Tags: Eurozone Crisis, Global Economic Collapse, global econonmy
Rev 6:5-6 NCV When the Lamb opened the third seal, I heard the third living creature say, "Come!" I looked, and there before me was a black horse, and its rider held a pair of scales in his hand. Then I heard something that sounded like a voice coming from the middle of the four living creatures. The voice said, "A quart of wheat for a day's pay, and three quarts of barley for a day's pay, and do not damage the olive oil and wine!"
• German foreign minister: We support a strong City
• European finance ministers to thrash out details of eurozone rescue, with Britain called on to contribute £25bn of loans
• Asian markets fall following Kim Jong-il’s death
• Mario Draghi speaks about break up of the eurozone
• Osborne backs £7bn ringfencing of banks’ “casino” investment banking divisions
• Today’s agenda
• Live-blogging now: Graeme Wearden
4.13pm: Mario Draghi has warned that Europe cannot avoid austerity as it attempts to fix the eurozone crisis.
The ECB head said there was no trade-off between austerity and growth, explaining that it was impossible to avoid a short-term contraction as the previous growth levels in some countries were not sustainable.
Draghi appears pretty relaxed, despite the high-octane start to his career at the ECB (in little more than a month he has cut eurozone interest rates twice, and bought tens of billions of euros of Italian and Spanish debt).
4.00pm: The first MEP to question Mario Draghi this afternoon asked the ECB president to comment on today’s front-page story in the Financial Times — headlined “Draghi warns on break-up” — in which he is quoted warning of the dangers of a costly eurozone break-up.
Draghi replied that the creation of the eurozone was irreversable. Here’s the key quote:
I have no doubt whatever about the strength of the euro, its permanence and its irreversibility.
Reading the FT interview closely, it appears that Draghi simply accepted that a break-up was possible. Here’s the key exchange (from the FT’s transcript).
FT: But these austerity programmes are very harsh. Don’t think that some countries are really in effect in a debtor’s prison?
Draghi: Do you see any alternative?
FT: They could leave the eurozone?
Draghi: But as I said before, this wouldn’t help. Leaving the euro area, devaluing your currency, you create a big inflation, and at the end of that road, the country would have to undertake the same reforms that were due to begin with, but in a much weaker position.
So,. Draghi was warning that a eurozone break-up is on no-one’s interests, not that it’s about to happen. Made a good headline, though…..
3.44pm: Mario Draghi told the European Parliament welcomed the decisions taken at the EC Summit earlier this month. The ECB president told MPs that EU leaders had:
…really brought about a breakthrough in terms of a commitment to sound and transparent fiscal rules.
Draghi added that the ‘fiscal compact’ was an essential step in the ‘evolution’ of the eurozone.
Otherwise, Draghi’s statement to the European Parliament didn’t include many fireworks. He emphasises that the ECB was already takings several steps to ease market tensions and encourage banks to keep lending to the real economy.
3.35pm: Mario Draghi, the head of the European Central Bank, has begun testifying to the European Parliament.
Draghi, who admitted this morning that the eurozone could break up, begun by warning that economic conditions are serious:
The economic outlook is subject to high uncertainty…. the outlook is subject to substantial downside risks.
More details as they come through…..
3.12pm: The most dramatic part of the William Hague and Guido Westerwelle’s press conference was when Germany’s foreign minister spoke about his country’s commitment to Europe following the second world war.
Westerwelle told an anecdote about how he went on a camping holiday overseas in the 1970s as a teenager, and was shocked that the appearance of a “blonde, slim” young German reduced one woman to tears.
That, and a trip to Berlin after the Wall went up, made him realise the importance of a united Europe.
German reunification was also the reunification of Europe. For us, Europe is not only our destiny, it is also our desire.
3.06pm: The press conference between the UK and German foreign ministers ended a few minutes ago. As Rupert a little blogged earlier, Guido Westerwelle went to some lengths to insist that relations between the two countries are still strong despite Britain’s recent veto.
Here (via Andrew Sparrow) are Westerwelle’s key quotes:
I would like to tell you there is no hidden agenda against the City of London. We think it is in our common interest, in our mutual interest, to have a strong segment of financial services here in the City of London. If you go into details, and see how many German, French, Spanish, Italian banks are invested here in the City of London, then I think you will see that it’s obvious that we share this goal.
For Germany, the United Kingdom is an indispendable partner in the European Union and there is no doubt for us we want to make the next steps in the European Union together, as 27, or with Croatia as 28 countries. We think we have a common destiny. We think the European Union is not only the answer to the darkest chapter in our own history. It is also a life insurance in times of globalisation because no country – not Germany, not Great Britain, not France – is strong and big enough to face the challenges of globalisation on its own … My main message is for the British people – you can count on us, and we count on you.
In other words – David Cameron’s use of the veto at the last EU summit has not irrevocably damaged relations between London and Berlin. That relationship could be tested again, though, by the UK’s reluctance to increase its contribution to the IMF.
3.02pm: Afternoon all. Anytime now, finance ministers from across the Eurozone should be picking up the telephone to hold a conference call to discuss the decisions taken at the summit of 8-9 December.
Alas we can’t dial into the call, but we’ll be watching out for details (these things usually leak pretty quickly).
2.38pm: Wall Street has opened. All three manin indices are up a fraction. The Dow’s up 0.25% to 11,895 points. The Nasdaq is up a fraction (0.4%) to 2,564. The S&P 500 is up 0.2% to 1,222.
In London the FTSE 100 is virtually flat on the day at 5,385 points.
And with that, I’m handing over to my colleague Graeme Wearden….
2.21pm: William Hague, the foreign secretary, is holding a press conference now with his German opposite number, Guido Westerwelle.
Westerwelle says Germany and the UK will stand “shoulder-to-shoulder” to save the Euro. He said the UK is an “indispensable” partner in the European Union.
He said Europe has “no hidden agenda” against the City. “It is in our mutual interest to have a strong City of London.”
1.43pm: Oh dear. Eastern European countries may be forced to ask the IMF for tens of billions of dollars in aid if western banks continue their flight to safety, according to a Morgan Stanley note seen by Bloomberg. Hungary alone might need €12bn. Remember the IMF hasn’t got enough cash to support western Europe as it is.
Eastern European countries may need to tap existing international support packages or request more aid from the International Monetary Fund should capital outflows from western banks in the region deepen.
Countries with no assistance currently in place should negotiate international aid packages to “boost confidence enough to ensure that the bear case does not materialize,” economists Pasquale Diana and Jaroslaw Strzalkowski at Morgan Stanley in London wrote in an e-mailed report today.
Eastern Europe, where western European banks control about 80 percent of the banking industry, risks a financing gap as parent banks are being squeezed by deteriorating loan quality and slowing economic growth. Capital outflows would exacerbate the region’s credit crunch and hurt domestic demand. Western banks lent 139 billion euros ($181 billion) to eastern Europe, Morgan Stanley estimates.
“We look at deleveraging pressures and find that aggressive retrenching, not our base case, by western European banks could leave a funding gap in central and eastern Europe such that most countries except the Czech Republic would probably need to tap existing support packages or negotiate more assistance with the IMF and the European Union,” the report said.
Hungary may need around 12 billion euros in IMF aid “to restore confidence,” it said. Romania’s precautionary credit line of 5.4 billion euros with international lenders “may not be enough under a severe” deleveraging scenario.
“We continue to think there is no case for a ‘big bang’ withdrawal from the region,” the report said. “For the banks in particular, we think that the IMF, EC involvement in any given country in central eastern Europe would be particularly encouraging.”
1.23pm: It looks like the IMF-organised €200bn eurozone bailout might be off. Italian eurozoen reporter Fabrizio Goria tweets: “Well, bye bye IMF to help Europe. So long and thanks for all the fish.”
And it’s all because the UK is, apparently, refusing to stump up £25bn of loans towards the fund. “UK unwilling to lend to the IMF now according to sources”.
1.11pm: Raoul Ruparel, Open Europe’s head of economic research, says the ECB’s exposure to struggling eurozone economies has surged by 50% in six months. Which means there’s no chance it can afford to act as the lender of last resort.
The latest EU summit has reached an outcome that seems to have fallen short of encouraging the greater ECB intervention which markets were hoping for. Ultimately, the new fiscal constraints and budget rules lack teeth and therefore credibility. The key concerns surrounding the ECB lending to states, such as whether sufficient conditionality is in place and the risk of countries becoming dependent on such funding, remain unresolved.
Lower ECB interest rates and more liquidity to banks may be welcome in the short-term since this could help stave off another credit crunch. However, hopes, and plans, that this funding will lead to a boost in purchases of sovereign debt look misguided. It would be a spectacular own goal for the eurozone if banks waste the opportunity to clean up their balance sheets by loading up on risky sovereign debt, just to keep the eurozone ticking over in the short term.
The ECB’s exposure to the PIIGS now tops €705bn, and has increased by over 50% in the past six months, highlighting how risk continues to be transferred from banks and investors to taxpayer-backed institutions. But instead of utilising the time the ECB has bought them to come up with a sensible plan, eurozone leaders have continued their bickering.
12.41pm: More from Rajoy’s speech to parliament. He said he is aiming to reduce Spain’s deficit by €16.5bn next year, but he was very sketchy on the detail.
The aim is still to bring the deficit as a percentage of GDP down to 4.4% by 2012. It was 9.2% last year.
He said Spain’s scary jobless rate had risen to about 23%, and 45% of those under 25 are unemployed. “The panorama could not be more somber,” he said.
He also pledged to cut taxes and increase pension payments, but was skimpy on the details of how he’s actually going to pay for it.
A budget will submitted to parliament by the end of the year.
11.55am: Spain’s new prime minister Mariano Rajoy is unveiling a wide range of urgent reforms to the economy and the budget. The only item of public spending that will increase in January is pensions – everything else will be cut.
Among the reforms will be a move of public holidays to the closest Monday or Friday. The Spanish business association CEOE (Confederación Española de Organizaciones Empresariales), had lobbied for this to discourage workers from taking a ‘bridging’ day. At the moment, when public holidays fall on a Tuesday or Thursday many people take the days off in between the holiday and the weekend – and the economy effectively comes to a standstill.
That brings back memories of holiday clever engineering around the Royal Wedding and Easter that allowed you to head away for two weeks while taking only three days holiday.
11.49am: Time for a look at the markets. The FTSE is still in the red, down less than 3 points at 5384. The Dax in Frankfurt is up more than 40 points while the CAC in Paris has climbed nearly 15 points.
On currency markets, the euro is trading at $1.30, near an 11-month low of $1.2945 hit last week, while news of North Korean leader Kim Jong-il’s death pushed the dollar higher, regarded as a safe-haven investment.
11.42am: Over in Ireland, the central bank has slapped its largest ever fine of €3.35m on an insurance company for breaching consumer and insurance regulations.
The central bank was criticised for its lax regulation during the recent property boom. Its director of enforcement, Peter Oakes, said:
This is the largest fine issued by the central bank and reflects the seriousness with which we view fundamental regulatory failures including indadequate systems and controls. This enforcement action relates to consumer protection failures and the penalty imposed demonstrates that we will not tolerate breaches of this nature.
11.21am: China has offered its condolences to North Korea and described Kim Jong-il as a “great leader” and “close friend”. In a statement read out on the main TV evening news, the Chinese government said it was confident that co-operation with North Korea would continue under its new leader Kim Jong-un.
Meanwhile, South Korean media reported that North Korea test-fired a short-range missile on its eastern coast today.
11.14am: The Bundesbank is confident that the German economy, Europe’s largest, will escape a major contraction in the months ahead. Many economists expect at least one quarter of contraction but some sectors have been surprisingly resilient.
Germany’s central bank, which recently slashed its 2012 growth forecast to 0.6% from 1.8% six months ago, said in its monthly report:
The construction sector has still turned out to be very robust. The same is true for private consumption, which has been supported by the continued favourable situation in the labour market.
Seasonally adjusted, industrial orders in October more than compensated for the strong loss they saw a month earlier, which along with the slight improvement in confidence in industry in November suggests that the dip in the economy in the autumn should not turn out too deep.
Industrial production beat forecasts to rise 0.8% in October, bouncing back after a steep fall in September.
10.51am: Italian president Giorgio Napolitano says the firewall to defend the euro is still insufficient. Details from Reuters
Speaking at a ceremony in Rome, Napolitano said medium-term measures to toughen fiscal discpline taken by European leaders this month must be accompanied by “the immediate defence of financial stability in the eurozone”.
He called for a “strengthening of the still insufficient firewalls necessary to defend sovereign debt and save the single currency”.
On Sunday Italy’s deputy economy minister Vittorio Grilli also said European debt bailout mechanisms needed to be reinforced.
10.40am: Some interesting research in the FT shows homeowners in some of the poorest parts of the country put themselves at risk of repossession (£) by taking out second mortgages in the run-up to the credit crunch.
Homeowners in some of the nation’s poorest areas have put themselves at increased risk of mortgage arrears or repossession as a result of the sharp rate at which they withdrew equity from their homes in the run-up to the credit crunch in 2007.
Based on data obtained under a freedom of information request from the Financial Services Authority, the FT analysis shows that nationwide, 61% of those remortgaging their properties in 2007 used the opportunity to take equity out of their homes. But in some areas, the percentage was much higher, with 74% of those in Northern Ireland pulling out equity and 68% in Bradford while 67% and 64% respectively of those remortgaging in the Doncaster and Oldham postal codes did so. The last two areas are in the two lowest deciles for income and wellbeing as measured by the Index of Multiple Deprivation.
Furthermore, in those areas price falls since the peak of the market in September 2007 have been larger than those in England and Wales generally and have been much slower to recover. Remortgagers in those areas who extracted large amounts of capital may well owe more on their homes than the market value even though they were purchased well before property prices peaked.
10.23am: FT currency correspondent Alice Ross tweets “North Korean leader dies; South Korean won plunges: buying opportunity, claims Soc Gen.”
Korea: North Korean leader’s death to temporarily unsettle South Korean assets. North Korean leader Kim Jong Il’s death was confirmed today. In our view, the transition of power is already a completed affair, and we don’t expect any disruption within North Korea. It is true that China has been uneasy on the inheritance of power for three generations in a row, but China has little choice as Kim Jong-un had been officially declared as the successor since late 2009 and has been appointed to the No.2 position in the party congress in October 2010. The question is if the new leader in North Korea feels compelled to demonstrate his new power. There is a possibility that Mr Kim Jong-un would cause an incident, similar to Yeonpyeong island incident in November 2010, to show off his resolve as a new leader. In order for North Korea to survive, brinkmanship is essential to coerce concession from the West. Kim Jong-un also may want to cause an incident so that China would be inclined to admit him as the leader of North Korea. How China reports the transition and whether it would formally endorse the new leader’s legitimacy is a key factor to watch in the next few hours. While we think the transition of power is a relatively smooth process, financial markets are likely to remain concerned for the next few weeks. KRW underperformed Asian currencies today on the back of the news and could be hit further in the coming days until uncertainty fades.
9.43am: Bank of England policymaker Paul Fisher has said the present situation is potentially more dangerous than in 2008, and the downside risk from the eurozone crisis is bigger than inflation.
More details as they come in.
9.38am: Christian Noyer, governing council member of the ECB, has told a press conference in Paris that the ECB will intervene to stem liquidity crises that affect European banks’ stability, but ruled out large-scale sovereign bond buying.
Noyer, who is also governor of the Bank of France, said restoring market confidence in the eurozone would likely be a “difficult and potentially lengthy task”.
Engaging in large-scale purchases of sovereign bonds is well beyond what should be expected in the central bank’s role as a lender of last resort. The best possible contribution of the euro system is to ensure price stability in the medium run. To the extent that financial markets jeopardise price stability, the euro system must intervene. This analysis has motivated our decisions in the past and will continue to motivate them.
Large-scale asset purchases are not without risks. Although they may help to eliminate upward pressure on interest rates in the short term, they will also affect price and financial stability in the medium run. Such risks will not necessarily materialise, but when they do the repercussions are immense.
9.25am: Standard & Poor’s has said it won’t downgrade South Korea’s credit rating following the death of Kim Jong-il.
Our ratings on South Korea take into account temporary uncertainties associated with North Korean security risks as well contingent liabilities arising from a possible reunification of the North and South.
But it warned that South Korea’s rating or outlook could be revised if the succession plan was not smoothly implemented or if there were other signs of political instability.
Earlier, Fitch Ratings said the death Kim Jong-il did not merit a negative move on South Korea’s A+ rating.
9.41am: It’s another busy day in the fight to save the euro, here are some of today’s highlights.
14:30 GMT: European finance ministers will hold a conference call with an aim to agree a new €200bn loan to the International Monetary Fund as part of a deal to save the single currency. The EU still expects the UK to contribute £25.9bn to the fund.
14:30: The ECB will announce last week’s bond purchases. It has spent €207.5bn on government bonds since its programme started in May last year.
15:30: George Osborne will address MPs on the Vickers’ report into banking
8.10am: The FTSE 100 has opened down 30 points at 5,360.
Joe Rundle, head of trading at ETX Capital, said:
It is a shorters’ market and not much real long-term investing. I think it is going to be a negative week with very thin volumes.
Everyone is talking about North Korea and the uncertainties, while Fitch had quite strong words in its statement. It does not look like anything is going to be solved in Europe until it is right on the brink.
The pan-European FTSEurofirst 300 index of top shares was down 0.4% at 952.96 points.
The banks are among the biggest losers in the FTSE 100 following Vince Cable’s announcement that he would “adopt in full” Sir John Vickers’ proposal to “ringfence” retail banking from riskier investment banks.
Barclays dropped 1.9%, RBS is down 1.9%, Lloyds 1.8% and HSBC 1%.
“Banks held too little capital in the good times – the danger now is that they will be forced to hold too much capital in bad times” Read Larry Elliott’s take on Vickers.
7.30am: Good morning, and welcome to another day of rolling coverage of the eurozone crisis.
European markets are forecast to open down in reaction to the news of the death of Kim Jong-il, the North Korean leader.
Most Asia-Pacific markets have dropped sharply as expects warn that Kim’s death could lead to civil unrest that could spark a crisis in the region. North Korea’s military has been put on the highest state of alert.
South Korea’s Kospi index dropped 3.4% and Japan’s Nikkei 225 fell 1.3% to 8,296.12. The Korean won fell 1.6% against the dollar. The FTSE 100 is expected to open down 69 points to 5,328.
Meanwhile Mario Draghi, president of the European Central Bank (ECB), has breached the taboo of not countenancing a break-up of the eurozone. In an interview with the FT Draghi warned that struggling eurozone countries that leave the euro bloc would still face great economic difficulties afterwards.
Countries leaving the bloc and devaluing their currency would create “a big inflation” and still need to adhere to structural reforms, “but in a much weaker position,” he said.
And, everyone is still expecting Standard & Poor’s to downgrade France’s credit rating.