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Eurozone crisis live: Lagarde urges Europe to boost its rescue fund

IMF chief: world risks ‘downward spiral’
Shares rise ahead of eurozone finance ministers’ meeting
Investors prepared to hold German debt at virtually 0%
EU ambassadors agree ban on Iranian oil imports
Today’s agenda

1.51pm: It’s just been announced that Mario Monti will visit America next month to discuss the eurozone crisis.

The Italian PM will hold talks with President Barack Obama on 9 February, the Whit House said. The two leaders are expected to discuss the prospect of expanding Europe’s financial firewall (as urged by Christine Lagarde this morning).

Monti and Obama will also discuss the structural reforms the Italian government is taking.

Since taking office in mid-November, Mario Monti has been engaged on a non-stop drive to restore Italy’s credibility in the financial markets, and hammer out a resolution to the crisis.

He still faces a huge task. But, with Italian 10-year bond yields around 6.1% this morning, there are signs that investors are giving him some slack.

1.36pm: Out in Brussels, national politicians and EU officials have been briefing the media ahead of this afternoon’s meeting of eurozone finance ministers.

Olli Rehn, EU economic and monetary affairs commissioner, struck an upbeat tone as he arrived. He said that progress was being made on the private sector involvment (PSI) in the Greek restructuring, adding that:

I am confident that we can conclude the negotiations on the PSI (private sector involvement) shortly – preferably in the course of this week.

That was enough to push the euro to .3031, up one and a half cents to its highest point of the day.

Spanish economy minister Luis De Guindos told reporters that Spain was committed to demonstrating “its absolute commitment to austerity”.

It’s a two-pronged approach: austerity on the one hand and economic growth on the other.

Austerity is underway in Spain. Growth is more elusive — especially following today’s prediction that the Spanish economy will shrink by 1.5% this year.

1.15pm: Time for a lunchtime round-up. The main event today is the eurozone finance ministers’ meeting in Brussels, which starts at 4pm London time (5pm CET). Finance ministers will have to decide whether to accept Greek bondholders’ ‘maximum offer’ for a key debt restructuring as they debate a second bailout package for the crisis-ridden country.

Meanwhile, IMF chief Christine Lagarde used a speech in Berlin to call on European leaders to urgently raise the size of their bailout fund and consider offering eurobonds.

European stock markets have climbed today, with the FTSE up over 40 points at 5769.

1.07pm: There is some encouraging news out of Paris. France and Germany say a deal with private sector investors to restructure Greece’s debt mountain is “taking shape”.

Without giving details, French finance minister François Baroin said at a joint press conference with his German counterpart Wolfgang Schäuble:

A voluntary restructuring of debt held by private investors…. seems to be taking shape.

We are determined to support Greece in the time necessary for it to put in place reforms and for them to produce their effects.

Schäuble, for his part, said Germany and France were seeking to implement Basel III rules on bank capitalisation, rebutting a Financial Times report that they were looking to relax the rules to encourage lending to businesses.

12.17pm: Here’s an interesting nugget of information — the cost of insuring Greek debt against default has actually dropped in recent weeks.

As this graph shows, the price of a credit-default swap on a five-year Greek bond peaked in early December and has been falling since. CDS contracts pay out if a bond defaults, and are meant to provide insurance for bondholders.

Greek CDSs have been driven to record highs in the last couple of years, as the country struggled to meet the targets set by the IMF in refurn for financial help.

So why are they now falling? Louise Cooper of BGC Partners (who kindly provided the graph) explains:

The CDS market is suggesting that a “voluntary” deal will be done, no “credit event” will occur, and CDS insurance will not be triggered.

The key question, of course, is ‘what counts as a default?’. Any deal that satisfies Greece and its creditors will see tens of billions of debt wiped out. Fitch and S&P have said they will class Greece as being in “selective default” if an agreement is reached – crucially, that is different than being in “restrictive default” (which is reserved for situations where a bond issuer refaults on its payments without the permission of its creditors).

There’s a good explainer about this in the Daily Telegraph, from last weekend.

Louise Cooper also points out that a Greek debt restructuring deal will have implications for other weaker European countries. If Athens can agree a haircut on its debt, what about Ireland and Portugal?

The restructuring of Greek debt means that all Eurozone bonds are no longer considered risk free, (other countries bonds could be restructured in a similar way) so borrowing costs, especially for periphery countries will remain high.

11.58am: Christine Lagarde, managing director of the International Monetary Fund, has called on European leaders to urgently raise the size of their bailout fund and consider offering eurobonds.

In a speech in Berlin, Lagarde warned that the world economy was on the brink of a “defining moment”, adding:

It is not about saving any one country or region. It is about saving the world from a downward economic spiral.

Lagarde said that the existing European Financial Stability Facility vehicle must be bundled into the new European Stability Mechanism. The ESM’s total resources should also be increased, she said, to give Europe the firepower to address the crisis.

Lagarde added that she was not suggesting that the ESM’s resources should be doubled – as Italy’s Mario Monti suggested over the weekend. At present, the ESM is due to have €500bn at its disposal. The EFSF currently has €440bn (and has committed less than half). Originally, EU leaders said that the total ESM/EFSF resources should not exceed €500bn, but that position could change.

The speech comes just five days after the IMF kick-started its push for an extra 0bn in funding to fight the financial crisis. Despite being initially rebuffed by the United States, Lagarde insisted today that “we must step up the Fund’s lending capacity”.

The longer we wait, the worse it will get.

Lagarde made some interesting comments on the eurozone crisis. She argued that Europe new ‘fiscal compact’ (tougher rules to make countries keep their budgets in line) should be complemented with joint borrowing measures to help weaker countries.

That’s not going to play well in Germany — where eurobonds are dismissed as an unhelpful suggestion that would encourage profligate countries to avoid fiscal responsibility. Also, the German government, through Angela Merkel’s spokesman Steffen Seibert, made clear today that Germany doesn’t believe the size of the ESM needs to be doubled at present.

11.25am: EU commissioner Michel Barnier has admitted that Britain cannot be steamrollered into accepting the Financial Transaction Tax (FTT).

Speaking in London this morning, Barnier also denied that Europe is hellbent on destroying the City. Barnier is responsible for the EU financial sector, and insisted today that the FTT could play a valuable part in the recovery from Europe’s financial crisis:

Here’s the key section from his speech:

Many of you see the Financial Transaction Tax as an attack on the City. And the ultimate proof that Brussels has missed the point.

The FTT is not part of my financial regulatory agenda. But I believe it to be feasible. And above all just. It is right the financial sector – massively bailed out by taxpayers – pays a fair contribution to help us face up to global challenges.

In the same way, and I fully endorse the comments made by Prime Minister
Cameron last week, I don’t think it’s right that such high bonuses are paid out in the financial sector when it has just been bailed out by the taxpayer, and so many in society are still suffering.

Back to the FTT, its nominal amount would be negligible. And it would be evied on the parties to the transaction, at their domicile. Regardless of whether the transaction is carried out in London, Paris, Frankfurt, Amsterdam or anywhere else. No discrimination.

But at the end of the day, the FTT won’t be imposed on the UK against its will.

Barnier is now heading off for his meeting with George Osborne – see 9.42am).

11.06am: David Jones, chief market strategist at IG Index, has summed up developments on the London stock market this morning. The FTSE is now up nearly 40 points at 5767, a 0.7% rise, while Germany’s Dax and France’s CAC have climbed between 15 and 16 points.

In mid-morning trade the FTSE has pushed slightly higher. It’s another positive, if unexciting, start to the week so far with the FTSE just scraping into double digit gains.

RBS is topping the blue-chip gainers so far with modest strength from other financials keeping the index underpinned. Hopes are high that today’s meeting in Brussels, the latest in a long line between euro finance ministers, will produce some positive plans to tackle the ongoing debt issues and balance out some of the frustration felt by the inability of Greece to come to an agreement with its lenders. With the economic summit in Davos also happening this week we could be in for another few days of low volatility trading as investors digest the thoughts of the great and the good. But despite the quiet start to the year, US and European equity markets are still positive and at the moment there is clearly an appetite to be a buyer of any weakness in blue-chips.

Looking ahead to the US open this afternoon, overnight markets are indicating a start of around -35 points for the Dow Jones.

10.37am: Results from the German bond auction just out: Germany sold €2.54bn of new 12-month Bubills at an average yield of 0.07% (down from 0.346% at the previous auction in late October). The bid-to-cover ratio was 2.2, compared with 4.3 on 31 October.

So investors are prepared to accept an interest rate of virtually zero to hold German debt for six months.

That’s a sign that ‘safe haven’ bonds are still in demand, reflecting deep unease about how this crisis will play out.

But it also shows that the European Central Bank’s injection of €500bn of cheap loans into the system last month is continuing to drive the bull market in sovereign debt. As FT Alphaville explained this morning, that market could run for a while yet.

10.35am: This is classic. French finance minister Francois Baroin has declared that France’s government debt should be excluded from the proposed Financial Transaction Tax (which France is eagerly pushing), to avoid scaring off investors.

During an interview yesterday, Baroin declared that the FTT (aka the Robin Hood tax) would cover trading in both equities and derivatives. He told TV viewers that:

“The tax would apply to shares and derivatives but would naturally exclude government bonds since we are in a period where we need investors.”

France needs to sell around €178bn of government debt this year. With S&P’s downgrade still rankling, you can see why Paris wouldn’t want to give traders another reason to avoid its debt. Still, it’s not really in the spirit of the Tobin Tax – particularly as ‘speculators’ have often been blamed whenever financial markets have moved against Europe.

10.26am: The Greek government has launched a campaign to name and shame tax dodgers, reports Greek newspaper ekathimerini.

Hoping to combat rampant tax evasion, the Greek government on Sunday published a list with the names of 4,152 major dodgers. The evaders, who had for months been warned to pay up their debts or risk being named and shamed, owe the state a total of €14.877bn.

The largest single debt included in the list released Sunday by the finance ministry is €952m. The list does not include debtors who have already made arrangements for settlement of their debts.

Kept afloat only by bailout loans, Greece is desperate to convince its international lenders that it is capable of filling depleted state coffers with tax income as part of reforms to get its finances back on track.

A 65-year-old clothing retailer was detained in the western port of Patra during the weekend on charges of withholding more than 600,000 euros in taxes from the state.

10.00am: So what are the chances of anything getting done on Greece today? Here is a quick round-up of analysts’ views.

European economists at Citigroup led by Jürgen Michels say:

Without a PSI [Private Sector Involvement] deal in Greece, there will be probably little progress on the second Greek bailout package today. This will make it more difficult – but still possible – to get the second bailout package in place for mid March, when a large Greek bond matures.

Elisabeth Afseth and Brian Barry, fixed income research analysts at Investec, say:

EU finance ministers meet today in preparation for next week’s leader’s summit. The focus will no doubt be on the Greek second package, as time is running short for it to be approved ahead of March redemption payments on Greek debt. We are also looking for how far advanced the ‘fiscal compact’ is.

Greek finance minister Evangelos Venizelos said last week ‘It [A debt deal] must be voluntary and participation must be 100%’. The threat of a change of law to retrospectively bring in collective action clauses may help focus investors’ minds (and blur the line between voluntary and forced exchange), but the economics of it may also leave investors choosing to participate, anything else is really a bet on how determined the EU is to avoid a full default amongst any of its members.

9.42am: Britain’s tussle with Europe over its proposed banking reforms will continue today when George Osborne welcomes Michel Barnier, Europe’s top financial regulator, to London.

Osborne and Barnier are expected to cross swords over two issues during their talks at 11 Downing Street:
1) EU proposals for a ceiling on how much capital a bank can be forced to keep, and
2) The powers that will be granted to a new European watchdog for the derivatives industry.

On point 1), the UK government wants the power to impose tougher capital requirements on British banks. On the second issue, the City is nervous that Europe might disturb its grip on the derivatives trading market.

The discussions are likely to be robust. One Treasury official criticised the EU’s approach to derivatives regulation, telling Reuters that:

Rather than saying everyone must wear a suit, they are saying everyone must wear a chairman Mao suit.

Derivatives were famously dubbed “financial weapons of mass destruction” by Warren Buffett* – so it’s understandable that the EU is pushing for closer regulation.

* – although this didn’t stop Buffett investing in them

9.01am: Spain has just released GDP figures for the fourth quarter and 2011. Its economy shrank by 0.3% between October and December from the previous quarter (following zero growth in the third quarter), and grew by 0.7% over the year as a whole.

The Bank of Spain also estimates that the economy will contract by 1.5% this year, and return to meagre growth of just 0.2% in 2013.

8.47am: Reuters is reporting that EU ambassadors have agreed to impose an embargo on Iranian oil imports, but decided to postpone the full implementation of the ban until 1 July. The news agency cited a senior EU diplomat.

The EU’s 27 foreign ministers, who are meeting in Brussels today, still have to formally approve the ban. EU governments will have to stop signing new contracts with Tehran as soon as the ban is in place, but will be able to fulfill existing contracts until 1 July.

8.43am: The Footsie is now up nearly 20 points at 5749, a 0.3% rise. On the continent, shares have also edged higher, with the Dax in Frankfurt up 5 points and the CAC in Paris 12 points ahead. The euro is trading around .2925. Markets are nervous ahead of the eurozone finance ministers’ meeting in Brussels, with a Greek debt deal shrouded in uncertainty.

8.26am: Today’s meeting of eurozone finance ministers in Brussels has a very full agenda to consider, says Michael Derks, chief strategist at FxPro.

There is the latest draft of the fiscal compact to discuss, a review of the progress made in the Greek debt talks, and a conversation on a draft for the European Stability Mechanism (ESM). The latter apparently includes collective action clauses, although any debt write-offs will need to comply with IMF standards. Germany and France are both keen to wrap up the ESM issue as soon as possible, although it can only take effect once it has been ratified by those countries representing 90% of its capital. It is unlikely that any of these issues will be fully resolved at this meeting, although some progress will be made.

Interestingly, these days the single currency is setting less store in meetings such as these, in sharp contrast to those held in the final quarter of last year. After threatening .30 at one stage early on Friday, the euro drifted back to near .29.

8.07am: Brent crude futures were steady around 0 a barrel this morning, as concerns about European demand were outweighed by fears over supply disruptions from the Middle East.

Eurozone finance ministers meeting in Brussels today will discuss what terms of a Greek debt restructuring they are ready to accept as part of a second bailout package for Athens.

The debt swap discussions with private creditors have been aimed at reducing Greek’s debt to 120% of GDP, from around 160% of GDP. Without a second bailout Greece will not be able to pay back €14.5 bn of maturing bonds in March, which would likely trigger a messy default and could plunge the eurozone into disarray.

EU governments are also expected to agree new economic sanctions against Iran over its nuclear programme today.

Ben Le Brun, market analyst at OptionsXpress, told Reuters:

Both of these meetings are going to be crucial in dictating oil prices. Any indication of a plan getting approved to tackle Greece’s debt would support oil. An Iranian oil embargo would also boost prices as demand continues to improve.

8.04am: The FTSE 100 index in London has opened more than 10 points higher at 5739, a 0.2% gain.

Many Asian markets – China, Hong Kong, Singapore and South Korea – were closed for the Lunar New Year holiday. Stock markets that were open for business were mixed, amid light volumes. Japan’s Nikkei was flat at 8,765.90.

7.59am: The main event today is the meeting of EU finance ministers this afternoon. Here’s today’s agenda:

• Franco-German finance and economy council meets in Paris. Press
conference – 10.15am GMT (11.15am CET)
• Eurozone consumer confidence of January – 3pm GMT
• European finance ministers meet in Brussels – 4pm GMT (5pm CET)
• Angela Merkel speaks on 10 years of the euro – 4pm GMT (5pm CET)
• Christine Lagarde gives speech on 2012′s economic challenges -
5.30pm GMT (6.30pm CET)

Bond auctions
• Germany to sell €3bn of 12-month bonds – 10.15am GMT
• France to sell up to €8.3bn of Treasury bills – 1.50pm GMT

7.30am: Good morning and welcome back to our rolling coverage of the world economy and eurozone debt crisis. Hopes of a deal in Greece with private bondholders in time for the eurozone finance ministers’ meeting have dwindled after the bondholders’ representative, Charles Dallara, managing director of the Institute of International Finance, left Athens on Saturday.

Creditors have made their ‘best offer,’ and are not willing to take any more than a 65% to 70% loss on the current value of Greek debt (with a coupon of 4%-4.5%, while the IMF has indicated it wants a coupon closer to 3%).

Even that wouldn’t be anywhere near enough to tackle Greece’s mounting debt burden, says Michael Hewson, market analyst at CMC Markets.

Let’s not forget that we started out at a 21% haircut at last July’s EU summit and the number has kept going up, at the same rate that Greece’s economy has been spiralling down.

It remains unlikely that a deal will be reached by the end of today’s EU finance ministers’ summit, as originally hoped. Even so Greek officials remain confident that a deal can be reached by the next EU summit on 30th January but time is short, given the deadline of a €14.5bn bond repayment in March.

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