy secretary of the OECD has commented on Slovenia's financial situation, saying he sees no 'immediate need' for a financial rescue package.

Yves Leterme made the statement as the OECD presented its new report on Slovenia (see 9.41am)

Reuters has the details:

Slovenia, which is struggling to avoid a bailout, is not in immediate need of an economic rescue, Yves Leterme, deputy secretary general for the OECD, said on Tuesday.

"The government of this country has been able to meet its financial needs without difficulties so far," Leterme said in Ljubljana while presenting a critical economic survey on the euro zone country.

"It was at a relatively high cost (but) as far as we are concerned, there is no reason to anticipate an immediate need for a bailout."

Last month Slovenia had a successful debt auction of €110m of short-term debt, with yields falling. It said in January it hopes to raise up to €3bn this year.

10.11am BST

Britain’s trade gap widens, but industrial production beats forecasts

Britain's trade gap has widened, with exports falling and imports rising in February.

The Goods balance (the gap in value between what is physically shipped in and out of the UK) rose to -£9.416bn, from -£8.16bn in January.

UK trade data to February 2013
Photograph: Thomson Reuters

UK exports fell by 2.8% in February, while imports inched up by 0.3%.

Britain's traditional surplus in invisible items (ie services) meant the total trade gap was £3.64n, up from almost £2.5bn in January.

Not a sign that the UK's 'march of the makers' is proceeding smoothly, as Philip Aldrick, the Daily Telegraph's economic's editor, pointed out:

But in better news: industrial production jumped by 1.0% in February (smashing forecasts of a 0.4% rise) which analysts believe means the economy will have returned to growth this quarter.

But with output still 2.2% lower than a year ago, it's not a great picture.

James Knightly of ING commented:

With the UK’s largest oil and gas field coming back on-stream in March, likely leading to another positive gain in output, we are more optimistic that the UK can avoid its third technical recession in five years.

Updated at 8.00pm BST

9.41am BST

Slovenia’s bailout worries

The OECD's warning to Slovenia (see 9.04am) comes at an awkward time for the country, with speculation over a possible bailout swirling.

As Reuters puts it this morning:

Following last month's messy rescue of Cyprus, the country of 2 million perched on Italy's northeast border is facing intensifying market pressure while seeking funds to heal its state-owned financial sector.

Slovenia's banks, downgraded by Fitch last Friday, are still largely in public hands too.

One of the OECD's criticisms is that the Slovenian government hasn't yet agreed a list of public assets to be privatized or spun off.

Bloomberg explains:

“Limited equity markets and the backlog in the privatization program are hindering foreign direct investment, whose increase would help smooth corporate deleveraging,” the group of the world’s wealthiest countries said in the report.

“An agreement on a list of public assets to be privatized or managed by a new sovereign holding is still lacking.”

And here's Bloomberg's full story: Slovenia Faces ‘Severe’ Banking Crisis in Recession, OECD Says.

9.04am BST

OECD warns Slovenia over banking debts

The headquarters of Slovenia's second-biggest bank, state-owned NKBM, in Ljubljana.
The headquarters of Slovenia’s second-biggest bank, state-owned NKBM, in Ljubljana. Photograph: JURE MAKOVEC/AFP/Getty Images

The OECD has warned that Slovenia faces the risk of a "severe banking crisis" after calculating that the cost of rescuing its banks could be significantly higher than officially estimated.

In a report just released, the Organisation for Economic Co-operation and Development suggested that the bad debts on the books of Slovenia's banks (mostly state owned) could top the official estimate of €7bn.

Those under-performing loans have fuelled fears that Slovenia, already in recession, might require its own financial aid package.

The OECD didn't pull its punches, saying:

Slovenia is facing a severe banking crisis, driven by excessive risk-taking, weak corporate governance of state-owned banks and insufficiently effective supervision tools.

..and urged the government to recapitalize “distressed, viable banks” quickly, ideally by issuing new shares to investors.

The IMF estimated last month that the government in Ljubljana must inject around €1bn into its banks.

Worryingly, the OECD fears that the methodology used to calculate the bad debts on the Slovenian banking sector was "weak and non-transparent", so can't be relied upon:

Capital needs are uncertain and could in fact be significantly higher.

And the OECD was also gloomy about Slovenia's economic prospects – it expects GDP to shrink by 2.1% this year.

Against this difficult background and with a possible further deterioration in the international environment, Slovenia faces risks of a prolonged downturn and constrained access to financial markets.

Which is all likely to increase talk that Slovenia will become the next eurozone nation to seek help.

Reuters adds that the OECD also wants the Slovenian government to make a series of economic reforms:

It recommended Ljubljana increase the powers of the competition office, gradually raise the pension age, wean wealthier citizens off family benefits, cut unemployment and other benefits and improve efficiency in education and healthcare.

The report is being presented in Ljubljiana this morning, so we should have a response from the Slovenian government shortly.

Updated at 9.18am BST

8.54am BST

The latest industrial data from the Netherlands isn't too encouraging either, falling by 1.7% in February compared with a year ago:

8.33am BST

The agenda

Here's a few things to watch out for today:

• OECD report into Slovenia – 8.30am BST (details to follow!)

• Netherlands industrial production data for February – 8.30am BST

• UK industrial production data for February – 9.30am BST

• IMF releases analytical chapters of World Economic Outlook – 2.30pm

• George Soros gives a lecture in Frankfurt on Europe – 4.30pm BST

Updated at 8.34am BST

8.17am BST

German imports and exports slide…

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

First up, some disappointing economic data from the eurozone's two largest economies, France and Germany.

German exports and imports both fell unexpectedly in February, in a sign that the eurozone recession may have bitter harder last winter.

Exports from Germany slid by 1.5% in February, while imports took a 3.8% tumble.

It could just be a blip – or it might be more serious.

Christian Schulz of Berenberg Bank sums it up (via Reuters):

After quite a strong January, February went worse. China could have played a role: the new year celebrations fell into February, which temporarily weighed on exports there

The situation for German exporters remains tense. The euro zone remains in recession. That should dampen demand for German products for some time. Business with the U.S. and China is going significantly better. But temporary weak phases there therefore carry more weight.

In terms of the surprisingly strong fall in imports, one will have to see whether it is is a temporary effect caused by the long winter or whether the euro crisis is unsettling consumers.

Alexander Koch of Unicredit is more optimistic, though, suggesting optimism in the global economy will help exports.

We get UK and Netherlands industrial data later this morning too, which should help explain what's going on.

The news from France isn't too encouraging either. The French adjusted trade balance widened to -€6.01bn in February, from -€5.65bn in January (imports and exports were both down).

But the Bank of France remains hopeful that the country dodged recession — sticking to its forecast that GDP rose by 0.1% this quarter.

This splurge of economic data comes as Portugal wrestles to find the savings demanded by its international lenders. Government ministers should be meeting later today to discuss the latest planned cutbacks.

I'll be tracking the latest developments in Portugal, as well as watching Cyprus, Greece and Slovenia — seen by some as the latest eurozone country which might need more support….

Updated at 8.19am BST

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

 


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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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