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Eurozone crisis live: Finland approves Greek package as ECB lends banks €529bn

• 800 banks bid in huge cheap loans offer
Euro falls after results
Analysts welcome ‘Goldilocks’ result, but predict trouble ahead
Finland and the Netherlands approve Greece’s rescue package
Today’s agenda
• Live blogging now: Nick Fletcher

3.00pm: Hopes that the EU summit at the end of the week might talk about an increase in the European bailout funds appear to have been dashed already.

Not only does it appear that no discussions about the issue will take place tomorrow, but another suggested summit at the end of March may also skirt around the issue. Ian Traynor in Brussels has more:

Germany delivered a firm Nein today to moves towards boosting the euro firewall beyond the €500bn level already agreed.

Ahead of tomorrow’s EU summit in Brussels, a senior German official said there was no case for increasing the capacity of the European Stability Mechanism, the permanent bailout fund being established in July.

“We’ve told our partners in all friendliness that the time for an increase is the wrong one,” he said. “We don’t want to have that debate. The time is not right.”

Eurozone leaders have already cancelled another summit that was to have been held on the fringes of the full EU meeting on Friday because Berlin vetoed plans for a discussion on the firewall, defying pressure last week from G-20 finance ministers, from Washington, and the International Monetary Fund to put much more money in the pot to deter bond market attacks on the eurozone’s weakest economies.

And there seems no progress on resolving the fundamental differences about the issue. Ian continues:

Earlier on Wednesday, Jose Manuel Barroso, president of the European Commission, argued that the firewall had to be boosted. “We need reinforced firepower in Europe,” he said. “Not only an increase but flexibility.”

Barroso said a decision would be taken in March on whether to boost the bailout fund, most likely by merging the new permanent facility with the current temporary instrument to amass around €750bn.

But the German official pooh-poohed that, too. There would be no decision at the “end of March”, but merely a “reassessment”, he said.

The case for greater firepower was receding, Berlin argued, since the spreads on Italian and Spanish bonds over German bunds had narrowed since December, not least because of Mario Draghi’s easy money policy for hundreds of EU banks.

2.52pm: Let’s start with some more positive economic news from the US.

After the better than expected GDP figures comes news that the Chicago Purchasing managers index has comfortably exceeded expectations. The index rose from 60.2 in January to 64 in February, better than the forecast 61.5. The news has helped Wall Street to a positive opening, with Dow Jones Industrial Average up nearly 40 points in early trading.

2.43pm: Time for a (late) lunchtime summary before I hand this over to Nick Fletcher.

The European Central bank has lent almost €530bn to the region’s banks in low-cost three-year loans. Analysts are calling it a “Goldilocks” results – not too much, or too little, to alarm investors. But there are concerns that the money may not reach the real economy, and predictions of trouble down the line when it has to be repaid.

The Finnish parliament approved Greece’s second rescue plan. In the Netherlands, where MPs have also backed the plan, the parliament voted against holding a referendum on the new EU fiscal compact.

Protests against austerity continued in Europe today. In Athens, workers held demonstrations over the new cutbacks, while in Madrid students flocked to oppose education spending cuts.

Bank of England deputy governor admitted to eurozone mistakes. Paul Tucker said the Bank had underestimated the scale of the crisis.

Reuters has revealed that Germany’s finance minister played Sudoku during last week’s summit.

Nick Fletcher now has the controls. Thanks all….

1.57pm: Hundreds of Spanish students hit the streets of Madrid today to protests about cuts to education spending, as this picture shows:

The march illustrates the pressure that new PM Mariano Rajoy is feeling as he tries to persuade the EU to relax its deficit reduction targets and put more emphasis on growth (see previous post for more on this)

1.50pm: The brinksmanship between Spain and Brussels continues today.

Having admitted on Monday that it missed its deficit targets for 2011, the Spanish government is now pushing for this year’s target to be lowered. A deficit of just 4.4% isn’t achievable, Madrid officials indicate, given that 2011′s deficit came in at 8.5%.

Prime minister Mariano Rajoy appeared to give up on this year’s target today, telling reporters in Madrid that his government will simply cut borrowing by “as much as we can.” He added that:

We have to make these (deficit-cutting) policies compatible with those which serve to create jobs.

thanks to reader Michael Long for flagging up the Rajoy comments)

Our Spanish corespondent, Giles Tremlett, explains that Spain would like the deficit target cut before it announces the details of this year’s budget. Brussels, though, would rather like to see the budget first:

Giles adds:

Either way, the idea that Spain must adjust by some €45bn in one year is scaring a lot of people here, where the unemployment rate is already 23%.

The problem is largely caused by regional governments, who do most of the social spending – such as health and education – and completely failed to reduce their share of the deficit last year.

1.34pm: America has bucked today’s run of poor GDP data with higher growth than expected in the fourth quarter of 2011.

The US Commerce Department has just revised its estimate for growth up to 3.0% on an annualised basis (or around 0.75% quarter-on-quarter), from a previous estimate of 2.8%.

The upward revision was partly due to stronger consumer spending and commercial construction data.

That follows contractions in Slovenia and Sweden today, and weaker growth than expected in India.

Many European countries contracted during Q4 2011 (the UK shrank by 0.2%).

1.25pm: Today’s recommended lunchtime reading – Reuters’ inside account of how Greece’s rescue deal was finally agreed during all-night talks in Brussels.

The piece, called Insight: How the Greek debt puzzle was solved, begins by revealing that the German finance minister was playing computer games while the talks rumbled on:

Wolfgang Schaeuble was playing Sudoku on his iPad as he waited to hear whether Greece’s negotiating team had persuaded private creditors to accept a bigger loss on their Greek bonds.

The piece then explains how close the deal came to collapse during the negotiations, which began at 2.30pm GMT Monday and only yielded a deal around 4am on Tuesday:

Every time a new agreement came close, there would be more bad news about the state of the Greek economy and the carefully negotiated figures would have to be recalculated to fit with the increasingly gloomy forecasts coming from the International Monetary Fund, one of the main parties at the table.

1.03pm: Lloyds Banking Group has just revealed that it borrowed £11.4bn (€13.5bn) from the European Central Bank today.

In a statement, it said it would use the facility “to part fund a poll of non-core euro denominated assets”.

Lloyds decision to tap the LTRO illustrates how today’s programme has involved a wider pool of institutions than last time (although another UK banking group, Standard Chartered, told Sky News today that it didn’t take part).

Any organisation with a eurozone banking licence was able to take part in the LTRO, which led to large firms such as Peugeot saying it might join in the fun.

12.53pm: Portuguese government bonds have falling in value today, despite the ECB offering so much fresh liquidity into the financial sector today.

The yield on Portugal’s 10-year bonds jumped by 0.6 percentage points to 13.9%
this morning [the yield is the effective interest rate on the bond, moving inversely to the price].

Why? Because fears that Portugal will need a second rescue package have not abated, despite the IMF-EU-ECB troika approving the next stage of its existing aid deal yesterday.

Martin Koehring of the Economist Intelligence Unit warned that Portugal, like Greece, faces “a similar self-defeating logic of fiscal austerity and recession”, meaning it will fail to cut its debt burden:

Portugal’s debt burden (at over 110% of GDP at the moment) is likely to rise further in coming months as the recession deepens this year. Already, the government had to revise its forecast for the economy downwards to levels closer to our more pessimistic forecasts. This is not surprising given the collapse of domestic demand amid the budget cuts.

The bail-out package agreed with the EU and IMF only runs until 2013, and according to our projections Portugal’s debt burden would not start to stabilise at around 130-135% of GDP by 2014-16. Hence, Portugal is not likely to be able to return to international debt markets in 2013 as planned.

That would mean either a second financial package, or an orderly default (or perhaps a combination of both).

12.38pm: Word of the day is officially “Goldilocks”. Three analysts have now argued that the €529bn of loans made by the European Central Bank was neither too much, nor too little.

Michel Martinez of SocGen commented:

In a nutshell, the amount allocated at the ECB’s second 3-year LTRO seems to strike a good balance between a very large number that may have been seen as a sign of weakness of the banking sector and a small number that would have been seen as not making much difference to risk assets.

With stock markets stable across Europe, Goldilocks may also be bad news for the bears…

12.28pm: The Netherlands parliament has also just approved Greece’s second financial package, a few minutes afer Finland voted in favour of the €130bn loan deal.

UPDATE: This was really just a formality, after lawmakers agreed in principle yesterday to back the plan.

Perhaps more importantly, Dutch MPs also opposed the idea of a referendum on the new fiscal compact (ala Ireland). Details here.

12.16pm: In Greece, protests are well underway against the country’s austerity programmes.

This picture, taken in the city of Thessaloniki by Anthony Verias, shows that the march there was well attended, and proceeding peacefully.

Crowd shot Protest at about halfway point now #skg #greece #29fgr twitter.com/VeriasA/status…

— Anthony Verias (@VeriasA) February 29, 2012

12.09pm: Breaking news from Finland – its parliament has just given its approval to the Greece’s second rescue package…

…and here’s the voting figures:
111 MPs voted in favour
72 MPs opposed the package
16 were absent

That leaves the Netherlands as the one parliament still to vote. That decision should come in the next hour….

12.05pm: Italy’s largest retail bank, Intesa Sanpaolo, has revealed that it borrowed €24bn from the European Central Bank today.

That’s twice as much as Intesa borrowed three months ago in the previous LTRO. Its chief executive, Enrico Cucchiani, also told reporters in Italy that some of the funds will be used to buy Italian government bonds.

Italian 10-year bonds have slightly strengthened today, pushing down the yield produced by the securities to 5.27%. So it makes sense to buy them with money borrowed from the ECB at 1%, if you reckon there’s no danger of a Greek-style restructuring.

11.56am: One of the Bank of England’s deputy governors has admitted that the Bank underestimated the extent of the eurocrisis.

Appearing before the UK parliament’s Treasury Committee (see 10.02am and 11.01am for more details), deputy governor Paul Tucker admitted that the Bank made an error.

Tucker said:

The headwinds from Europe, the slowdown in the States in the autumn where much greater than we expected and that affacts our economy, and these external influences have arrested the recovery of our economy and we didn’t foresee that. It was an error.

My colleague Katie Allen has more details:

Talking of errors, external member of the monetary policy committee Adam Posen, a well-known dove who voted for more quantitative easing than most of his peers this month, has some thinly veiled criticism for those fellow policymakers. He is worried they are focussing too much on current inflation, which is well above the government-set target, rather than the outlook for inflation – which the committee has said it sees falling.

Posen has also expressed “frustration” with himself that he was not able to be more persuasive in the second half of last year that more policy easing was merited.

11.43am: Dr Gerard Lyons of Standard Chartered points out on Twitter that the German Bundesbank will not be pleased to see €529bn of cheap loans being handed out to the regions banks. “Buba”, though, must suffer in silence:

The ECB’s LTRO buys time, eases pain and removes the stigma, lending €529.5bn to 800 firms today. Mkts will like this, Buba will hate it.

— Gerard Lyons(@DrGerardLyons) February 29, 2012

11.20am: Today’s LTRO operation comes as Mario Draghi’s tenure as European Central Bank president hits the four-month mark.

And what a time he’s had.

Since replacing Jean-Claude Trichet, Draghi has cut eurozone interest rates twice, authorised a huge programme buying up peripheral debt from Italy and Spain, and now lent more than a trillion euros to the banking sector.

It feels like the change of leadership at the ECB came at the right time. Having raised rates twice in 2011, it’s hard to believe Trichet could have executed a u-turn on monetary policy. What’s surprising, though, is that Draghi has been able to take so many big decisions without any significant public opposition from the likes of Germany and Finland.

Do central bank governors get honeymoon periods? If so, Draghi’s got full value out of his.

11.10am: With the euro continuing to lose ground in the currency markets, this comment from Nawaz Ali, market analyst at Western Union Business Solutions, is timely:

Today’s action to hand bankers another €530bn could turn into an unexpected blow for the single currency, which could find itself sinking in the long term.

Ali argues that the US Federal Reserve proved three years ago that central banks who offer large amounts of low-cost liquidity to their financial sectors devalue their own currencies:

The Fed’s attempts to grease the wheels of interbank lending [in 2008] by turning itself into what was essentially a high-speed printing press proved too much of a temptation for investors who simply used the funds to invest in more appealing assets overseas.

The money that was meant to flow back into the American economy ended up being invested abroad and drove the US dollar to record lows.

And Jeremy Cook, chief economist at foreign exchange company World First, reckons that the sight of 800 banks scrabbling for cheap loans from the ECB must be negative:

Markets are very messy at the moment as they digest this data, however we have seen a lift for gold, oil, silver and peripheral government bonds in the minutes after publication…

Brent crude, for example, is up almost 1% at 2 per barrel.

11.01am: Back to the UK briefly, but sticking with the eurocrisis theme.

My colleague Katie Allen has full details of Sir Mervyn King’s comments about Europe’s Long Term Refinancing Operation:

King, and other members of the BoE’s monetary policy committee, have been taking questions from the UK’s Treasury Committee (see more here). They have faced many questions over what can be done to make banks lend to smaller businesses. King and others have repeated previous assertions that while the central bank can inject money into markets with quantitative easing it is not its place to tell banks how to lend. It’s a theme he picked up when asked about the ECB’s LTRO operations. King comented:

“The idea that the long-term repo operations have eased the supply of finance to small businesses in the euro area is a myth.

“What it has done is to provide a source of funding to banks, particularly in the southern member countries of the euro area which were experiencing a bank run, enabling them to fund the withdrawal of funds.

10.45am: City reaction to the ECB’s LTRO operation is coming in. Here’s some of the best:

Martin van Vliet of ING suggested that we could be looking at a “Goldilocks outcome” (ie, take-up of almost €530bn is neither too little, nor too much, but just right):

The short-term market reaction to today’s slightly higher-than-expected LTRO take-up should be positive. In fact, in our view it is a Goldilocks outcome: not overly large as to generate concern about the fragility of the European banking system, but high enough to pre-fund a substantial share of maturing bank debt and spark more buying of Italian and Spanish paper.

Ven Vliet warned, though, that the injection will probably only bring temporary relief. And he wonders how, in the long term, heavy users will manage to wean themselves off…

Michael Symonds of Daiwa Capital Markets was relieved that the LTRO number wasn’t much lower, but warned that Europe will face problems in three year’s time when today’s loans need repaying.

New risks are now raised by the wall of maturity in three years time.

Megan Greene of Roubini Global Economics pointed out on Twittter that the key issue is not how much money the ECB lends the banks, but where the money goes next:

Liquidity for everyone! Now what will banks do with it? That’s the important bit.

— Megan Greene (@economistmeg) February 29, 2012

10.36am: The euro has been flailing around on the foreign exchange markets since the LTRO results were released.

It’s currently down around 0.3 cents against the US dollar, at .343, but there have been some real spikes in the last few minutes, as this image from Reuters shows.

10.30am: The ECB has reported that it received bids from 800 banks in today’s LTRO operation. Every bid was allocated in full, it added.

That’s a big increase on last December’s operation, when 523 banks took part.

10.26am: The results are in — the ECB has loaned €529.531bn to Europe’s banks, for three years, at a rate of 1%.

That’s broadly in the middle of City forecasts, but also even more than last December’s LTRO operation (when the ECB lent €489bn).

More to follow

10.24am: The first details of the ECB’s refinancing programme are in:

• The ECB has loaned €6.5bn banks in a 91-day refinancing tender (ie, loans repayable in three month’s time).

Now for the big one, the three year lending programme…..

10.20am: Sir Mervyn King just offered his support for the ECB’s LTRO (as the City awaits the results with growing impatience….). King told the Treasury Select Committee that the LTRO has removed the possibility of a bank run in the eurozone.

The UK, he added, is also not facing the risk of a bank run.

10.19am: [tick tock] nothing official from the ECB yet….

10.11am: Quick nugget of economic data before the LTRO results are out (in four minutes).

Eurozone inflation for January has been revised down to 2.6%, from 2.7%. Analysts say that’s good news for the region, but warn that the high oil price is likely to lead to ‘stickier’ inflation.

Howard Archer of IHS Global Insight explains:

Stickier inflation would be a blow to Eurozone recovery prospects as it will squeeze consumers’ purchasing power further while high oil prices will pressurize companies’ margins. Stickier inflation is also likely to make the ECB even more reluctant to cut interest rates further in the near term at least.

10.02am: In the UK parliament, MPs are quizzing members of the Bank of England’s monetary policy committee about the state of the British economy. The Men from the MPC are discussing the impact of the eurocrisis on the UK, and warning that economic conditions remain tough.

My colleague Heather Stewart has this early report:

Three MPC members, deputy governors Paul Tucker and Charlie Bean, and the resolutely doveish American economist Adam Posen, have submitted their “annual report” – a kind of personal statement – to the Treasury select committee, in preparation for their appearances.

Tucker says the UK failed to achieve “escape velocity” in 2011: the point at which economic growth becomes self-sustaining.

Tucket blamed spare capacity in the economy, and the euro market chaos of last August, for the deterioration in the outlook. This prompted him to consider voting for more QE in September, before actually backing it, with the rest of the committee, in October. Alongside the heightened sovereign yields in the euro-area periphery, funding conditions for European banks generally worsened, posing the threat of a renewed tightening in credit availability, and a slowing in demand generally as a result of the heightened uncertainty, he says.

However, Posen makes the point that the euro crisis can’t be blamed for the weak forecast that prompted him to call for an extension of QE at every meeting for a full year before the rest of the MPC joined him.

“To be clear, I believed that my vote was justified on the basis of the UK outlook alone, taking into that forecast the direct impact of euro area activity simply slowing or mildly contracting (but not downside risks there).” He says it will be 2013 before the economy achieves a strong recovery.

9.49am: More gloomy economic news. Slovenia’s economy shrank by 2.8% on a year-on-year basis in the last three months of 2011, data just released showed.

That follows a 0.5% contraction in the previous quarter, making Slovenia one of several eurozone countries in recession (see also Greece, Portugal,the Netherlands….)

9.45am: Here’s a round-up of City comment on the ECB’s Long Term Refinancing Operation (or Loans To Rogue Organisations, as Twitter user Paul Hindle dubbed it.)

Jane Foley of Rabobank:

Our expectation is for an add of €440bn. Since there is the prospect that the credit ratings agencies will be concerned about the health of the banking sector if there is a significantly higher than expected demand for liquidity, such an outcome would raise the chances of a pullback to risk appetite. Similarly a significant lower than expected number could raise concerns about the sustainability of risk appetite.

David Morrison of GFT Markets:

It is far from clear what an unexpectedly small or large take-up by European banks would mean for risk assets. The initial market reaction could reverse quickly as the full implications of the take-up are absorbed by investors.

Gary Jenkins of Swordfish Research:

To some degree it does of course make perfect sense for the likes of Italian and Spanish banks to draw down LTRO money in order to buy bonds of their respective countries as they may as well go all in. After all, if the sovereign were to fail it would take the banks with it so that trade in the short term makes a lot of sense.
The ECB may well have averted a meltdown of the financial system.

9.26am: More protests are expected in Greece today, after new austerity measures were approved last night.

A three-hour stoppage has been called from 12 to 3pm (local time, I believe), which could disrupt services at tax offices and other public agencies.

There’s particular anger that the Athens cabinet formally agreed to make deep cuts to the minimum wage, which will be backdated to February 14.

Not the best Valentine’s Day present, as Yiannis Mouzakis pointed out on Twitter:

And belated Valentine’s present from the #Greece gov to the people, new min wage reductions effective from Feb 14th

— Yiannis Mouzakis (@YiannisMouzakis) February 29, 2012

The Greek parliament also approved new cuts in public sector pensions and government spending. This, like the minimum wage cuts, is the price of Greece’s second rescue package.

9.10am: Just in – the German unemployment rate has risen this month.

The number of people out of work rose to 3.109m in February, from 3.084m in January. That puts the Germany unemployment rate at 7.4%, up from 7.3% (although if you strip out seasonal factors, it comes in at 6.8%, as in January).

But the German statistics body also revealed today that the number of people in employment came in at 41.063 million, the first time that the workforce has been recorded above 41m in a January.

The Federal Statistics Office said:

The positive development in the labour market continued at the beginning of 2012.

9.01am: In the reader comments, Sharkfinn asks three questions, which I’ll have a stab at answering:

Who is ultimately receiving this money?
That depends on the individual banks – they can use this new liquidity in various ways.
One sensible policy would be to take your loan at 1% and buy a higher-yielding bond for a guaranteed profit (unless you pick a country or corpration that defaults. Nicolas Sarkozy actually said banks should do the patriotic thing and purchase sovereign debt with their LTRO funding.
Another option would be to increase lending to small businesses and individuals.
Some of last December’s LTRO was used to pay off existing loans from the ECB.

Who is ultimately paying/financing these loans?
That’s still the ECB, which adds the new loans to its balance sheet.

Will these loans be repaid and who has to fork out if they don’t?
The banks have to hand over ‘collateral’ to the ECB in exchange for the loans. That collateral would be decent quality assets such as sovereign debt (ahem) or mortgage securities (ahem again). If a bank defaults on its LTRO obligations then the ECB would keep the collateral.
Ultimately, the ECB is supported by the members of the eurozone, who have put up capital to back it.

8.48am:Is anyone prepared to stick their necks out and predict how large today’s LTRO will be? City predictions range from €300bn to €1trn.

You’re playing for the glory and admiration of your peers. Might also be able to russle up a small prize – perhaps one of the books about the financial crisis that litter my desk…..

For the record, I’m going for €600bn.

8.37am: We’ve seen disappointing GDP data from Sweden and India this morning, but for different reasons.

The Swedish economy shrank by 1.1% in the last three months of 2011, on a quarterly basis according to data just released. That’s more than analysts had expected. Sweden’s stats office also slashed the growth recorded in the third quarter of last year to just +0.9%, from 1.6% previously.

It means that Sweden grew by 3.9% during 2011. Even though it’s not a member of the euro, its economy has suffered the impact of the euro crisis. Industrial production, business confidence and consumer spending have all been hit.

Earlier, India reported growth of 6.1% in the final quarter of 2011, on a year-on-year basis. That’s the weakest growth in nearly three years. It was blamed on a slowdown in the manufacturing sector (which has suffered from rising raw material costs and high borrowing costs, with interest rates currently at 8.5%)

India is now expected to grow by 7% in the current financial year.

8.18am: So why is the European Central Bank prepared to offer hundreds of billions of euros to the banking sector? Well, as my colleague Ian Traynor explains here, the ECB is hoping to:

stabilise the euro, forestall a new credit crunch and shore up troubled banks.

Loans agreed under the Long Term Refinancing Operation will be made on a three-year basis, at an interest rate of just 1%. Because there is no official upper limit to the amount offered under LTRO, there’s a lot of interest in how much is taken up.

Last time the ECB did this, three months ago, Mario Draghi handed out almost half a trillion euros – much more than expected. The influx of liquidity has been credited with rescuing Europe from another credit crunch. But, as Ian points out, the LTRO has its critics:

The cheap money has overwhelmingly flowed to the eurozone’s weakest corners, feeding a grumbling campaign that is getting louder in the northern, more disciplined creditor countries.

Of the €489bn taken up in December, €325bn was tapped by banks in Greece, Ireland, Italy and Spain.

There are also complaints that the LTRO is just a disguised version of quantitative easing. The ECB may not be buying government bonds itself, but it knows very well that much of the cheap loans will be used to buy up peripheral sovereign debt.

LTRO’s aren’t a new invention, but the ECB has changed the rules by offering the loans over such a long timeframe (rather than the 3 or 6 months that were more common in the past).

8.07am: Most of today’s action should come in the next few hours. The ECB’s loans will dominate the headline, but policymakers and central bankers will be busy, on both sides of the Atlantic.

Here’s the agenda:

• UK Treasury Committee hearing on the Bank of England inflation report – 9.45am
• European Central Bank announces LTRO details – 10.15am GMT
• The Netherlands parliament votes on Greek aid package – from 11am GMT
• Finnish parliament votes on Greek aid package – from noon GMT
• Federal Reserve chair Ben Bernanke testifies to Congressional Financial Services Committee – 3pm GMT

8.01am: Good morning, and welcome to our rolling coverage of the European debt crisis.

And what a lively day we have ahead. The European Central Bank is about to pump hundreds of billions of euros into the financial system through cheap loans to the regions banks. Today’s Long Term Refinancing Operation (LTRO) is unlimited, and City investors and analysts are on tenterhooks to see quite how much money the bankers ask for.

Two more European parliaments will vote on Greece’s new financial package. Having cleared the Bundestag on Monday, the programme will now be considered by Finland and the Netherlands.

And in London, senior members of the Bank of England will be quizzed by MPs. Expect the eurozone crisis to come up.

We’ll also be monitoring events in Ireland, after yesterday’s news that a referendum will be held on the EU fiscal compact.

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