...
For a week that has felt like a continual uphill battle we are least ending on a higher note which gives an indication that there is risk appetite out there. But with volumes remaining low the conviction of today?s rally is questionable.
Italy's 10-year bond yields have crept above 6pc again, rising 14.7 basis points to 6.031pc while Spain's are up 2.1 basis points to 6.574pc.
17.42 Sony Kapoor of the Re-Define thinktank has published his thoughts on Italy's turn in the eurocrisis spotlight. He writes:
The single biggest factor weighing on the Italian economy at present is the uncertainty about whether or not the Eurocrisis will be resolved. And it is this, rather than Italy?s own domestic situation (which is also complicated), that is the most serious problem.
While the Spanish economy is already caught in a vicious downward spiral, the Italian economy is not, at least yet. However, unless the Eurozone acts quickly to stem the uncertainties surrounding the Eurocrisis, what has essentially been a liquidity problem for Italy thus far (having to rollover debt at gradually rising interest rates) may well turn into a self-fulfilling solvency problem leading inevitably to a need to restructure its debt. This may not happen through the first order impact of rising interest costs, but through the suffocating impact on the private sector, through rising capital flight and through falling GDP.
17.15 There's been unrest in Spain today, with civil servants protesting against austerity measures, and there could be more to come. Spain's main unions have apparently called on public workers to strike in September.
17.00 Deputy prime minister, Saenz de Santamaria, has also been speaking out about Spain's predicament. Speaking after the cabinet meeting, where sales tax increases and spending cuts were approved, she said:
Spain is going through one of its most dramatic moments.
Adding that the austerity measures were "neither simple, nor easy, nor popular," she said the government would try to enact the measures "with the maximum justice and equity."
16.34 King Juan Carlos of Spain has made a rare political comment, reports AFP, calling on the government not to forget Spain's unemployed as it decides on austerity measures to battle debt. He told a cabinet meeting:
No one should be excluded from the outcome of the economic recovery that we all want and hope for. I'm referring particularly to the young and those who suffer a lack of employment and prospects for the future.
16.05 Spain's government has been rubber-stamping other austerity measures at its cabinet meeting today. They include the VAT increase to 21pc from 18pc, which will take effect on September 1.
15.30 Spain's economy minister, Luis de Guindos, has approved a new fund of up to ?18bn to ease the regions' difficult funding situations:
The fund will finance the autonomous communities on the basis of the funding costs of the Treasury plus a small spread. There is a guarantee that the regions will receive the funds (they need) but they keep the responsibility of paying them back.
The mechanism will be funded through a ?6bn loan from the state lottery and the rest will come from the Treasury.
14.58 Spain's government has met for its weekly cabinet meeting this afternoon. At a news conference following that meeting, deputy prime minister Soraya Saenz said the government will soon open a discussion with other political parties to review the country's pension system:
We will send [to other parties] a law to guarantee the sustainability of the pension system.
She also said the government had approved a program of structural reforms for the second half of the year, including a reform of local administration and governments, a reform of the energy sector as well as laws to liberalise the rail, road and air transport sectors.
These measures are part of a new ?65bn austerity package announced on Wednesday.
14.34 On the markets, the FTSE 100 is still ahead, putting on 0.43pc to 5632. But Spain's IBEX is down 0.64pc to 6588 and Italy's MIB is off 0.53 pc to 13512.
Italy's 10-year bond yields continue to hover dangerously close to the 6pc mark, rising 9.6 basis points to 5.979pc while Spain's are up 2.4 basis points to 6.578pc.
The euro is at $1.2205.
14.12 Reuters has this snap of civil service workers protesting today against austerity measures in Madrid's landmark Puerta del Sol in front of city hall in Madrid:
14.00 AP has a bit more colour from those protests by Spanis civil servants that we mentioned at 13.10. They are protesting against a second wave of wage cuts and AP writes:
In the Puerta del Sol in downtown Madrid, about 500 civil servants gathered, about half of them dressed in black. Some women wore veils, as if they were at funerals. Protesters blew whistles and horns.
...
Isabel Perez, a 40-year-old librarian, said "our wages have already been cut and now they take away the Christmas payment. I don't make it to the end of the month as it is. The extra payment gave some relief. We're not exactly millionaires."
13.42 After all the excitement of the Italian debt auction this morning, Spain says it is going to issue 2014, 2017 and 2019 bonds on Thursday. It has cancelled a bond auction due on August 16.
13.10 After Spanish miners headed to Madrid this week to protest over cuts to industry subsidies, today it's the turn of the civil servants. They are taking to the streets to protest their second wave of wage cuts in as many years as the government prepares ?65bn of austerity measures.
AP reports that several hundred workers left the complex of government ministries in Madrid and blocked traffic briefly. In the eastern city of Valencia, several hundred Justice Ministry workers shouted "hands up, this is a stick-up" at a protest rally.
12.33 At 11.57, we mentioned the Bank of America-Merrill Lynch research that used game theory to conclude that Italy and Ireland have more incentive to quit the euro than Greece, while Germany has limited room to prevent departures from the currency union.
SImon Nixon of the Wall Street Journal has also written about this Merrill research, which suggests that the risk of a eurozone break-up might be rising:
In game theory, the most likely outcome isn't always what economists call "Pareto optimal," one that will bring maximum benefit to all players. Instead, the "Nash equilibrium" for the eurozone?the situation in which no player has an incentive to change strategy because to do so unilaterally would leave them worse off?is that Italy refuses to undertake the overhauls needed to enable its economy to grow and Germany refuses to provide the bailouts to persuade it to stay.
12.24 The European Commission has expressed some doubts regarding the wisdom of Moody's downgrading of Italy, bearing in mind it came just before a bond auction. SImon O'Connor, a Commission spokesman, said:
I do think one can legitimately and seriously question the timing of it, whether the timing was appropriate. We consider that Italy's policy actions to ensure sound public finances address long-standing structural weaknesses and have been both determined and wide ranging.
12.01 But economist, Megan Greene, has this to say on Twitter about the Bloomberg research:
11.57 Bank of Amerca-Merrill Lynch has published some thoughts on the eurozone's predicament. Its strategists reckon that Italy and Ireland have more incentive to quit the euro than Greece, while Germany has limited room to prevent departures from the currency union.
In a report dated July 10, which Bloomberg has seen, the bank uses cost-benefit analysis and game theory to conclude that investors ?may be underpricing the voluntary exit of one or more countries? from the bloc.
Italy, the euro area?s third-largest economy, would enjoy a higher chance of achieving an orderly exit than others and would stand to benefit from improvements in competitiveness, economic growth and balance sheets, they said.
While Germany is the nation deemed able to leave the eurozone most easily, it has the least incentive of any country to quit because it would face weaker growth, possibly higher borrowing costs and a negative hit to its balance sheets, Bloomberg cites the strategists as saying. Austria, Finland and Belgium also have little reason to quit, they said, while Spain has the weakest case for leaving among economies most directly affected by the crisis.
11.36 At 09.09, we mentioned that according to ECB data, Spanish banks borrowed ?365bn in June versus ?325bn in May - a new record. Analysts suggested that the data provides more evidence that Spanish lenders remain largely shut out of the interbank market. Juan Pablo Lopez, banking analyst at Espirito Santo, said:
It was widely expected that the data would reflect the growing loss of confidence towards Spain's banking sector. Local banks are shut out of the wholesale markets, small investors and savers are losing confidence in their banks and the high yields offered on bonds means the Treasury has become a direct competitor for funds.
11.29 According to the details of the new Funding for Lending scheme, banks will be able to borrow treasury bills from the Bank of England to use as collateral to fund lending. Banks will have 18 months to use the facility and up to four years to repay.
A bank can borrow an initial 5pc of its existing stock of loans to the non-financial sector. Banks will pay a minimum fee of 0.25pc of the amount borrowed provided they maintain current lending rates or increase it. For each 1pc fall in lending, the fee will increase by 0.25pc, rising to a maximum of 1.5pc if banks' lending contracts by 5pc or more.
11.15 Details of the Bank of England's new Funding for Lending Scheme are out. The scheme aims to make around ?80bn of loans more accessible and cheaper for households and businesses.
Chancellor George Osborne said:
Today?s announcements aim to make mortgages and loans cheaper and more easily available, providing welcome support to businesses that want to expand and families aspiring to own their own home. The Treasury and the Bank of England are taking coordinated action to inject new confidence into our financial system and support the flow of credit to where it is needed in the real economy ? showing that we are not powerless to act in the face of the eurozone debt storm.
11.03 Italy's treasury undersecretary has also taken umbrage at Moody's downgrade. He has told Reuters that it was an "incomprehensible" decision and that Rome would respect its commitment to achieving a structural budget surplus even if the economic cycle worsens. Gianfranco Polillo said:
I am very perplexed by the Moody's decision because of the weakness of the reasoning and above all by the size of cut. They are very weak reasons. On the one hand, they're talking about political reasons, which is quite arbitrary. I don't think anyone is able to explain how the Italian political situation will evolve.
10.44 Further to the auction of three-year bonds, Italy also sold three bonds due in 2019, 2022 and 2023 for a total of ?1.75bn.
The March 2022 bond fetched a 5.82pc yield and the August 2023 was sold at an average 5.89pc rate.
10.35 Initial reaction to the Italian three-year bond auction is fairly positive. Nicholas Spiro of Spiro Sovereign Strategy writes:
This was a challenging enough auction without the downgrade which makes the result look all the more impressive. The cut to Italy's credit rating had been more or less priced in. Once again, the Treasury was able to get its debt out the door which, right now, is the overriding priority. Domestic banks continue to hold the fort at Italian actions. The concession, however, is still hefty and reflects the increasing risks in Italy.
But he adds:
Italian government debt remains under considerable pressure. Practically nothing was done at the last EU summit to help shore up the Italian sovereign. The current firepower of the eurozone's rescue funds is woefully inadequate to shield Spain and Italy. There needs to be a much more credible ECB-backed backstop in place to help restore confidence in Italian sovereign debt.
Nick Stamenkovic, bond strategist at RIA Capital Markets, says:
The new three-year BTP auction achieved maximum target ... demand was decent with the average yield falling modestly compared to previously. The concession following Moody's double notch downgrade of Italy helped auction to be absorbed comfortably. With overseas investors shifting out of sovereign paper domestic investors were probably the main buyers particularly Italian banks. All in all, a bit of relief for Italian bonds but this is likely to prove short-lived given the poor fiscal outlook.
10.26 Results from Italy's debt auction are coming through. It has sold ?3.5bn of three-year bonds at an average yield of 4.65pc. That's much lower than the 5.3pc it had to pay in June.
The yields on Italy's 10-year bonds have managed to ease back below 6pc. Just. They're now at 5.95pc.
10.17 Yesterday, the IMF said it had found policy implementation delays in a "number of areas" in Greece's international bailout during recent talks. Today, German daily Rheinische Post cites unnamed government sources suggesting that the preliminary report from the 'troika' has turned up some serious shortcomings in Greece's efforts to implement reforms.
The troika - comprising the European Central Bank, the European Union Commission and the International Monetary Fund - apparently found that the Greek government has failed to fulfill 210 of the 300 budget savings requirements.
10.06 The head of Italy's business association, Confindustria, has hit back at Moody's downgrade. Giorgio Squinzi said:
This is just Moody's opinion. I think our country, and our manufacturing system, is much stronger than the Moody's evaluation suggests. As president of Confindustria, as an employer and as a private citizen, I think our country is stronger than that.
10.02 In the UK, data this morning shows that construction output dropped 6.3pc in May despite an extra working day, as the public holiday held at the end of the month was postponed until June for the Jubilee weekend.
09.47 Some reaction is starting to trickle through to Moody's decision to cut Italy's credit rating to just above junk. Investec say:
In Europe, Moody?s cut Italy?s rating by two notches to Baa2, citing an increased risk that funding costs could rise further possibly leading to a ?sudden stop in market funding?. The Euro remains under pressure although its reaction to this news was subdued suggesting it wasn?t a great surprise as the cut leaves Italy?s rating two above junk and one above Spain?s rating. Italy is on track to bring its budget deficit within the European Union limit this year but its 10-year bond yields have risen above 6 per cent in recent weeks after Spain sought a bailout fuelling concerns that Italy is next.
The euro slipped towards two-year lows on Friday, dipping to $1.2190 at one point. It is now trading around $1.2200.
Beat Siegenthaler, currency strategist at UBS, said:
The Italian downgrade means demand from international investors for the bonds on auction today will suffer. While there is a risk of a short squeeze that could push the euro higher, we expect more selling into a bounce. We also expect the ECB to lower rates and launch unconventional measures in coming months, all of which will keep the euro under pressure
09.39 Still on those China figures, Simon Denham, head of Capital Spreads was sceptical:
Manufacturing in China is suffering and the official numbers always seem to be at odds with other independent readings and there is no doubt that sectors are contracting speedier than the data will tell you. China?s economy is slowing because its biggest customers are not buying its goods and whilst they are trying to replace the lost demand from the West with their own domestic demand, it isn?t taking up the slack yet. We?ve seen indications of this earlier this week when imports took a dive.
So why aren?t the markets taking this data badly? Most likely because of the grey areas surrounding the figures and that whilst GDP may be slowing more than expected in the world?s second largest economy, it is not as bad as it could have been and China is still growing at a fair lick.
09.35 At 08.38, we mentioned that China?s economy grew at 7.6pc in the second quarter, its slowest expansion since the aftermath of the financial crisis. But Ilya Spivak, currency strategist at DailyFX, reckons this was broadly in line with exepctations:
On balance, the outcome appeared to have a net neutral impact on sentiment, offering no additional fodder to drive risk aversion. This opened the door for growth-geared assets to stage a corrective recovery following yesterday's blood-letting. S&P 500 stock index futures are pointing higher in late Asian trade, arguing for more of the same into the week-end.
09.26 There have been murmurings in recent days that Silvio Berlusconi could be poised to return to power. Italian news agencies are this morning quoting a senior official in Berlusconi's PDL party, who says that the former prime minister will return to frontline politics as the centre-right candidate in next year's general election.
Fabrizio Cicchito, PDL parliamentary leader told Italian news agencies after a meeting of the party leadership at Berlusconi's Rome residence:
Yes, Berlusconi is the candidate for premier
Berlusconi has given several hints of late that he was planning a return to politics, complaining about his successor Mario Monti's austerity policies and musing openly about the possibility of Italy exiting the euro.
09.09 According to ECB data, Spanish banks borrowed ?365bn in June versus ?325bn in May - a new record.
09.07 Damian Reece, Telegraph head of business, has focused on the UK's "funding for lending" scheme. Details of the Bank of England's plan are due to be unveiled today.
Banks can access the scheme on condition they use the funds to make loans, rather than refinance their own balance sheets. A seperate ?5bn a month facility, available for 12 months, has been set up for that purpose.
Previous schemes to boost lending have failed, reflecting the fact that demand for credit is falling as companies suffer a lack of confidence caused by the eurozone crisis which is holding back investing and spending - a point Sir Mervyn King, Governor of the Bank, himself made in a BBC radio interview on Tuesday.
Lenders will not extend loans to any but the most credit worthy of borrowers as they avoid the previous mistakes of loose credit conditions which caused the credit crisis in the first place. Sir Mervyn will announce the scheme at 10am this morning so come back to telegraph.co.uk for all the details.
09.02 German Economy Minister Philipp Roesler feels the Troika is "at the end of its patience" with Greece.
08.51 European Union Competition Commissioner Joaquin Almunia has said he?s investigating alleged rigging of Libor rates.
The story is quite shocking. We are focusing our investigations on suspected cartel arrangements involving financial derivatives related to these benchmark rates, including possible collusion over the setting of the rates.
08.49 We are hearing that Italian final inflation figures for June have been delayed for an hour due to strike action by statistics agency staff. They will now be released at 10am.
08.48 Italy faces a key bond auction of ?5.25bn today, just hours after it was downgraded by Moody's.
Ten-year Italian government bond yields rose 13 basis points to 6.04pc, a level widely seen as unsustainable in the long term.
FTSE 100 +0.4pc
CAC +0.3pc
DAX +0.4pc
IBEX -0.6pc
MIB -0.3pc
08.42 Spain's inflation rate has risen to 3.6pc in June from 3.4pc the month before.
08.38 China?s economy grew at 7.6pc in the second quarter, its slowest expansion since the aftermath of the financial crisis.
The Telegraph's Malcolm Moore writes that the National Bureau of Statistics said growth had slowed from 8.1pc in the first quarter of the year. In 2011, China?s gross domestic product (GDP) grew by 9.2pc.
In the wake of that acceleration, inflation rose from less than 3pc in July 2010 to a high of 6.5pc last July. It has since fallen back to 2.2pc last month. The property market, meanwhile, gave every impression of being a bubble ready to burst.
China?s leaders have now promised to stop focusing on the speed of economic expansion and instead on the ?quality? of growth, in a bid to rebalance the economy away from low-end manufacturing and heavy investment and towards consumption and services.
08.31 US ratings agency Moody's downgraded Italy's government bond rating by two notches, citing the knock-on effects of a possible Greek exit from the eurozone and Spain's banking woes.
US ratings agency Moody's downgraded Italy's government bond rating by two notches, citing the knock-on effects of a possible Greek exit from the eurozone and Spain's banking woes.
08.24 The Government launched its funding-for-lending scheme earlier this summer, designed to reduce the cost of borrowing for banks so they pass on cheap cash to businesses, which expand and inflate the sagging economy.
Late last night Sky News reported that there would be a league table to "name and shame" those banks that aren't participating. It's reported that the Bank of England will announce the plan later today. We'll bring you more on that as we have it.
08.20 Michel Barnier, the EU commissioner responsible for the single market and regulation, said yesterday that Europe needs a central finance minister answerable to national parliaments and EU politicians to pave the way for closer integration:
My conviction is that we should have an EU finance minister, subject to strong democratic control from the European Parliament and national parliaments.
At some point in the future, I also believe that we should combine the role of the President of the European Commission and the President of the European Council
08.00 Good morning and welcome back to our live coverage of the European debt crisis.
Debt crisis live: archive
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