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Euro debt crisis: Italy passes first austerity vote – LIVE

• Silvio Berlusconi wins vote of confidence over austerity plan – second vote tonight
• French banks under pressure after Moody’s cuts Société Générale and Credit Agricole’s credit ratings, blaming worsening conditions in banking sector amid Greek crisis
• Bank of France governor rules out nationalisation
• Crucial talks between Germany, France and Greece due later
• EC president calls for “Un nouveau moment fédérateur

2.04pm: The next scheduled event in the seemingly never-ending European Debt Story (Halo572′s objections to the overuse of the word ‘crisis’ have been noted) is the conference call between Angela Merkel, Nicolas Sarkozy and George Papandreou. It is scheduled to take place after the European stock markets close, at 5pm GMT (6pm UK time).

However, we aren’t too hopeful that the phone chat will yield much. French government spokeswoman Valerie Pecresse has said that France is not planning to issue a statement after the conference call.

According to Pecresse, the call will centre on Greece’s efforts to cut its budget deficit, with France looking for proof that Greece will meet the commitments agreed in return for its bailout cash.

“We have to be firm on these commitments and on putting them into action,” she said.

1.53pm: Berlusconi won his vote of confidence by 316 votes to 302, Reuters reports. That suggests there’s less danger of a shock defeat when the austerity package is voted on at 7pm BST.

But what’s in the actual package? There has been a massive political row in recent weeks, with various measures being added to the programme and then ditched.

We know that the plan aims to cut Italian borrowing by €54bn. Details released yesterday showed that VAT will be raised by one percentage point to 21%, and a special 3% levy will be imposed on people earning more than €300,000 per year.

Italy also plans to raise the retirement ages for women in the private sector, cut various state benefits, and reduce payments from the central government to regional offices.

There’s a good round-up here on Business Week.

Italian bond yields are down slightly today, at 5.63%. They had dropped below 5% a few weeks ago after the second Greek bailout was agreed, but have crept higher recently – a sign that the markets fear that Italy could potentially struggle to finance itself.

1.15pm: This just in. The Italian government has won a crucial vote of confidence – paving the way for its austerity package to be voted through later tonight.

Had the vote gone the other way, Silvio Berlusconi’s government would have collapsed, the fiscal consolidation plan would have been in ruins, and the eurozone would have been in even more of a pickle. Admittedly, Berlusconi was expected to win this one — but the victory has given the financial markets another fillip — with the FTSE 100 just jumping 96 points to 5270.

The Italian lower house of parliament will now vote on the austerity package at around 7pm BST. The governing coalition has been fighting over the details of the plan for weeks (we’ll bring you some detail of what’s on the table shortly), but Berlusconi should have enough of a majority to win tonight’s vote.

12.49pm: The Eurozone crisis is getting plenty of attention in UK political circles. At Prime Minister’s Questions, David Cameron told MPs that “France and Germany are meeting to stop Greece going bankrupt”

We’re not sure that this is exactly what Angela Merkel had in mind yesterday when she said everyone needed to “weigh their words very carefully” to avoid alarming the financial markets.

(full coverage of PMQs is over at Andrew Sparrow’s Politics Live blog)
Deputy prime minister Nick Clegg also devoted part of a speech earlier today to the situation in Europe. Here are a few highlights:

To quote Christine Lagarde, the new head of the IMF: ‘We are in a dangerous new phase’. A huge rise in oil and food prices. A slowdown in overseas markets. Continued turmoil in the Eurozone. Ongoing uncertainty in the US. Far from a one off shock, the 2008 banking crisis has set off a chain reaction that continues to reverberate around the globe.

In terms of the Eurozone, the real failure has not been the original concept of monetary union. It’s that the rules were never applied stringently enough. The Stability and Growth Pact was actively watered down in 2005, allowing members to wriggle out of their fiscal commitments to each other. Now we are seeing the effects.

But on a day like today, when people are talking openly about the possibility of Greek default, the key question is not: how do we seek to renegotiate the UK’s place in the European Union in a treaty that hasn’t even materialised yet. The single – most important question, the urgent question is what role can we play in helping the Eurozone avoid further turmoil, creating the stability needed for prosperity and jobs – in the Eurozone and in the UK too.

Got a suggestion for how the UK can help? Last week, Christine Lagarde said the UK needed to be “nimble” – an indication that while the IMF backs George Osborne’s Plan A today, the fiscal consolidation may need tweeking if the global economic climate worsens.

On that issue, our Scotland correspondent Severin Carrell reports that First Minister Alex Salmond has been in cheery mood today, saying that the Scottish economy was bucking the UK trend.

Today’s unemployment data showed that Scotland was the only place in the UK with a net jobs increase, part of a six month trend of overall jobs growth. Salmond claimed the SNP’s
capital investment, building programmes and stimulation packages for small firms were all much more successful that UK govt policies.

The First Minister said Osborne should now have a plan B: his.

12.30pm: There’s an interesting blog post from former Treasury adviser Gavyn Davies about the developing crisis, over on the FT’s site. In it Davies outlines just why the dilemmas facing Europe’s policymakers are so awkward.

“Even after a bond default, Greece would still be left with a primary budget deficit and a current account deficit, both of which would require continuing finance running at about 3-5 per cent per annum. Without further help from the eurozone and the IMF, there would be no choice for Greece other than to leave the euro and devalue.

For Greece, the immediate consequences of introducing a new drachma would be extremely painful for its banks, bank depositors and the economy generally, but it might still choose that route because of the lack of alternative options, and the prospect of longer term recovery. But for the eurozone, the consequences could be worse.

A Greek exit from the single currency could cause uncontrollable contagion to other weak members of the euro, bringing on a generalised break-up of the euro. If Greek citizens had just seen the value of their bank deposits cut in half as the new drachma was devalued, why would anyone hold bank deposits in other troubled members of the euro?”

That would mean there would be an immediate need to recapitalise the European banking sector, Davies argues, leading to “uncontrollable contagion to other weak members of the euro” and a break-up of the single currency.

This is why Angela Merkel backed away from the nuclear option of stopping paying Greece’s bailout cash, triggering a disorderly default. But the alternative appears to be to put yet more money into Greece even after a default – a political disaster for Merkel?

Meanwhile, BBC business editor Robert Peston had an interesting take on the crisis this morning. However, as we at The Guardian are always careful to take account of the work of the French markets regulator, we can only say that Peston has some interesting views on French bank accounting worth reading.

11.54am: More action from the European Parliament session in Strasbourg, from Ian Traynor:

Tories in the European Parliament want Greece kicked out of the euro, although it’s not certain that the rest of the eurozone will be listening to the advice even if the odds are shortening on a Greek departure.

“We all woke up this morning to see another emergency discussion was taking place between Mrs Merkel, Mr Sarkozy and Mr Papandreou….We are all watching the slow-motion car crash that is this European Monetary Union crisis,” said Martin Callanan, the conservatives’ leader in the chamber in Strasbourg.

“The only solution now is for Greece to default on its debt, leave the Euro and devalue. It will be extremely difficult and painful but it is the least-worst solution to this crisis.”

Callanan also criticised José Manuel Barroso, after his pledge to bring forward options for the implementation of eurobonds.

The crisis “won’t be solved by Eurobonds, more high-interest loans or a financial transactions tax., and it certainly won’t be solved by a theological debate about whether the economic governance package follows the intergovernmental model rather than the community method, or whatever else.”

11.25am: After the early selloff, financial markets have staged a healthy rally. As madeupname2 points out below, French banking shares are recovering – Credit Agricole is now up around 3.1%, with BNP Paribas down around 1.5%, and SocGen off 3.1%.

The wider markets are also looking much cheerier, with the FTSE 100 up 56 points at 5231. Other European stock markets are also higher (French CAC up 1.2%, German DAX up 1.3%).

Ben Critchley, sales trader at IG Index, reckons the Moody’s downgrade has actually reassured the markets, and could help Wall Street pick up the pace this afternoon:

After an unsteady start, markets have rallied in the first couple of hours trading as the Moody’s rating downgrades on the French banks seems to have removed at least one element of uncertainty that had been haunting many in recent days. It does, however, seem difficult to imagine that this news will produce any extended rally.

Looking into the afternoon session, we have US retail sales data for August on the agenda and forecasts are that we’ll see only the smallest sign of growth here. Any shortfall, however, could serve to rattle the fragile confidence that we’re seeing right now. Earnings calendars on Wall Street remain relatively quiet too, so raw sentiment really is going to be setting much of the pace. We’re currently calling the Dow to open around 50 points higher.

11.03am: Ian Traynor also has more insight into the situation with euro bonds – debt guaranteed by every member of the eurozone. (see 9.28am for Barroso’s comments on this earlier today).

Olli Rehn at the commission is to unveil a green paper on the pros and cons of eurobonds next month. That has been known for a while, and Brussels officials talk about it here every day. The real issue is whether eurobonds would entail renegotiating the Lisbon treaty.

The commission is likely to emphasise ways of organising eurobonds without rewriting the treaty to make things faster and to try to minimise political conflict. None of which means we’re getting eurobonds – yet, anyway.

10.45am: More from Ian Traynor:

Barroso’s key political point is that the approach of the past 18 months has failed. Eurozone governments cannot keep hatching deals among themselves and bypassing Brussels.

A system based purely on intergovernmental co-operation has not worked in the past and will not work in the future. After all, this is why the community method and the European Union institutions were created by the member states in the first place.

The Economic and Monetary Union cannot function properly only on the basis of decisions taken by unanimity. Because if a eurosceptic fringe can determine the position of one member state and one member state can block decisions, the result is that we are not credible. This is not about institutional positioning or power. It is about efficiency
and delivery. Markets and investors will trust us only when we will be able to show that we are able to deliver on our commitments in a real determined way.

The only right way to stop the negative cycle and to strengthen the euro is to deepen integration, namely within the Euro area, based on the Community method. This is the way to go. It is also the only way for the Euro area to really play the role that investors and global partners expect it to play.

What we need now is a new, unifying impulse – “un nouveau moment fédérateur“, let’s not be afraid of the word, moment fédérateur is indispensable

10.30am: Our Man In Brussels, Ian Traynor, has more details of the speech given by José Manuel Barroso, president of the European commission:

Addressing the European parliament in Strasbourg, Barroso sounded desperate and thoroughly exasperated by European leaders’ failure to deliver fast enough on their rescue pledges.

He was referring to the 21 July EU summit which agreed a second bailout of Greece and raft of measures to empower and strengthen the temporary bailout fund, the EFSF.

In the cacophony of criticisms, counter-criticisms, magic bullets and miracle panaceas that are proposed on a daily basis, the truth has been drowned out – that solid, feasible and concrete proposals have been made. That they have been agreed upon. But they have taken too long and have not yet been fully delivered. So my first concern is implementation – implementation of what we have agreed.

Therefore I expect all Euro area Member States to make good on their promises and urge them to ratify the 21 July agreement by the end of September.

There was also some alarming words from Barroso:

We are confronted with the most serious challenge of a generation. This is a fight for the jobs and prosperity of families in all our member states. This is a fight for the economic and political future of Europe. This is a fight for what Europe represents in the world.
This is a fight for European integration itself.

09.55am: More on the UK unemployment numbers. Most of the 80,000 increase in joblessness was driven by a surge in young people unable to find work – with 77,000 18-24 year olds joining the ranks of the unemployed.

Employment minister Chris Grayling has admitted that the figures are pretty poor:

Today’s figures underline the scale of the challenge that we face particularly given slower growth across Europe and North America. Unemployment remains lower than it was six months ago but clearly we must continue to focus our efforts on supporting business growth and ensure that people who do lose their jobs have the best possible support to get back into employment.

And Graeme Leach, chief economist at the IoD, says the Bank of England must act now to stimulate the UK economy with more quantitative easing:

The storm clouds are gathering with falling employment and rising unemployment at a time when it is difficult to see how this might reverse. The ongoing uncertainty surrounding the eurozone crisis means that companies are likely to remain cautious about hiring and more certain about firing.

On top of this, the continued sharp squeeze in consumer incomes, with real pay falling by almost 2%, means that high street prospects remain gloomy. Today’s figures reinforce our belief that we need to launch QE2 as soon as possible.

9.43am: Britain may be outside the Eurozone, but today’s unemployment data shows that the UK’s economy is still a gloomy place.

The Office for National Statistics has just reported that unemployment jumped by 80,000 in the three months to July, on the ILO measure. That takes the total number of people officially out of work to 2.51 million, and is the biggest quarterly rise since August 2009.

The claimant count (which is more timely than the ILO stats) also rose, with an additional 20,300 signing on in August. That’s a better figure than City analysts had expected (a 30k+ rise was pencilled in).

The data also shows that the UK public sector workforce dropped by 111,000 between April and June – the biggest quarterly fall on record.

9.28am: While the Moody’s downgrade of the French banks took the prize for the gloomiest story this morning, European commission president José Manuel Barroso has provided the real shock – and sent stock markets rallying.

Barroso said that the commission was preparing to present options for Eurobonds, an idea that appeared to have been kicked into the long grass.

I want to confirm that the commission will soon present options for the introduction of euro bonds. Some of these could be implemented within the terms of the current treaty, and others would require treaty change.

But we must be honest: this will not bring an immediate solution for all the problems we face and it will come as an element of a comprehensive approach to further economic and political integration.

Both French president Nicholas Sarkozy and German chancellor Angela Merkel had earlier ruled out the prospect of eurozone-wide borrowing arrangements. The idea is particularly unpopular in Germany.

Markets have responded positively to Barroso’s announcement. The FTSE 100 is now up 40 points having fallen in early trading. France’s CAC is up 0.6% and the DAX is up 0.1%.

9.15am: The impact of the French banks downgrade was felt as far away as Australia (despite, as we said earlier, many analysts expecting Moody’s to strike this week).

A late sell-off after the Moody’s announcement hit the wires sent Australia’s main stock market down to its lowest level in five weeks, down 1.6% on the day. Banking stocks all suiffered, with National Australia Bank losing 3%.

Australian shares have dropped 8% during September. Justin Gallagher, head of Sydney sales trading at RBS Australia, told Reuters that a range of factors are to blame:

The same old concerns are haunting investors: hard Greek default, possible recession in the U.S., slowdown in China – the list goes on. The magnitude of the fall is indicative of the concern about the macro environment, which we are slaves to at the moment.

8.48am: We’ve got some more details of the “Crisis? What Crisis?” interview given by Bank of France governor Christian Noyer (in which he told RTL that the downgrade “relatively good news”)

Asked about the nationalisation of a French bank, Noyer said:

That is something which makes no sense. It is totally surreal. French banks do not need any outside capital to face up to risks.

Noyer also said that Greece can “stay on the rails” in relation to its debt agreements. “They can do it. That implies huge reforms, but they can do it.”

With Greek two-year government bonds yielding (wait for it) 93% this morning, the markets take a rather different view.

Noyer is trying to draw attention to the elements in the Moody’s releases today which stressed that the banks can meet potential Greek losses.

“Even if there was a shocking scenario, as the market expects at times, it would represent less than six months of profits. That would mean a smaller dividend, but no losses,” as Noyer put it today on French radio station RTL.

However, Moody’s also points out that each of the French banks, including BNP Paribas, are heavily reliant on wholesale funding. This “may pose a vulnerability given considerable market tension,” the agency said.

In other words, as Jill Treanor says below, if US banks decide they can’t risk lending to their French counterparts, SocGen et al might find themselves caught in a 2008-style liquidity crisis.

8.45am: Here’s some early analysis of the French banking downgrade from Jill Treanor, our banking correspondent:

Markets have been expecting the downgrade by Moody’s to come today or on Thursday, because the agency had warned it might downgrade them three months ago. Since then, the French banks been trying to prevent such a move: SocGen announced €4bn of asset sales on Monday – but was still downgraded.

BNP Paribas’s balance sheet reduction programme announced earlier today appears to have stalled a downgrade for now.

But Greece isn’t the only worry as Moody’s talks about the “structural challenges to banks’ funding and liquidity profiles” for the sector. This may be more of a concern. Just as happened to UK banks in 2007 and 2008, funds in the US are much more reluctant to lend money to French banks.

The boss of SocGen described this yesterday as a “new world which is a bit disturbing”, but stressed at the presentation in New York that the bank was able to find dollars from elsewhere and alter its funding needs in the markets.

All the French banks need to convince the markets that they can keep funding themselves, otherwise the rumours of a government bail out will refuse to go away.

You can read the full report of SocGen CEO Frédéric Oudéa’s trip to New York here.

8.24am: French banks shares have fallen sharply again following Moody’s downgrade — and despite Christian Noyer’s admirable optimism:

Société Générale has been hardest hit, losing 4.2% in the first 20mins of trading. Credit Crédit Agricole is faring slightly better, down 3.2% at pixel time.

The biggest faller, perhaps surprisingly, is BNP Paribas, whose shares have tumbled by 5.1%. It dodged a downgrade – and announced a €70bn asset sale plan. City analysts, though, reckon BNP is on borrowed time.

As Michael Hewson, market analyst at CMC Markets, puts it:

Surely it can only be a matter of time before BNP Paribas follows in their wake, as the bank announces a restructuring plan to increase capital, probably in order to head off a downgrade at the pass.

8.12am: France’s answer to Mervyn King, Bank of France governor Christian Noyer, has just responded to the downgrade — with a classic Gallic shrug.

Speaking to a French radio station, Noyer described the downgrades of two of France’s largest banks as “relatively good news”. Moody’s decision just means French banks now had equivalent ratings to European peers, he argued:

French banks have an excellent rating, the same level as other major European banks, HSBC, Barclays, Deutsche Bank, Credit Suisse. There’s no really bad news on the way, and Moody’s says the level of capital of French banks allows them to absorb any potential losses on sovereign debt.”

The downgrade was “very small”, Noyer added.

8.02am: The City had been braced for Moody’s to downgrade the French banks, since it put the sector on negative watch three months ago. The move is a blow to Europe’s political leaders as they attempt to persuade the financial markets that Greece’s problems can be contained.

Moody’s said that funding conditions in the banking sector had worsened since it started its review – particularly bad news for French banks, which hold .7bn (£36bn) of Greek debt.

Here’s the full details of the downgrade:

The debt and deposit ratings for SocGen were moved to Aa3, from Aa2. The bank’s overall strength rating, currently at C+, remains under review, Moody’s said, with a one notch downgrade likely.

Credit Agricole’s overall bank strength rating was downgraded from C+ to C, while its long-term debt and deposit ratings were moved down to Aa1 from Aa2.

BNP Paribas’s rating, meanwhile, remains on review as Moody’s considers its reliance on wholesale funding, the ratings agency said.

In SocGen’s case, Moody’s said that the bank could cover losses on Greek, Portuguese and Irish debt, but added: “Nevertheless, SocGen’s wholesale funding, the majority of which is short-term, is still high in absolute terms and may pose a vulnerability given considerable market tension.”

The debt and deposit ratings were downgraded to reflect changes in Moody’s assumptions about the level of support the French government might provide in the event of a crisis, it added.

Credit Agricole’s exposure to Greek debt had led to its downgrade: “Moody’s has concluded that although GCA has considerable capital resources to absorb potential losses arising over time from these risks, the exposures themselves are too large to be consistent with existing ratings.”

Moody’s had said in June that it was putting the three banks under review.

7.45am: Good morning. It’s another crunch day for Europe, as the debt crisis that has convulsed the region for months intensifies.

As dawn broke over the City of London, Moody’s slashed the credit ratings of two of France’s biggest banks – Société Générale and Credit Agricole. Both have major holdings of Greek debt – leaving them vulnerable to a default.

A third bank, BNP Paribas, was spared a downgrade, for now, but is planning to sell €70bn (£60.6bn) of assets to patch up its capital reserves.

The move comes as Nicolas Sarkozy and Angela Merkel prepare to hold crisis talks with Greek prime minister George Papandreou. Italy will also be in focus, as the Italian parliament votes on Silvio Berlusconi’s controversial austerity plan.

Back in the UK, the latest unemployment data is released at 9.30am – an opportunity to see how Britain’s own economy is faring.

So, a big day for the eurozone, and beyond. We’ll bring you the latest action and reaction throughout the day.

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