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Eurozone crisis live: IMF warns of catastrophe as EC rebukes S&P over downgrades

• IMF: Europe could be swept into a downward spiral
• Meeeting between Merkel, Sarkozy and Monti delayed by ‘internal’ French issue
• Greek PM rules out return to drachma
• Moody’s ‘still assessing’ France’s credit rating
What do you think about S&P’s downgrades?
• Today’s agenda
• Live-blogging now: @GraemeWearden

1.38pm: Anti-poverty campaigners have lambasted hedge fund managers today for destabilising the Greek debt negotiations in the search for riches.

Nick Dearden of Jubilee Debt Campaign claimed financial speculators were “gambling with the lives of Greece’s people”.

Dearden said:

The sight of vultures swirling above Athens proves that vulture activity is neither marginal nor helpful to the functioning of the global economy. We need to crack down on this activity if the lives of millions of people are not to be decided by a handful of super-rich speculators.

So how are hedge funds supposed to be doing this? Jubilee cites three scenarios:

• If most creditors accept a write-down the funds which hold out will not need to accept any reduction in the value of the debt, and they can be paid in full
• If European politicians become desperate for a deal then bailout funds might be given anyway, allowing Greece to continue paying vulture funds off, essentially with European taxpayer money.
• If all else fails, Greece could be forced into a default by 20 March, in which case the funds get paid out on their credit default swaps, which act like a sort of gamble that a country will default.

If you’re tempted to dismiss this as an example of typical anti-City bias from debt campaigners — check out these articles on Reuters and Bloomberg.

Hedge funds hunker down for Greek debt standoff

Hedge funds are positioning to profit from a plan to slash Greece’s towering debt pile as Athens enters final talks that could sway the country’s membership of the euro.

Hedge Funds Try to Profit From Greece Debt Swap

Hedge funds in New York and London are trying to profit from trading Greek government bonds as European banks brace for losses from a debt swap.

Jubilee has a solution to the Greek debt crisis – “broad debt cancellation”, of much of its €330bn total borrowings.

1.01pm: Quote of the day? Via Fabrizio Goria, the prolific financial reporter at Linkiesta:

@fgoria: ***French finance minister says talks on Greece not suspended, just a pause***

Maybe it’s a European irregular verb — “we’ve just paused, your talks are suspended, their negotiations have collapsed without agreement”?

Then again, the finance minister has a point — we are expecting Greek officials to sit down with creditors on Wednesday. It’s not clear, though, that the two sides will be closer to agreement.

12.41pm: One of the International Monetary Fund’s top officials has warned that the world economy could be dragged into catastrophe unless Europe gets its act together.

IMF First Deputy Managing Director David Lipton told an audience in Asia that the stakes are incredibly high:

Europe could be swept into a downward spiral of collapsing confidence, stagnant growth, and fewer jobs.

And in today’s interconnected global economy, no country and no region would be immune from that catastrophe. This is especially true for Asia.

The comments came after UK chancellor George Osborne appeared to plead for world governments to give the IMF more support.

Osborne told the Asia Financial Forum that leaders have a responsibility to “to ensure the IMF has the resources it needs to promote the global economic stability from which we all benefit”.

Osborne himself hinted last week that the UK could be persuaded to lend more to the IMF if the rest of the G20 agreed. That, though, would herald a battle with eurosceptic MPs – many on his own side.

12.35pm: If you want further evidence that fiscal austerity crushes growth, look at Ireland.

Davy, the Dublin-based asset management group, has predicted that the Republic’s GDP will only grow by 0.4% this year and 1.4% in 2013. This is a downgrade by Davy which had initially projected Irish GDP to grow by 1.7 per cent in 2012.

Henry McDonald, our Ireland correspondent, has more details:

Even exports, one of Ireland’s success stories in the recession, is expected to slow from 4.5% last year to only 2.8% in 2012, according to Davy. The company also predicts that that employment will fall this year by 0.4%

Crucially in terms of the eurozone crisis Davy said it does not expect Ireland to hit the targets set out for the budget deficit in 2012 and 2013.

It said the main reason for its revisions downward was the deterioration in consumer and investor confidence in the euro zone.

The organisation has revised down its forecast for consumer spending growth to a 1.7% decline in 2012 before a 0.5% expansion next year.

In addition, investment spending is expected to fall by 0.2% in 2012 and to rise by 4.4% in 2013.

Goodbody stockbrokers last week also downgraded its 2012 GDP forecast to 0.7% from 1.2%.

12.24pm: Divyang Shah, senior strategist at the International Financing Review, captures the essence of S&P’s concerns about Europe.

He writes that the current Eurozone rescue plan boils down to a belief that:

In order to solve the crisis, all that is needed is for peripheral countries to undertake fiscal austerity, and all that is needed to prevent a future crisis is for measures to be in place to prevent fiscal proficiency (the fiscal compact).

A comprehensive recue plan would include measures to address differences in economic competitiveness across the eurozone. Austerity, though, appears to be making that gulf even wider.

You can read more here.

11.57am: By criticising Standard & Poor’s for last Friday’s glut of downgrades (see 11.35am), the EC is ignoring the advice of the Liberal Democrat alliance within the European Parliament.

Guy Verhofstadt, president of the ALDE Group, is disappointed that no European leader has actually grasped S&P’s argument – that they are fixated with austerity and failing to develop a comprehensive response to the crisis.

Verhofstadt said:

Whatever one may think about the role of rating agencies in this crisis, it is clear that not a single European leader has heeded the S&P motivation for their downgrade.

They describe a monumental failure both in actually recognising the reasons for the eurozone crisis and in the ability to find adequate solutions.

I am no fan of rating agencies, but it does seem clear that they are simply describing the lack of political courage and leadership required to find a solution. They should not take all the blame for their sharp and critical assessment of the politicians’ failures. Rather European politicians should read the assessments and start putting their recommendations into effect.

11.35am: The European commission has rebuked Standard & Poor’s for daring to downgrade nine eurozone countries on Friday night.

EC spokesman Olivier Bailly told reporters in Brussels that the timing of the decision was “odd”, and claimed that S&P didn’t understand Europe’s rescue plan, because:

The idea expressed by the ratings agency that Europe is pursuing a strategy based on a pillar of fiscal austerity alone is a serious misperception.

[that follows S&P's warning that austerity on its own is potentially self-defeating, as it destroys growth and makes debt problems worse.]

Bailly continued:

We take note indeed of what Standard & Poor’s decided last Friday, but we believe… that it is inconsistent on substance and it’s really odd as far as the timing is concerned.

Bailly also told the press conference that there was “no indication” that the EFSF bailout fund’s credit rating could be downgraded.

Indication or not – France’s downgrade makes it highly likely, unless Germany increases its own guarantees (something Wolfgang Schäuble ruled out this morningsee 8.28am)

11.10am: News is breaking that the Italian-German-French summit that was scheduled for this Friday has just been postponed, until the end of February.

The surprise delay is being blamed on an ‘internal French political issue’ that prevents Nicolas Sarkozy from attending…..

The 20 January summit was billed as a chance for Sarkozy and Angela Merkel to agree the terms of the new EU fiscal compact with Mario Monti, ahead of the full European summit at the end of this month.

The cancellation may raise fears that the new fiscal rules will not be finalised in time.

11.07am: Mario Monti, Italy’s prime minister, has commented on the two-notch downgrade inflicted on Italy by Standard & Poor’s.

Monti insisted that his government of technocrats was taking “very positive” actions to address Italy’s troubled economy.

Somewhat curiously, he also said that it was important to “reduce the differences” between the eurozone and Great Britain. Not, one trusts, by dragging the UK into the mire….

Monti was speaking after meeting EU president Herman Van Rompuy today.

Van Rompuy also spoke to the media, and declared that Europe urgently needs an “anti-recession” strategy.

10.35am: The Economist Intelligence Unit isn’t convinced by the Greek prime minister’s claim that Greece will avoid a return to the drachma.

Charles Jenkins, economist at EIU, said the EU had blundered badly by leaving Greece to haggle with its creditors without their support. This left Athens with only one negotiating weapon – the threat of default.

The mismanagement of this issue is making it more likely that Greece will default in a disorderly way and be forced out of the euro.

Jenkins is also concerned that Papademos has been badly distracted by these negotiations since being parachuted in as Greece’s technocratic prime minister last November.

The Greek government has little time left to put in place credible fiscal and economic reforms before the forthcoming election likely by April and has been diverted by the fruitless negotiations on private sector involvement (PSI).

10.17am: Moody’s, one of S&P’s main rivals, has just announced that it will give its own verdict on France’s credit worthiness by the end of March.

At present Moody’s rates France as AAA with a stable outlook – which is now somewhat at odds with S&Ps view of AA+ with a negative outlook. Moody’s told the City this morning that it is ‘still assessing’ its rating, and will make a decision by the end of Q1 2012.

Moody’s said that:

France’s AAA rating could come under pressure if its debt/GDP ratio continue to rise and if the euro debt crisis worsens.

A second downgrade would be a major blow to Nicolas Sarkozy. Moody’s won’t act straight away, though – typically, an agency would lower a country’s outlook to ‘negative’, then put it on ‘Creditwatch’ before finally cutting the rating.

France is currently rated AAA with negative outlook with Fitch (the third member of the Big Three) – so Moody’s is currently taking the most optimistic view of France.

10.14am: Slovakia has shrugged off the impact of being downgraded by S&P – it successfully sold €294m of 12-month debt this morning, or twice as much as it had targeted.

The yield (or interest rate) on the bonds also fell slightly, to 1.96% from 2% last time.

9.58am: One interesting snippet of credit rating news from outside the eurozone — Fitch has just lowered its outlook on Russia from Positive to Stable.

That means there’s much less chance of Russia being upgraded from BBB anytime soon.

Fitch said that the global economic outlook has worsened, while political uncertainty in Russia has increased. That means there’s more risk of investors pulling their money out of Russia, and less chance of a robust fiscal stimulus package if the economy hits crisis.

9.45am: Britain is likely to retain its own AAA rating “for now”. That’s the verdict of Citigroup this morning, who clearly don’t agree with the German politician who argued on Friday that if France is downgraded, the UK should also be cut.

Despite running a larger deficit and national debt than France, the UK is obviously less directly vulnerable to the eurozone crisis than our friends over the channel. Britain also has the advantage of control over its currency — Sir Mervyn King and the MPC can ease monetary policy as much as they see fit, and buy up huge quantities of government debt through QE too.

9.21am: Greek workers are planning to mark the return of international inspectors to Athens tomorrow, by going on strike.

Helena Smith, our correspondent in Athens, has the details:

Militant communist-backed labour unionists are bracing for strike action in Greece tomorrow. It will be the first major industrial action of the new year and is well-timed: come dawn the first team of inspectors from the EU, IMF and ECB will have descended on Athens and they’re not in the best of moods.

Book checking in the coming weeks will intensify as they evaluate whether Greece, under its new interim coalition government, has gone beyond “talk talk” and is actually walking the walk in terms of finally enacting economic and structural reforms.

We’re also expecting tough negotiations between Greece’s business owners and workers’ unions when they meet on Wednesday to discuss possibly freezing pay and lowering the minimum wage. All part of the drive to make the Greek economy “more competitive”…

9.05am: Greece’s prime minister has insisted that the country will not be forced out of the euro and back to the drachma.

Lucas Papademos told CNBC that quitting the eurozone “is really not an option”. The unelected leader also claimed that negotiations with Greece’s creditors are going well:

Our objective is to complete the two processes and also to fulfill our commitments that have been made in the past … and we are confident that we’re going to achieve this.

But, but… talks over the Private Sector Involvement broke up on Friday without agreement, with the banks’ negotiators demanding a suspension and admitting that progress was disappointing.

Not according to Papademos, who argues that the ‘little pause’ in talks (they should restart on Wednesday) doesn’t matter, as Greece and its creditors are still hammering out a deal.

Some further reflection is necessary on how to put all the elements together. So as you know, there is a little pause in these discussions. But I’m confident that they will continue and we will reach an agreement that is mutually acceptable in time.

Time, though, is running out. Greece has got to agree a debt reduction deal with its creditors soon, so it can get its next aid tranche by March (when it must repay €14bn of maturing debt).

Papademos may not want to go back to the drachma – but if the PSI talks go sour, he may not have a choice….

8.43am: The amount of money being stashed overnight with the European Central Bank has hit yet another record high this morning – and is approaching half a trillion euros.

The ECB reported this morning that it accepted€493.2bn in overnight deposits from European banks on Friday evening. The amount being borrowed through its overnight loan facility also increased, to €2.38bn (from almost €1.5bn).

The overnight deposits figure has been hitting record levels in recent weeks, ever since the ECB pumped almost €500bn of cheap loans into the system. So what does this mean?

Some analysts say it is a clear sign of stress in the financial sector – with banks choosing to leave their assets with the ECB at a very low rate of return rather than lending them.

ECB head Mario Draghi has rubbished suggestions that the ECB’s plans have backfired. Last week, he insisted that the banks who took advantage of the cheap loan splurge are “by and large” not the same banks who are now depositing their funds with the ECB overnight.

Either way, €493.2bn is a lot of money to be switching between commercial banks and the ECB’s electronic vault.

8.28am: Germany’s finance minister took to the airwaves this morning to insist that Europe’s bailout fund will not be thwarted by S&P.

Wolfgang Schäuble told German radio channel Deutschlandfunk that Germany will not be forced to increase its guarantees to the European Financial Stability Facility (EFSF), to make up for France’s downgrade.

Schäuble insisted that Germany’s current pledge of €211bn will be quite sufficient, because:

The heads of government and states have decided to get the …permanent European Stability Mechanism (ESM) to supercede the EFSF already this year…

For the job that the EFSF has in coming months, the sum of guarantees is easily sufficient.

S&P stated on Friday night that the EFSF could still keep its own AAA rating if other countries increased their guarantees to make up for France’s loss of firepower [France and Germany are the two major backers of the EFSF, which raises funds for countries frozen out of the markets].

Schäuble appears to be suggesting that Germany won’t cough up – so an EFSF downgrade could soon follow…..

8.18am: Europe’s financial markets are open, and there’s no sign of panic.

In fact, the FTSE 100 has broken into positive territory (up 4 points at 5641).

Other markets are stuck in the red, though, with the Spanish IBEX down almost 1% in early trading and the French CAC losing 0.5%.

Nothing to get alarmed by, though. That reflects the fact that the S&P ratings cuts were expected.

As Stan Shamu of IG Markets commented this morning:

These downgrades should not have come as much of a surprise. In retrospect we may look back on them as the most flagged and blatantly obvious downgrades in history.

8.08am: It’s not a particularly busy day for economic news, but the bond markets should be busy. The highlight is probably an auction from France – will the AAA downgrade push up its borrowing costs?

Here’s today’s agenda:

• Italian inflation data for December – 9am GMT (10am CET)
• Italian government debt for November – 10am GMT (11am CET)

• France auctions up to €8.7bn of short-term debt. 1.50pm GMT
• Netherlands auctions three and six-month bills. From 10am GMT
• Slovakia auctions €2bn of 12-month bills. From 10am GMT

+ George Osborne visiting Hong Kong
+ Wall Street is closed for Martin Luther King day

7.54am: What do you think about Standard & Poor’s decision to downgrade nine eurozone countries?

Economic affairs commissioner Olli Rehn was quick to criticise, calling the move “inconsistent” at a time when the eurozone was taking “decisive action” to tackle the debt crisis.

Portugal also took badly to being relegated to Junk status, saying it “disagrees with S&P’s assessment”.

So is it simply a case of shooting the messenger? Or are ratings agencies simply taking on too much power? Should we even be worried about S&P’s views?

Here’s a reminder of the nine countries downgraded by S&P:

France: Downgraded by one notch, from AAA to AA+. Negative Outlook.
Austria: Downgraded by one notch, from AAA to AA+. Negative Outlook.
Malta: Downgraded by one notch, from A to A-. Negative Outlook.
Slovenia: Downgraded by one notch, from AA- to A+. Negative Outlook
Slovak Republic: Downgraded by one notch, from A+ to A. Stable Outlook

Cyprus: Downgraded by two notches, from BBB to BB+. Negative Outlook
Italy: Downgraded by two notches, from A to BBB+. Negative Outlook
Portugal: Downgraded by two notches, from BBB- to BB. Negative Outlook
Spain: Downgraded by two notches, from AA- to A. Negative Outlook.

7.45am: Good morning, and welcome to another day of rolling coverage of the eurozone financial crisis.

Two issues dominate the agenda today – Greece, following the breakdown in debt reduction negotations, and the aftermath of last Friday’s mass downgrades by Standard & Poor’s.

The situation in Greece worsens by the day. Talks between the Greek government and private lenders over a plan to reduce Greece’s debt by 0bn are now frozen until Wednesday. But the political pressure will continue to build on Lucas Papademos’s government, with speculation over a disorderly default growing.

Traders and analysts will also be reacting to the loss of France and Austria’s triple-A ratings, and the seven other downgrades announced by S&P after the markets closed last week. We don’t expect a major panic – the French downgrade was a real non-surprise – but will be tracking all the reaction.

There’s also a few debt auctions to look forward to. And, in the UK, warnings that the British economy is falling back into recession. © 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