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Eurozone crisis live: ECB deposits smash through €500bn mark

€501.9bn stashed with the European Central Bank
• EFSF boss: S&P downgrade shouldn’t matter
• Today’s agenda
• Live-blogging now: Graeme Wearden

9.45am: Spain has a great result in the bond market this morning, selling almost €5bn of short-term debt at much lower interest rates than late last year.

The Spanish treasury sold €3bn of 12-month bills at an average yield (interest rate) of just 2.049%, down from 4.05% the last time it sold this type of debt.

It also shifted €1.87bn of 18-month bills, at a yield of 2.399%, down from 4.22%.

Both auctions attracted plenty of interest from investors, with bid-to-cover ratios of 3.5 and 3.2.

This is another sign that S&P’s downgrades (it cut Spain by two notches from AA- to A) have not spooked investors.

Another immediate reaction is that the nearly €500bn of cheap loans handed out by the ECB last month is having an effect, with banks using the liquidity to buy peripheral debt as Mario Draghi hoped.

9.31am: UK inflation fell sharply last month, with the consumer prices index (CPI) dropping to 4.2% on a year-on-year basis, from 4.8% in November.

That’s the biggest drop in inflation since April 2009, and the lowest since June 2011, and is in line with economist forecasts.

Data released by the Office for National Statistics also showed that the retail prices index (used for wage negations and setting state benefits) fell to 4.8% from 5.2% in November.

The ONS reported that clothing stores started offering discounts before Christmas (unlike the previous year, when prices started climbing ahead of the increase in VAT).

Relief for the Bank of England – who have long been promising that the rise in the cost of living could come back into line. It may also mean the Bank’s Monetary Policy Committee votes for a third bout of quantitative easing soon (Carl-Ludwig Thiele would not approve!)

Next up, eurozone inflation at 10am…

9.21am: In the comments below, peterbracken kindly flags up an interesting speech given by Carl-Ludwig Thiele, a Bundesbank board member.

Thiele signalled that the Bundesbank remains firmly opposed to the European Central Bank turning to quantitative easing, saying that:

One idea should be brushed aside once and for all – namely the idea of printing the required money. Because that would threaten the most important foundation for a stable currency: the independence of a price stability orientated central bank.

More controversially, Theile also claimed that the ECB’s current programme of buying up peripheral government debt breaks the rules.

These buys were a violation against the prohibition of monetary financing, that is the basic principle that a central bank should not give credit to a state.

9.11am: Japan has offered Europe some support this morning.

Finance Minister Jun Azumi said bonds issued by the European Financial Stability Facility (which funds the bailouts of Greece, Ireland and Portugal) remained “attractive” despite S&P’s decision to slash its AAA rating last night.

Azumi told reporters in Toyko that:

Japan has bought them by certain amounts and our stance will not immediately change just because of the downgrade.

Encouraging, as the EFSF is reliant on the support of overseas investors to keep its progammes on track.

8.53am: Klaus Regling, chief executive of the European Financial Stability Facility, has been quizzed about last night’s S&P downgrade in the last few minutes.

Regling told reporters in Singapore that the downgrade would not have much impact “so long as Moody’s and Fitch don’t follow suit”.

And possibly tempting fate further, Regling said that “no country would be forced out of the euro area” unless the situation went “terribly wrong”, and that the EFSF has “never had problems” selling its bonds.

Regling’s comments prompt the question – could another agency downgrade the EFSF too? I would suspect that Moody’s is more likely than Fitch. Moody’s said yesterday that it would make a decision on France’s AAA by the end of March. Fitch, though, has said it is likely to leave France on AAA with negative outlook until next year.

8.40am: Here’s a quick run-down of today’s agenda:

• UK inflation data 9.30am GMT
• Eurozone inflation data 10.00am GMT (11am CET)
• German ZEW survey of economic sentiment 10.00am GMT (11am CET)

• Spain auctions €4bn-€5bn of 12 and 18-month Treasury bills – 9.40am GMT
• Greek, Malta, Belgium debt auctions – morning
• EFSF auctions €1.5bn of 6-month debt for Portugal and Ireland – 11am GMT

• Mervyn King at the Treasury Select Committee – from 10am GMT

+ a general strike in Greece

8.22am: Europe’s banks stashed more than half a trillion euros with the European Central Bank last night — a record figure.

The ECB just announced that its overnight deposit facility took in €501.9bn last night, up from €493bn on Friday evening.

Regular readers will know that overnight deposits at the ECB have been hitting record levels in recent weeks, ever since the ECB pumped almost €500bn of cheap loans into the system in an effort to avoid a new credit crunch.

The ECB has denied that the banks who took these loans are now simply lending the money back to the central bank. However, the data is a sign of unease in the financial system. Banks are clearly happier to leave their excess capital in the ECB’s vaults (where it will attract a very low interest rate) rather than either lending to each other or to the wider economy. That suggests a lack of trust in each other, concern that loans to other businesses could turn sour, or simply a fear that they face further writedowns on their own assets.

8.09am: Shares are rallying across Europe in early trading. The FTSE 100 has jumped 50 points to 5707 (up 0.9%), while Germany’s DAX opened 1.3% higher.

Traders are taking their cue from China’s better-than-feared GDP data (see 7.55am). S&P’s downgrade of the EFSF has also caused little alarm — like the French downgrade on Friday night, it was anticipated and ‘priced in’.

7.55am: Overnight, China has reported that its economic growth fell to its slowest rate in over two years.

Chinese GDP growth slowed to 8.9% in the fourth quarter of 2011 (on an annualised basis), dragging down growth for the full year to 9.2%, down from 10.3% in 2010.

China’s National Bureau of Statistics, which released the data, also warned that 2012 will be challenging:

In terms of the domestic and international situation, 2012 will be a year of complexity and challenges so we should be fully prepared.

The Chinese economy appears to have felt the chill from the eurozone crisis in the last few months. Exports to Europe — a crucial market — grew by just 7% year-on-year last month, down from 22% in August.

But rather than causing any alarm, the GDP data sent shares surging on the Shanghai stock market. Two reasons — economists had expected a bigger drop in GDP growth, and there is speculation that the Chinese government might relax monetary policy to prevent a slowdown.

7.50am: Good morning, and welcome to another day of rolling coverage of the European financial crisis.

Standard & Poor’s decision to strip the European Financial Stability Facility of its AAA rating last night is still reverberating today. We’ll soon know if the decision has alarmed investors – as the European bailout fund is auctioning €1.5bn of debt today.

Spain, Belgium, Malta, Greece and Hungary are also auctioning debt today.

In Greece, workers are expected to hold a general strike in protest at planned changes to working rights, including cuts to the minimum wage. The walkout comes ahead of the resumption of troubled talks between the Greek govenrment and its creditors.

We also have plenty of economic data today – including inflation data for both the UK and the eurozone, and economic confidence data for Germany. And Sir Mervyn King, governor of the Bank of England, is speaking in parliament about financial stability this morning.

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