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Eurozone crisis: Markets shrug off threat of Italy downgrade- as it happened

• FTSE gains 1.5% despite Fitch warning
Highest ever ECB deposits fuel fears of new credit crunch
• German chancellor Angela Merkel to meet IMF chief Christine Lagarde
• UK issues debt at a negative interest rate
• French industrial and manufacturing figures come in better than expected
Today’s agenda
• Blogging now: Graeme Wearden

10.50pm: So the action now shifts to Wednesday, and another round of meetings

Angela Merkel is due to hold discussions with Italian Prime Minister Mario Monti in Berlin, while Christine Lagarde is heading to Paris to meet with Nicolas Sarkozy (in whose government she served before getting the top job at the IMF).

We’re done for tonight. Thanks for reading and commenting – see you tomorrow…..

10.21pm: Finally! A few news snaps out of Berlin following the Merkel-Lagarde talks.

A spokesman for the German chancellor just told reporters that the meeting “focused on the debt crisis”. That included the situation in Greece, as well as discussing the important of stimulating growth and jobs in Europe.

Update: And that, alas, is all the information forthcoming

9.54pm: London hedge funds are deliberately slowing down the Greek debt talks in the hope of making a juicy profit.

That’s the claim in the New York Times tonight. It reckons that many hedgies have stocked up on Greek bonds in recent weeks as banks and insurance firms cut their exposure. That includes large quantities of debt maturing in March (Athens must repay €14bn at the end of the month). These hedge funds are now reluctant to agree to take a 50% haircut on this debt — and are playing hardball in the hope of getting all their money back in a couple of months.

From the article:

“They are calculating that Greece will not default before March,” said G.Mitu Gulati, a sovereign debt expert at the Duke University School of Law and a co-author of a recent paper on the intricate dynamics of the debt restructuring process in Greece.

Mr. Gulati points out that it is these investors that are in many ways behind the delay in getting a deal done. “If you own a bond that matures in March and it is January then you have every incentive to delay,” he said.

This is also a self-fulfilling situation — the longer things drag on, the more banks will cut their losses, and the greater the influence the hedge funds get on the process.

It’s slightly reminiscent of Kraft’s takeover of Cadbury — during the months of battling, traditional investors cashed in their profits by selling their shares in the UK confectioner to hedge funds, who were therefore keen to take Kraft’s final offer and take a profit.

9.30pm: There’s a disappointing lack of news out of Berlin from the Merkel-Lagarde talks tonight — the IMF is clearly sticking to its policy of not making any statement.

Instead, we have the witty thoughts of Ms Merkel’s spoof Twitter account to keep us going:

@Angela_D_Merkel Asked @Lagarde to lend me a Euro for the jukebox and she tried to restructure my mortgage.

@Angela_D_Merkel Helping @Lagarde carry out structural adjustments on the black forest gateau.

If only the truth was as much fun….

9.12pm: Despite the euro tensions, the US stock market closed higher today.

The Standard & Poor’s 500 index gained 0.9% to 1,291.96, which is its highest closing level since July 29. That’s the week before S&P slashed the US AAA credit rating.

So for another day, hopes over the economic recovery continue to trump fears that the eurozone crisis is heading for another panic. As Paul Nolte, managing director at Dearborn Partners, put it on Marketwatch:

It still remains a euro-centric story, and the euro is rallying because things haven’t blown up over there.

Yet, anyway…

8.01pm: Here’s a remarkable story that shows the extent of the Italian challenge — the Mafia is now Italy’s biggest business, and its largest banking group.

Italian business group Confesercenti (a Mediterranian CBI) warned that the Mafia now turns over €140bn a year, and holds €65bn euros in liquidity. While many legitimate firms have struggled since the financial crisis began, it has been a real opportunity for crime bosses.

Marco Venturi, president of Conferscenti, said the Mafia now has a major grip on much of the country, not just its traditional powerbase in the south:

During this economic crisis, mafia organizations are the only businessmen able to invest.

We should never forget that the economic crisis is useful for organized crime which influences the legitimate economy and floods the illegal economy with both the production and sale of illegal goods.

7.05pm: Speaking of Christine Lagarde (as we were), the IMF just released this statement about her trip to Europe this week:

IMF Managing Director Christine Lagarde is holding a series of meetings in Europe this week on current economic issues. We can confirm that she has a dinner meeting today with Chancellor Merkel in Berlin, and has held meetings with other German officials, including Finance Minister Wolfgang Schäuble and Vice Chancellor and Economy Minister Philipp Rösler.

Additionally, the Managing Director is scheduled to meet on Wednesday with President Sarkozy in Paris. We do not expect to provide any specific readouts from these meetings, or offer further comments. Madame Lagarde will return to Washington later in the week.

6.40pm: The main event this evening is the tête à tête between Angela Merkel and Christine Lagarde.

The German chancellor is meeting the head of the IMF from 7pm GMT in Berlin. Alas there won’t be a formal press conference, but officials and insiders can be relied on to release some details afterwards.

Top of the agenda is the situation in Greece, after Merkel warned yesterday that time is running out to agree a deal with its private creditors.

As Helena Smith reports from Athens, although Christmas fairy lights are still adorning shop windows and the capital’s central boulevards there is a level of nervousness that is hard to miss in the statements and general disposition of government officials.

Everyone is acutely aware that crunch time has come.

Central, of course, to Greece’s fate are negotiations to persuade
bondholders to forgive at least half the nation’s debt – a deal that
would see around €100bn euros sliced from the €205bn of privately owned Greek debt as part of efforts to bring the country’s debt-to-GDP ratio down to the “more sustainable level” of 120% by the end of 2020.

Although speculation has mounted that investors will have to accept more than a 50% reduction in the value of their Greek bonds, the latest word is that negotiations have entered a final phase and should be completed by week’s end. Tellingly, Charles Dallar, who heads the Institute of International
Finance which represents the global banks and insurance firms among
Greece’s largest private sector creditors , flies into Athens

6.01pm: One of the world’s biggest car bosses is running out of patience over the eurozone debt crisis,

Chrysler and Fiat boss Sergio Marchionne told the Detroit Auto Show that the very future of Europe was in doubt, warning Europe’s leaders that they are “playing with fire”.

One of the things we need to realise is that the world is fundamentally interconnected. We have ended up being accountable to a lot of people who financed our public debt.

“Europe is being called to task to solve a number of issues. If we don’t acquire the confidence of the financial markets, the future of Europe is doubtful.

Our Wall Street correspondent Dominic Rush has the full story here.

5.17pm: The Greek bank run that we discussed at 3.54pm has prompted a surge in sales of safe boxes and alarm systems, as people try to keep their savings safe at home instead.

Our correspondent in Athens, Helena Smith, explains:

With the government itself racheting up the rhetoric on Athens’ possible exit from the euro zone, more and more Greeks are voting with their feet when it comes to keeping deposits in banks. Alarm companies have reported a record rise in requests for systems to be installed at homes where soaring numbers are now electing to stash cash.

“It’s been phenomenal,” said a saleswoman at the central offices of Fotellis, one of the country’s biggest security firms. “People no longer seem to have any trust in banks with all this speculation about leaving the euro zone.”

Sales of safety deposit boxes have also shot up. With the smallest boxes costing around €100 and the biggest ones €450, companies say they can’t make them fast enough.

“We have been getting the oddest requests for boxes to be installed and hidden in homes,” said one company rep. “Some people are even asking that they be bolted under drain pipes to keep burglers at bay. They may no longer have much faith in banks but nor are they willing to keep money under the
proverbial mattress.”

As the crisis has intensified in the country where it was born, so too has crime with house break-ins rocketing in Greece over the past year according to police.

5.06pm: It’s been a cheery day in the financial markets (unless you’re in the short-selling trade), with the FTSE 100 finishing 84 points higher at 5696, a gain of 1.5%. Most other European markets posted strong gains too.

On Wall Street, the Dow Jones industrial average is up 90 points at 12482.

So why the rally, given the eurozone’s problems remain as acute as ever? The trigger was strong financial results today from aluminium producer Alcoa, which left investors more optimistic about the state of the world economy.

America’s largest aluminium producer beat expectations with a 6% rise in revenue. Joshua Raymond, chief market strategist at City Index, commented that:

Alcoa is the traditional curtain raiser to the US earnings season and whilst their results are unlikely to set the tone for the entire results period in the US, the fact that they have beaten expectations helps to put European traders on the front foot.

4.42pm: You would have thought the European Central Bank president, Mario Draghi, had enough to worry about. But our Italian correspondent John Hooper understand that tomorrow the Italian gossip mag, Oggi, will be adding to his woes:

An alert paparazzo (if that’s not a tautology) apparently snapped the ECB’s rigorous boss while he was driving in Rome with a mobile phone clamped to his ear.

Talking while driving without a hands-free carries rather less onerous penalties than those being dreamed up in Brussels for euro zone governments with excessive budget deficits — 10 points on the licence and a fine of up to €612.

Why €612? Who knows? As they say here, “Siamo in Italia” (“We’re in Italy”).

Perhaps Draghi’s next call should be to Nick Freeman, the lawyer who has helped numerous UK celebrities through their motoring indiscretions (M’Lud). Surely the Italian legal system would show clemency — after all, it’s good to talk when you’re trying to hold Europe’s banking sector together.

UPDATE: You can see a picture of Draghi nattering away behind the wheel here.

4.22pm: Another interesting development in Ireland today. EU and IMF officials are currently assessing the health of the country’s economy — and an Irish centre-left think tank is demanding full disclosure of its findings.

TASC challenged the Dublin government today to ensure all the information compiled during the “troika’s” latest mission to Ireland is published in full and in public (our Ireland correspondent Henry McDonald reports).

TASC director Nat O’Connor said that the data provided to the European Commission, European Central Bank and IMF by the Irish authorities under the terms of the EU-IMF agreement should be published simultaneously in Dublin.

Dr O’Connor said:

Much of the data required under the EU-IMF agreement is either not available to the Irish public, or there is a significant time lag in its availability.

A lack of data is one of the core problems facing those working in the public policy arena. The EU-IMF’s insistence on comprehensive and timely data provision is therefore welcome. However, that data should be published in Dublin at the same time it is forwarded to Brussels and Washington. Where there are concerns about commercial sensitivity, these can be addressed using the same exemptions as already apply under Freedom of Information legislation.

The issue of full disclosure is rather sensitive in Ireland, after a draft copy of 2012′s budget showed up at Germany’s Bundestag last November.

3.54pm: Greece’s quiet bank run continues….

New data released by the Bank of Greece this afternoon showed that the total deposits owned by Greek businesses and households fell by 2% in November. That’s not a major drop, except that deposits have been leaking out of Greek banks for months.

Total deposits are now 17% lower than a year ago, at just below €173bn, down from €176.4bn in October.

One reason for the decline is that cash-strapped firms and families are eating into their savings. The other factor is that people are afraid that Greek banks are teetering on the brink of collapse, and would drop over the edge if the country quit the euro.

This image, uploaded by OpenEurope via ZeroHedge shows the steady fall in deposits.

3.23pm: Ireland’s prime minister has rejected claims today that the country will need a second bailout.

Despite recent poor economic data (including a 1.9% drop in GDP), Enda Kenny insisted that Ireland still enjoys the backing of the IMF and European Central Bank.

Kenny also stressed that it was important that Britain remained at the heart of EU affairs and said that he would raise the issue of Europe with David Cameron at a meeting at Downing Street on Thursday.

Citigroup’s chief economist, Willem Buiter, caused a stir yesterday when he predicted that Ireland should negotiate the terms of a second bailout now (details here). He argued that Ireland was in “very bad fiscal shape” because of the bad bank debts that now squat on the government’s balance sheet.

Buiter’s comments were dismissed as a “not particularly useful” contribution by Amadeu Altafaj, spokesman for Olli Rehn.

Our Ireland correspondent, Henry McDonald, has the full story here.

3.08pm: Has Hungary raised the white flag in its clash against the rest of the European Union and the International Monetary Fund?

It emerged this afternoon that Hungary is prepared to consider changing the controversial legislation that sparked weeks of bruising battles with the IMF and the US, and put a new bailout package at risk.

In a letter sent to the European Commission, released today, foreign minister Janos Martonyi said that:

We stand ready to consider changing legislation, if necessary.

The IMF suspended talks over a new €20bn credit line for Hungary after it refused to drop a new central bank law, that appears to compromise its independence and allow the government to control monetary policy.

Yields on Hungarian debt have shot up in recent weeks — it was forced to pay an interest rate of 7.98% on a sale of three-month bills today. Analysts have warned that, without a change of course, the country could be heading for a default.

2.48pm: “The future of the euro will be decided at the gates of Rome.”

Those were the words of David Riley, Fitch’s head of sovereign ratings, in London today as he explained the rating agency’s thinking on Europe.

As reported this morning, Fitch is reviewing all its European ratings and will announce its decisions by the end of the month. Italy, with its €1.9trillion debt pile, is the biggest problem by far, and faces a “significant” risk of a ratings cut.

Riley told his audience in London that:

Taking out the crisis premium means a credible firewall….At the moment, we don’t have that, and that’s a serious concern with respect to Italy.

The financial markets clearly agree — with the yield on 10-year Italian debt hovering around 7.17% today. Although Italy’s current deficit is quite small, over €300bn of debt matures this year and must be rolled over or paid off.

2.28pm: Afternoon all. Some interesting comments from Olli Rehn are just hitting the wires.

Europe’s economic and monetary affairs commissioner has declared that the future governance of Europe will be determined in 2012, and pleaded with the financial markets to give Europe time to fix its problems.

Addressing the European parliament, Rehn warned that:

The crisis has damaged the European economy and affected the jobs and the welfare of Europeans, and this crisis is by no means behind us

It will take time, structural reforms often take a long time…Markets however, tend to be impatient and this impatience can push sovereigns or banking institutions into a liquidity crisis that could surely endanger financial stability.

Rehn urged Italy and Spain to press on with labour market reforms, calling it a ‘pressing priority’. More curiously, he also said Europe must strike the right balance between “responsibility and solidarity” in its response to the crisis.

I’m not quite sure what that last point means — can’t see how ‘irresponsible solidarity’ or ‘responsible isolationism’ would improve matters. #lostintranslation?

Speaking of Olli Rehn, he is due to meet with Hungarian officials later this month to discuss the country’s troubled negotiations over a new IMF loan.

2.11pm: Just time for a lunchtime round-up, and then we’ll hand over to Graeme Wearden.

• The UK has issued £700m of long-term debt at a negative real interest rate.

• Fitch says it will not downgrade France, for now at least.

• Overnight deposits at the ECB have soared to €482bn, adding to fears of a new European credit crunch as banks hoard cash.

• Shares have performed strongly, with the FTSE 100 up 1.5% at 5,697.

• Portugal’s economy will contract by 3.1% this year, according to its central bank.

1.33pm: Shares in Unicredit, the Italian bank which recently launched a deeply discounted rights issue, have rebounded today.

They are up 9.3% so far – having almost halved in value since the announcement. The bank’s capital raising is being closely watched by other eurozone banks needing to raise capital.

Volumes were low, but even so, some regard the big falls as an attractive buying opportunity, Reuters reported.

1.25pm: Portugal’s economy faces “virtual stagnation” in 2013, and will contract by 3.1% this year, the Bank of Portugal has said.

The falls will come as a result of an unprecedented fall in private consumption, the bank said in its quarterly economic bulletin.

12.06pm: At midday the FTSE 100 is now up almost 60 points, at 5,670. That’s a rise of just over 1%.

The European markets are even more bullish. The French Cac is up 2.4% and the German Dax is up by the same percentage.

11.38am: Whether or not Standard & Poor’s will eventually downgrade France, depriving it of its AAA credit rating, Fitch will not, at least this year.

“On the basis of some current economic and fiscal trends in France…we wouldn’t expect to downgrade France this year, unless there is a material deterioration in the eurozone”, Ed Parker, head of EMEA sovereign ratings, told Reuters.

Fitch has put Belgium, Spain, Slovenia, Italy, Ireland and Cyprus on negative watch, with a conclusion expected by March.

Austria, despite fears it is exposed to debt-laden neighbour Hungary, is also unlikely to be cut.

“One of the main risks when we look at Austria is that the exposure of its banks to Eastern Europe and Hungary at the moment is a concern.

“But overall in the portfolio a lot of the exposure is to the more stable and better performing economies in eastern Europe like the Czech Republic.”

11.31am: Another recent UK flotation heads south…

Flybe, which floated in December 2010 at 295p, saw its shares fall 21% this morning following a warning that third quarter UK revenues were below expectations.

The shares are now trading at 54p.

11.07am: Perhaps unsurprisingly, given negative interest rates, gold is rising. It’s trading at ,632 an ounce, up about on the day.

Gold, which by definition pays no interest or dividend, is more attractive when other assets are themselves paying no interest either. An alternative way to look at it might be that the euro has firmed slightly against the dollar, and dollar-denominated assets like gold attract more buyers when alternative currencies can buy more dollars.

Oil is up too today. Brent crude is trading at just over 3 per barrel, up almost 1% on the day.

10.50am: The UK has issued £700m of long-term debt at a negative real yield.

A gilt due to mature in 2047 was issued today at a real yield of -0.116%.

Michael Hewson says the negative yield is “unusual but indicative of the times we are trading in” – the UK being a haven from the eurozone crisis.

Our economy is not immune to the eurozone troubles but the UK won’t default because the bank will print more money. Whether it will be the same value is another thing, but you will always get something back.

10.33am: Two debt auctions to update you on.

Austria has got away its €1.2bn auction of five- and ten-year bonds. It reopened a bond due to mature in 2016, with the yield up to 2.213% from 1.960%, and also a bond maturing in 2022, where the yield fell to 3.322% from 3.528%.

Meanwhile Greece has sold €1.625bn of six-month debt at a yield of 4.9%, down from 4.95% on an equivalent sale in mid-December.

10.09am: The supervisory council of the Swiss National Bank may have forced Philipp Hildebrand to step down, Swiss newspapers have reported.

Emails released on Monday showed that the central banker had been involved in discussions over his wife’s dollar trade, but had not made clear whether he approved it.

After looking at the emails, the SNB advisory council made clear to Hildebrand that his position was no longer tenable, according to two Swiss newspapers reported by Reuters.

10.01am: In the UK there have been a huge bundle of Christmas trading updates from the high street.

Food sales rescued Christmas for Marks & Spencer, as shoppers bought party food such as pork and mustard mini sausages and salted caramel profiteroles.

Game shares have tumbled by more than a quarter after a disastrous Christmas put the retailer in danger of breaching covenants

Debenhams sales were better than forecast, while Majestic Wine said like-for-like sales grew 4% in the nine weeks to the first week of January.

9.50am: Jane Foley, a currency strategist at Rabobank, says that Swiss National Bank policy, of keeping down the value of the Swiss franc, is likely to remain unaltered following Philipp Hildebrand’s resignation yesterday:

The spike lower in EUR/CHF after yesterday’s news of the resignation was very short-lived suggesting that the market on balance expects no change in policy direction by the SNB board.

After all, there is no change in the fact that the Swiss economy is suffering from deflation nor in the risk that CHF strength could constrain growth potential.

That said the broad recovery of the USD which has lifted USD/CHF by around 35% from its August 2011 lows will be offering some comfort to SNB policy makers. While the USD move is significant, the EUR is far more important to the Swiss economy.

While it is possible that softer tone of the CHF vs. the USD will have reduced the risk that the SNB will act imminently to push higher its EUR/CHF1.20 ‘floor’, the risk of a move is still on the table particularly given the recession risk in the eurozone and the accompanying threat to Swiss export potential.

One euro currently buys you 1.2125 swiss francs.

9.43am: Some more detail is coming in on the banks’ use of the overnight lending facilities at the ECB.

Just as a reminder – the banks can lend to each other at 0.372%, the interbank rate, but are choosing to leave their money with the central bank, where they will get just 0.25%. A clear sign of a lack of faith in the credit markets.

Reuters says overnight deposits tend to rise towards the end of the month-long reserves maintenance period, a period during which banks must maintain a certain level of reserves. The current period ends on January 17 – next Tuesday.

The deposits are still at historically very high levels. Before the crisis, banks left less than €100m overnight with the ECB. And during the last two reserves maintenance periods, banks left less than €300bn at the ECB, well short of the €482bn we saw today.

9.29am: Reuters columnist James Saft has an interesting take on the Hildebrand affair.

Swiss National Bank chairman Philipp Hildebrand resigned yesterday after admitting he could not prove he had not discussed a huge dollar trade with his wife, which netted the couple tens of thousands of pounds after the SNB intervened to weaken the Swiss franc.

Saft says:

There is a very good chance that former Swiss National Bank chief Philipp Hildebrand will be remembered not for the scandal which forced him from office but for the folly of his policy.

His mistake, Saft says, was to overreach himself, and try to control something a Swiss central banker cannot control:

Thus far, the Swiss policy is almost universally acclaimed as a success. It has been successful; despite continued ructions in the eurozone the cap has not been truly tested.

In going it alone and seeking to single-handedly hold back the sea, Switzerland makes a very typical risk management error by selecting a policy that will improve outcomes marginally much of the time, but lead to disaster in isolated circumstances.

Saft concludes that Mrs Hildebrand’s trades were clearly ethically wrong:

That same arrogance colours the Swiss franc policy, even if the intentions behind it are benign. There are problems, globally, not just with the individuals making stupid or arrogant decisions, but with the culture in which they operate, one which has as its hallmarks a blindness to risk and a sense of entitlement.

8.49am: OK, here is a proper agenda for today

• Greece will auction €1.25bn of six-month T-bills. Austria will also issue €1.3bn of ten-year bonds.

• German chancellor Angela Merkel is meeting IMF chief Christine Lagarde later today. The meeting, billed as an informal exchange of views, is happening at 7pm GMT.

• We’ve had French industrial and manufacturing figures, which came in better than expected.

• Meanwhile overnight borrowing at the ECB has soared to a new record of €482bn – we will have reaction to that as the day goes on.

8.22am: And some more data for you…overnight borrowing at the ECB has risen further to €482bn.

That is up from €464bn, itself a record.

The huge amounts being stashed with the ECB overnight at low rates show the lack of confidence in the market – banks would rather keep cash safe at the central bank rather than with each other.

8.17am: French industrial output has suprised on the upside – rising 1.1% against a flat forecast.

Manufacturing industry output was up 1.3%, against 0.2% in October.

8.11am: The FTSE 100 has opened 45 points up at 5,657, a 0.8% rise, with Marks & Spencer leading the way.

M&S is the top riser among the FTSE 100, up almost 2.5% at 316p.

The French Cac is up 1.1% while the German Dax has risen 1.2%.

7.50am: Morning everyone, and welcome back to our live coverage of the eurozone debt crisis.

Today we have another big meeting, this time between German chancellor Angela Merkel and IMF head Christine Lagarde. The pair are meeting in Berlin and are expected to give a press conference later.

Austria is auctioning €1.3bn of 10-year bonds – interesting not least because of the country’s exposure to neighbouring Hungary. The Netherlands is also issuing debt later.

We will have more reaction to yesterday’s resignation of Philipp Hildebrand from the Swiss National Bank – the key issue being whether or not the market decides to test the SNB’s resolve in keeping down its currency.

We also have some French manufacturing and industrial figures. © 2012 Guardian News and Media Limited or its affiliated companies. All rights reserved. | Use of this content is subject to our Terms & Conditions | More Feeds