A screen in Hong Kong displaying the Hang Seng index's turbulent day today. Image AP
Welcome back to the FT’s coverage of the eurozone crisis and its global fallout. Curated by John Aglionby, Tom Burgis and Orla Ryan on the news desk in London and with contributions from correspondents around the world. All times are GMT.
Market reaction to events in Italy shows that the crisis is now truly global. Markets are looking for more clarity from Rome on timings, particularly of the austerity vote. Meanwhile the Greek establishment has finally settled on a new prime minister.
18.53 That’s the end of our live coverage today. See FT.com through the night for all the latest news and analysis.
18.45 Our reporting team in Italy has produced a profile of Mario Monti, frontrunner to be the next Italian prime minister:
Former European Commissioner Mario Monti at a news conference in Strasbourg in 2001 (Reuters)
Romans are already talking of the beneficial “Mario Monti impact” on Italy’s debt mountain – even before his appointment as prime minister is in the bag.
The spread between Italian and German 10-year bonds has fallen some 50 basis points since peaking at 576 on Wednesday, partly attributed to the prospect of the respected economist and former European commissioner taking over from Silvio Berlusconi to head a caretaker government.
18.41 FT Alphaville has more on S&P’s tangle in Paris.
18.22 Back to the real economy where Pirelli, the Italian tyremaker, is girding itself for a slowdown brought on by the troubles in the eurozone. It’s warned that the slowdown could, in a worst-case scenario, see car and truck sales slow as sharply as they did in 2008-09. John Reed, the FT’s motor industry correspondent, reports:
CEO Marco Tronchetti told me this afternoon that the Italian tyre producer has drafted a contingency plan that factors in a 10 per cent drop in car sales and 20 per cent fall in truck sales globally. That would be a drop as big as that seen after Lehman Brothers’ collapse, which plunged the global car industry into crisis and forced governments around the world to bankroll the biggest bail-out of any industry outside banking.
Pirelli can rest relatively easy: demand for tyres is relatively crisis-proof because of demand for replacement products for cars already on the road. It says it can remain solidly profitable by cutting costs and investment, even if the world economy heads south. It is also relatively insulated from the problems in its home market because Italy makes up less than 10 per cent of its business. But Pirelli’s bearish scenario planning adds to a a growing cloud of pessimism over the near-term prospects of the car industry.
Tronchetti also urged Italy’s politicians to get on with it, saying that a government including Mario Monti would be “the best possible option” for Italy. “Markets showed they go much faster than politics,” he said. “Now politics has to show that at the very last minute it can face the emergency and put the country back on track.”
18.19 Lorenzo Bini-Smaghi’s move to Harvard – he is to be appointed to the university’s Center for International Affairs – caps a good week for eurocrats seeking alternative employment. Lucas Papademos, another alumnus of the ECB, emerged this morning as the next Greek prime minister. And Mario Monti, who spent a decade as a European commissioner in Brussels (and who is, incidentally, also president of Bocconi university), is the favourite to take the helm in Italy. Jean-Claude Trichet for Uefa president, anyone?
18.02 The full statement on Bini-Smaghi’s exit from the ECB is over on the FT’s Money Supply blog.
17.53 Well now. The erroneous S&P announcement (see 17.25) that it had downgraded France’s credit rating – it hasn’t – caused a sudden widening in the spread of French bonds over German bunds. Not exactly what the markets’ shredded nerves needed – and a reminder, if one were needed, of the influence of the rating agencies’ pronouncements. The spread has yet to narrow, even though S&P has expanded on its initial clarification, adding:
The ratings on Republic of France remain ‘AAA/A-1+’ with a stable outlook, and this incident is not related to any ratings surveillance activity. We are investigating the cause of the error.
Lest we forget, only last month France was forced to pledge that it would defend its rating after Moody’s, another of the big three agencies, warned of a possible cut to its outlook.
17.45 Speculation earlier today that Lorenzo Bini-Smaghi might be joining a new Italian government appears to have been misplaced. He is, in fact, off to Harvard. This would seem to offer a neat resolution to the Franco-German spat over seats on the ECB board.
Only last month, Silvio Berlusconi was poised to appoint Bini-Smaghi as Italy’s central bank governor. He changed his mind at the last minute and opted instead to promote the Bank of Italy’s number three, Ignazio Visco, to the governorship.
Nicolas Sarkozy had publicly demanded the departure of Mr Bini-Smaghi from the ECB board to make way for a French candidate. Perhaps he will now get his way?
17.37 BREAKING NEWS Italian TV reporting that Bini-Smaghi has resigned from ECB.
17.28 To Dublin, where the Irish government today put billions of dollars of infrastructure projects on hold as it seeks to meet the terms of its bail-out. The FT’s Jamie Smyth has been listening to the deputy PM demand some solidarity.
Irish deputy prime minister Eamon Gilmore warned France and Germany on Thursday not to go off on “solo runs” during the eurozone crisis and insisted Ireland would remain in the eurozone.
“Yes we will be in it [the eurozone],” said Mr Gilmore when asked about the danger of the eurozone splitting up.
“All of the countries in the eurozone and indeed the European Union are interdependent on each other, whether Germany or France or any other country. They need to understand that there is an interdependence here,” said Mr Gilmore.
“While it is understandable that for political reasons, for domestic political reasons, that countries take a nationalistic approach to these issues and a bit of an individualistic approach, what is required now is a collective approach across the European Union and in particular across the eurozone.”
17.25 Standard & Poor’s, the credit rating agency, appears to have caused a few heartbeats. It has just issued this clarification:
LONDON (Standard & Poor’s) Nov. 10, 2011–As a result of a technical error, a message was automatically disseminated today to some subscribers of S&P’s Global Credit Portal suggesting that France’s credit rating had been changed. This is not the case
17.18 Back to Rome, where Silvio Berlusconi, having lost control over economic policy, is now losing his grip over his own People of Liberty party in what are likely to be his last days in office. The FT’s Guy Dinmore reports:
Berlusconi’s insistence that the party line is to push for elections after he resigns — possibly this weekend — is being openly challenged by some of his long-time ministers and proteges, including Franco Frattini, foreign minister, and Claudio Scajola, former industries minister, who are backing the introduction of a technocrat-led caretaker government. A party leadership meeting this afternoon apparently failed to reach a united position.
Angelino Alfano, party secretary, emerged to tell reporters that the party still preferred early elections but that it would make a decision after consulting with Giorgio Napolitano, head of state, the country’s grand arbiter [Ed - see 16.55].
It is not immediately clear when those consultations will take place. Presumably the head of state will want to wrap them up before parliament approves a package of economic reforms, which is the moment when Berlusconi has said he will step down. But unconfirmed reports suggested the consultations would take place afterwards, leaving open the possibility of delays in the head of state’s efforts to avoid elections and find broad parliamentary support for a new government to be led by Mario Monti.
A senate budget commission hearing on the reforms was adjourned to listen to EU monitors who arrived in Rome on Wednesday to monitor Italy’s progress — another sign of the extent of how policy is being directed by Brussels. The session has just resumed.
17.06 To Frankfurt and the FT’s Ralph Atkins, who has been leafing through the Bundesbank’s financial stability report released earlier this afternoon (see 13.35):
German banks’ total exposure to Italy is about €118bn, including to companies, banks and other financial institutions as well as to public debt. That compared with €27.8bn in Greek exposures.
A large chunk of Germany’s exposure would be via HVB, the Munich-based bank which belongs to Italy’s Unicredit. German banks’ exposure to Italy was actually higher than to France (at €115bn) but lower than to Spain (€119.5bn).
Andreas Dombret, Bundesbank executive board member, said risks arising from exposures to Greece, Ireland and Portugal were “manageable” but he admitted Italian and Spanish exposures were of a different dimension.
16.55 We’ll bring you a profile of Italian man of the moment Mario Monti shortly but first Ferdinando Giugliano, the FT’s Peter Martin Fellow in the leader-writing team (and an Italian), has this take on the crucial role being played by Italy’s president:
The Italian political class is not famous for his youth. As the reign of Silvio Berlusconi, 75, approaches its end, it is an 86-year-old man, Giorgio Napolitano, who is holding the ring in Rome.
Very far from the juvenile lifestyle of the prime minister, the Italian president is using all his political experience to break the impasse in the Italian political system and help to restore confidence in markets.
His political acuteness became clear last night as he surprised commentators by naming Mario Monti — the former EU commissioner who is tipped to rule a grand coalition in Rome — as a life senator. In doing so he handed him the seat which he himself had held prior to becoming president.
In Napolitano’s complicated game of chess against Berlusconi’s resistance, this might well turn out to be a game-changer. By making Monti a life senator, he transformed him simultaneously into a pater patriae and in a political player. He also sent a strong signal to markets and dithering politicians on who he is backing for the country’s top job.
Napolitano’s sharpness goes back a long time. A former member of the Italian Communist party, he was the first officer of the party to obtain a visa for the United States during the Cold War. When the University of Oxford awarded him a honorary degree last June, he was hailed by the chancellor, the former Hong Kong governor Chris Patten, for his wisdom. He will need it all in what could hardly be more testing times for his country.
16.07: It’s been an all-round uncomfortable day for the government in Paris, writes Hugh Carnegy.
With spreads between French and German bond yields breaking euro-era records, the European Commission’s latest growth forecasts for 2012 and 2013 have come in under the revised targets issued by Paris only earlier this week.
On the first subject, the government is obviously concerned by any suggestion that France is next in line for contagion.
“The situation has to stabilise,” said one senior official. He insisted that “there are technical explanations linked to the evolution of the German benchmark”.
In other words, it was as much a story of rock-bottom German yields as of high French yields. Or, as the same official put it, German yields have “gone through the basement”. But yields on French 10 year bonds have climbed markedly, hitting 3.4 per cent on Thursday afternoon – a long way short of “call the IMF” levels but worrying all the same.
Just a fortnight ago, President Nicolas Sarkozy was explaining to the French people in a national television broadcast that Paris paid a premium on its borrowing compared to Germany because of its weaker economy. At that time he could argue that it was relatively stable. No longer: on Thursday afternoon the spread had hit 1.66 per cent, up 36 basis points this week alone.
Meanwhile, the European Commission forecast growth of just 0.6 per cent for France next year and 1.4 per cent in 2013, and suggested this meant Paris would have to make further efforts to hit its target of reducing the budget deficit to 3 per cent of gross domestic product in 2013.
That was about as welcome as a cup of the proverbial in Paris where Mr Sarkozy’s government has only just unveiled a €65bn five-year savings plan designed precisely to hit that target. But the plan was based on projections of 1 per cent and 2 per cent growth respectively in the next two years.
Cue Francois Baroin, the finance minister, and Valerie Pecresse, the budget minister, who issued a sharp retort, reiterating in a statement that the government would hit its targets. It does have some leeway as it has some €6bn built into the savings plan – the second supplementary budget it has been forced to issue in less than three months – as a buffer against weaker growth.
15.41 It’s still a waiting game in Athens and Rome as plans for new governments take shape. But there’s news from corporate Europe. All in all the mood seems to be that the impact of the sovereign debt crisis on the real economy might perhaps not be as dire as some think, although there are plenty of reasons to be nervous about banks:
Siemens, the German industrial conglomerate whose broad base of interests makes it a bellwether of European economic conditions, said it expected moderate revenue growth in 2012 but cautioned that earnings would level off amid pricing pressures and higher operating expenses. Read the full story
Crédit Agricole, one of France’s most exposed banks to highly-indebted eurozone countries, reported a 65 per cent drop in third-quarter net profits, after taking a bigger-than-expected hit on Greek sovereign bonds. Read the full story
Deutsche Telekom, the German telecoms group, managed to hold its full-year outlook after beating earnings expectations and posting better-than-expected results in peripheral southern and eastern European markets, including in Greece. Read the full story
3i more than doubled its dividend despite reporting a loss in the first half after the UK’s largest listed private equity group was hit by falling valuations in the wake of Europe’s sovereign debt crisis. Read the full story
14.54 To Brussels, where José Manuel Barroso and Herman Van Rompuy, the EU’s two presidents, have hailed the deal for a new Greek government in a joint statement:
The agreement to form a government of national unity opens a new chapter for Greece. We have long stressed the need for a broad political consensus around measures to lift Greece out of this deep economic crisis. As such, we warmly welcome this news.
Although this will be a transitional government, its workload will be extremely intense. A second programme of financial assistance must be rapidly concluded, as foreseen by the Euro Summit on 27 October. The voluntary bond exchange with private sector investors should take place as planned at the beginning of 2012.
It is important for Greece’s new government to send a strong cross-party message of reassurance to its European partners that it is committed to doing what it takes to set its debt on a steady downward path. Fiscal consolidation should go hand in hand with the structural reforms needed to transform Greece’s growth potential and generate the jobs its people so urgently need.
We reiterate that our European institutions will continue to do everything within their power to help Greece. But Greece must also do everything within its power to help itself.
We have relayed these messages to the Greek leadership. We look forward to meeting as soon as possible with the designated Prime Minister Lucas Papademos to discuss the pressing matters on our common agenda.
14.30 What is to be done to fix the eurozone and how can emerging markets help? John Authers, FT Long View columnist, and Stefan Wagstyl, emerging markets editor, chew the fat in this newly published FT video.
14.23 What of the growing band of France bears? Over on FT Alphaville, Sid Verma has been examining French exposure to the eurozone’s problems.
14.15 Should anyone want to go through the fine print of the eurozone’s economic outlook (see 10.23) here are all those European Commission forecasts in full.
14.10 Positive noises from Athens and Italy have helped the euro, which hit an intra-day high of $1.3652 and is now at $1.3646, up 0.7 per cent. Against the yen, traditionally a safe haven investment, the euro is up 0.5 per cent.
14.04: Lucas Papademos, the man tasked with pushing through a restructuring of Greek debt, had strong opinions on the efficacy or otherwise of this strategy just a few weeks ago. In an Oct 21 opinion piece for the FT, he argued:
There are no free lunches for debtors and no easy solutions for creditors. An involuntary restructuring of Greek sovereign debt is likely to result in modest net financial benefits and pose substantial risks that would seriously threaten the financial stability and economic performance of the eurozone as a whole. The realisation of these risks would ultimately impose a heavier burden on European taxpayers, have undesirable consequences for the stability and cohesion of the eurozone and undermine the credibility of the euro. For all these reasons, a comprehensive and convincing policy package that can help restore market and public confidence is urgently needed for the resolution of the European debt crisis.
Read the article in full here.
13.52: Euro relief as Papademos appointed, tweets the FT’s Chris Adams.
13.39: Economists have weighed in with their reaction to the appointment of Lucas Papademos as prime minister of Greece.
Nikos Christodoulou, an analyst at Merit Securities, told Reuters:
“This government is transitional. We do not expect many initiatives from it. We expect above all the approval and the vote of the (EU summit) Oct.26 loan agreement. The new government is expected to face many problems. We still do not know how long its term will be.”
Will the Greek public really back this government, asks Chris Williamson, chief economist at market research firm Markit.
“I can’t see the unions and the population willing to support an unelected technical government that is demanded by the European Union and even more so Germany. There’s the danger that an interim technical government will not be able to implement policy purely because, down the road, there will be general elections and things will be reversed, so there is a great risk of a state of limbo. The markets prefer a technical government but if that technical government doesn’t have the population behind it, it’s difficult to see how this will be resolved.”
It all looks good to Platon Monokroussos, EFG Eurobank economist:
“This is clearly a positive market development coming at a difficult time for Greece and the euro area. The new government, which will enjoy very strong support in parliament, is expected to rigorously implement the Oct. 26-27 bailout agreement and the economic policies supporting it.
“The new prime minister is a broadly and internationally recognised and appreciated policymaker and this is likely to help restore Greece’s credibility with its euro area partners and with financial markets.”
After all the fun and games of recent days, Mr Papademos is a very capable candidate, says Costas Panagopoulos, Alco Pollsters.
“After three days of comedy, Greece has today a prime minister who is fully qualified to succeed in the task he has been assigned to.
“The fact that the parties finally managed to co-operate is also very positive. I hope that the big gap between political parties and Greek citizens will now start narrowing.”
13.35: The Bundesbank has issued its annual “financial stability review”. The main conclusion, writes the FT’s Ralph Atkins, is worrying but not surprising. “Risks to the German financial system are clearly on the increase – the main challenges lie in the worsening and widening sovereign debt crisis and the associated loss of confidence in the European banking system.” But Sabine Lautenschläger, the Bundesbank vice president, told journalists: “On the positive side, it must be stressed that the resilience of German banks has grown over the past two years.”
13.11: Victor Mallet, FT Madrid bureau chief, analyses the Spanish dimension to the latest European Commission forecasts:
In its latest eurozone growth forecasts, the European Commission has joined the ranks of those saying publicly that Spain will fail to meet its ambitious deficit reduction targets this year, albeit not by a very large margin.
Spain’s overall public sector deficit for 2011 is predicted to reach 6.6 per cent of gross domestic product, compared with the official target of 6.0 per cent. The Commission blames the country’s regional governments for collectively failing to meet their target, as well as worsening economic conditions. Real Spanish GDP is forecast to grow by just 0.7 per cent this year, compared with an official Spanish prediction of 1.3 per cent.
The European Commission is also sceptical about budget deficit targets for future years, but says much depends on whether new measures are taken by the incoming government after a general election on November 20.
On the good news side, Spanish exports continue to perform strongly, partly because of the country’s increased trading outside the European Union with emerging economies.
13.00: Some good news finally from Greece: former central banker Lucas Papademos has a mandate to form a new government, according to an announcement from the Greek president’s office, writes Kerin Hope.
The cabinet list is expected to be announced later in the day. There’ll be three parties participating: the PanHellenic Socialist Movement led by outgoing premier George Papandreou; New Democracy, the biggest conservative party under Antonis Samaras, and Laos, a small rightwing party led by George Karatzaferis.
It took four hours of face-to-face negotiations chaired by president Carolos Papoulias, an 82-year-old former foreign minister, to get a deal, and none of the political leaders said anything as they left his mansion.
But will it be a strong government with a free hand to accelerate reforms in line with the terms of Greece’s new bail-out package? Or a caretaker administration that will struggle to implement measures already agreed with European Union and International Monetary Fund before taking Greece to an early general election in February next year?
12.39: The Dutch political class doesn’t seem to have fully absorbed the implications of Italy’s plunge into the credit-risk danger zone, writes Matt Steinglass in Amsterdam. He filed this report:
At a private gathering of political figures Wednesday night, the mood was tense but not urgent.
Older politicians and officials who had helped guide European Union policy over the past two decades insisted on the inevitability of political and monetary integration, and blamed younger politicians for not doing enough to move it forward. Younger politicians complained that older ones didn’t understand the political difficulties of selling European integration to today’s sceptical public, and said the prior generation should have done more to build mass political support.
There were critiques of the Dutch government’s stubbornness and isolation in recent eurozone negotiations, which many feel has lost the Netherlands the influence it once had in Brussels. Leftists and centrists agreed that there had been failures of “communication”, while the right…well, let’s just say nobody from the far-right, anti-European Party for Freedom of Geert Wilders would have been at a gathering like this. And they certainly aren’t having any trouble getting out their message.
There was no acknowledgment that Italian bond yields soared into the 7%-plus zone yesterday, and that the life or death of the euro may now have passed out of the hands of politicians and into the hands of bond markets and financial institutions.
There were no calls for immediate, drastic action within the next few days to tame the markets and save the euro. A couple of younger politicians present provided a novel explanation for the equanimity.
Bond markets and financial analysts, they say, have been screaming for almost two years now that we have to do this or that immediately, there’s no time to lose. And then even when they’ve complied they said, the markets continue to fall, and the crisis continues. Politicians have become “crisis-moe” — tired of the crisis.
Lucas Papademos, AP
12.35:
Breaking news from Kerin Hope in Athens: Lucas Papademos has got the job, the president’s office has just announced.
12.32: The Bank of England kept its quantitative easing target at £275bn and held interest rates at 0.5 per cent. But the eurozone crisis could mean it may soon have to increase its bond buying programme. This from Markit’s Chris Williamson:
“With exports falling and the domestic market suffering from weak business and consumer confidence, there is a strong likelihood that the UK could contract in the fourth quarter, though probably only modestly.
However, if the euro zone crisis escalates further, which is quite possible given the current political limbo in Italy and Greece, a UK contraction could extend into early next year, raising the risk of steeper, double-dip recession.
A swift resolution to the euro area’s debt crisis would mean this risk is low, but any signs of the situation worsening could therefore prompt the Bank to step in and add support to the UK economy via more QE – printing more money – possibly as soon as the December meeting.”
12.28: As the crisis evolves the risks for Asia are rising, according to a research note from HSBC. European deleveraging could disrupt local credit growth, but, it says, Asia’s financial systems are sufficiently robust to “fund further growth after the impending blow”:
Here, then, is the skinny. Aggressive deleveraging by European banks will interrupt credit growth in Asia and weigh on local consumption and investment. This could affect growth through the first half of 2012, possibly even plunging a number of Asian markets into a technical (with growth being negative sequentially for two quarters, though not necessarily in annual terms). But, fundamentally, Asia’s financial systems have enough muscle to make up the shortfall, even if the adjustment will take some time. In the longer-run, of course, there is another problem to deal with: Asia can’t grow forever by credit alone. But let’s leave that for another time to worry about.
12.18: Where do Italian yields go from here? On FT Alphaville, Alastair Marsh has examined a Citi strategy, which implies rates should in fact be far higher than at present.
12.10: Italian stocks made strong gains on Thursday on reports of the European Central Bank buying the country’s debt, writes Duncan Robinson, but broader European equity markets were more cautious:
As the FTSE MIB was trading 2 per cent higher at 15,365.45, the FTSE Eurofirst 300 edged down 0.1 per cent to 965.28.
Italian banks jumped, with investors buoyed as yields on 10-year Italian bonds slipped back below 7 per cent during morning trading.
Intesa Sanpaolo, Italy’s largest retail bank, rose 3.5 per cent to €1.19, recouping its losses from earlier in the week…
UniCredit bounced up 4.9 per cent to €0.79, while BMPS rose 2.1 per cent to €0.29….
In France, the CAC 40 index was up 0.1 per cent at 3,079.19.
11.57: Italy’s crisis is having an impact on all its neighbours. This report from Bloomberg considers rising borrowing costs in nearby Slovenia:
Slovenia’s borrowing costs are at euro-era highs because of the turmoil in its western neighbor Italy and its own fiscal outlook, said Michal Dybula, an economist at BNP Paribas SA. Slovenia’s 10-year bonds fell for a third day, pushing the yield to the highest since the former Yugoslav nation adopted the single currency in 2007. The rate was at 6.538 per cent at 12.36 p.m. in Ljubljana, according to Bloomberg data. The extra yield investors demand to hold Slovenian bonds compared with similar maturity German debt also rose to a euro-era record of 488 basis points from 396 basis points a week ago.
“Slovenian government bonds are in a way a victim of proximity to Italy as well as the presence of Italian banks in the country and an uncertain fiscal outlook for Slovenia adds to that,” Dybula said in a phone interview today.
“But problems are much easier to tackle since debt levels are much lower than in Italy or other peripheral countries like Greece, Portugal or Ireland.”
11.36: Nouriel Roubini, Dr Doom himself, describes current events as a slow-motion train wreck in this piece. Can disaster be averted? Below is an excerpt:
The eurozone can survive with the debt restructuring and exit of a small country such as Greece or Portugal. But if Italy and/or Spain were to restructure and exit this would effectively be a break-up of the currency union. Unfortunately this slow-motion train wreck is now increasingly likely.
Only if the ECB became an unlimited lender of last resort and cut policy rates to zero, combined with a fall in the value of the euro to parity with the dollar, plus a fiscal stimulus in Germany and the eurozone core while the periphery implements austerity, could we perhaps stop the upcoming disaster.
11.28: More on bond yields from David Oakley on the FT’s markets desk, who writes that the fall in Italian yields is probably due to European Central Bank intervention.
Italy also sold €5bn of 12-month bills for a yield of 6.09 per cent and a cover of 1.98 times. This is the highest level for an auction of this maturity since January 1997, according to data from Reuters. The yields, however, were lower than secondary market 12-month bills that are priced at yields of 8.45 per cent.
11.17: The latest on bond yields from Chris Adams.
11.10: Greek jobless rate is now at a record high. There is one vacancy we are aware of…. This report from Reuters:
Greece’s jobless rate hit a record high of 18.4 per cent in August, as the country struggles through painful austerity measures demanded by foreign lenders and its fourth year of recession.
Data from national statistics agency ELSTAT on Thursday showed unemployment rose from 16.5 per cent in July as a rise in tourism activity in August failed to stem sharp job losses in the economy. More than four-in-ten young people were out of work.
“The rate of deterioration in the labour market topped even the most pessimistic projections during a month when tourism provides support,” said Nikos Magginas, an economist at National Bank of Greece.
11.06: Goodbye risk-free and hello French spreads at a 21-year high. Check out this chart at Alphaville. Sid Verma warns:
If this is the new normal for French credit risk, it could have a huge impact on French corporate capital-raising trends as markets price in the declining creditworthiness of the sovereign.
11.01: The eurozone faces some stark choices this morning, as BNY Mellon’s Simon Derrick outlines in a research note:
This then is where we stand this morning: No longer is it unimaginable that a disorderly default can happen in a country within the eurozone or that a nation can end up leaving the single currency. Indeed, given the news flow yesterday, it seems entirely possible that the euro could end up changing its membership very rapidly indeed. The eurozone is therefore faced with a stark choice: either it changes what it is (a “stability union” if we needed reminding) or who its members are.
Perhaps the only truly surprising element of the past forty eight hours remains the performance of the euro itself at least against the dollar.
Notwithstanding yesterday’s sharp fall it still remains significantly above the lows seen in early October and a full 14 per cent higher than it did in June of last year. As regular readers will be aware, we certainly do not see this as a vote of confidence in the single currency but, rather, as measure of a growing loss of confidence in the dollar itself as a store of value. As to what the next few days will bring, we watch and wait.
10.55: Risk assets remain volatile, writes Jamie Chisholm, global markets commentator, but rumours are fuelling a rebound:
Early sharp falls in Europe have been reversed as rumours swirl that the European Central Bank is poised to make a market-supporting announcement, and after an auction of Italian T-bills saw strong demand, albeit at high yields.
The FTSE All-World equity index is down 0.5 per cent after the Asia-Pacific region shed more than 3 per cent. But the FTSE Eurofirst 300, which was down 1.5 per cent at the start of the session, is now up 0.7 per cent.
10.51: There are some winners on the stock market this morning, the FT’s Chris Adams tweets.
10.49: Olli Rehn, the EU’s economic and monetary affairs commissioner, offers his take on the impact of higher debt yields on Italian growth:
Of course, higher debt servicing costs could also have negative effects on financing costs of the financial sector and further dampen economic growth, as these high interest rates of government securities are passed to the wider economy and thus are having an impact on the real economy.
This impact is quite difficult to quantify. In case of an entire pass-through to the economy of this 1 percentage point increase in interest rates on government securities, the real GDP level could be up to 1 percentage point lower after three years.
10.45: Our colleagues over at BeyondBrics have posted this article from Sergey Aleksashenko, formerly at the central bank of Russia, and Martin Gilman, formerly at the IMF.
Our proposal is … a comprehensive IMF program for the eurozone as a whole co-financed by the Europeans. In the end, the Fund could allocate unprecedented resources to save the eurozone, acting as the vehicle and guarantor for channeling money lent by the world’s major new creditors such as China, Russia, South Korea and so on. In doing so, these creditors would have the right to demand that a programme be designed by IMF experts who can demand an intra-eurozone agreement on burden-sharing as a prior action. …
This may sound like wishful thinking. But we are convinced that only the IMF has the authority and expertise and potential firepower to contain the eurozone conflagration and design a muscular growth-oriented program that even the Germans could accept. It is also the only way that the world’s new dominant creditors such as China and Russia are likely to participate in this rescue operation in significant amounts, and obtain more of a say in the use of their assets.
Which makes Alan Beattie’s post of last night all the more interesting:
One intriguing idea floating around Washington: if the ECB can’t bring itself to bail out Italy direct (sovereign credit risk, no expertise in setting lending conditions) it could in theory, according to Article 23 of its protocol, lend vast amounts to the IMF.
10.37: As if Italy didn’t have enough to worry about, corporate taxes are high and hard to pay there, according to a joint PWC – World Bank report on the ease of paying taxes. It ranks the country 133rd out of 183 countries, the FT’s Giulia Segreti reports.
The overall fiscal burden in Italy is the highest in Europe, 68.5 per cent of commercial profits, compared with a European average of 43.4 per cent and a global average of 44.8 per cent. The lowest Total Tax Rate calculated by the report in Europe is in Luxembourg(20.8 per cent) followed by Cyprus (23.1 per cent) and Ireland (26.3 per cent).
Fabrizio Acerbis, partner of PwC Tax & Legal Services, said:
Italy’s position in the global ranking has slightly gone down, from 128 to 133, as several indicators in other countries have improved.
Italy is not moving with regards to reforms while other economies are more decisive in using the fiscal leverage to increase competition.
10.30: Kerin Hope reports from Athens that the mood at Greece’s presidential mansion is growing slightly more optimistic. Lucas Papademos, the not-quite-premier-yet, has arrived but hasn’t gone into the meeting room, we’re told. He wished the political leaders “bon courage” in their talks. Much needed, given yesterday’s bust-up.
10.25: Henny Sender reports from Hong Kong that at a conference in Hong Kong which was supposed to address the landscape for private equity in Asia, the outlook for Europe repeatedly cropped up, especially at a presentation from Chris Flowers – widely considered one of the smartest financial investors on the planet since making over $1bn for himself and a small group of investors after taking over the former Long Term Credit Bank of Japan fund, now known as Shinsei.
Mr. Flowers is a numbers guy and the statistics he produced did not make for cheerful reading. Bank assets to GDP of the largest bank in the US, Bank of America is a mere 16 per cent. In contrast Spain’s Bank Santander is 116 per cent of that country’s GDP, while deposits fund less than half of Spanish banks’ total liabilities.
Mr. Flowers was also openly sceptical that European banks will be able to raise anything like the €106bn that is their part of the official solution to the current crisis, adding that 60 percent of that capital will come from a reduction in risk-weighted assets. “Basel III will also increase the pressure to reduce assets and be a drag on global demand,” he said.
10.23: Stanley Pignal reports from Brussels that the European Commission has downgraded what were already lacklustre growth forecasts for the eurozone, predicting just 0.5 per cent growth in 2012. The figure is down from a 1.8 per cent growth forecast in the spring.
“Do not shoot the messenger,” pleaded Olli Rehn, economics and monetary affairs commissioner, as he forecast some eurozone member states would experience recession in late 2011.
All but two of the 17 countries in the eurozones saw their growth predictions downgraded. Unemployment was revised upward.
The growth rate in 2013 is expected to be 1.3 per cent.
Kevin Brown reports from Singapore that Lee Hsien Loong, the island-state’s prime minister, has said that China is unlikely to come to the aid of the eurozone, but the clock is ticking and European policymakers needs to find a way of instilling confidence quickly.
Lee-Hsien-Loong, Reuters
10.15:
Mr Lee, who was at the G20 summit in France as an observer, said the meeting showed that the European sovereign debt problems were too complex to be dealt with through a single solution that could be easily imposed.
Mr Lee said the European authorities understood the importance of acting urgently to instill confidence, but were finding it very hard because of the politics involved. He said:
“The trouble with this sort of situation is that the time to act is before it appears urgent because by the time the markets are moving quickly and the situation is getting out of control, the psychology is probably too late to reverse and you really want to get in decisively early, with a big package, and instill confidence and therefore not have to use the ammunition which you have gathered and that unfortunately, what I think, the Europeans have not yet been able to do. They know it needs to be done, they experienced in 08-09 during the world financial crisis in America particularly, shows the importance of over-reacting and instilling confidence in a massive way, but politically they’re finding it very hard to do.”
On China’s potential role in resolving the crisis, Mr Lee said:
“I don’t think it is a situation where a white knight can come riding to the rescue and I think in particular, there will be a lot of inhibitions on the part of China to come forward and say, I’ll save you. China has to preserve its own interest, China has to act in a way, which is acceptable globally. I think the IMF provides an impartial format, by which other countries can participate in, to chip in, to be part of a solution for a global problem. But the European problem in the first instance, I think the Europeans have to have the resources to solve it and have to muster the political will to do it.”
Mario Monti. Image AP
10.05: More from Guy Dinmore in Rome, where Silvio Berlusconi has broken almost 24 hours of silence to send a message congratulating Mario Monti on his nomination as senator for life. Mr Berlusconi pays tribute to the former European commissioner’s achievements in “social and scientific fields” and wishes him success in his work “in the interests of the country”.
This is a tantalising statement. Is Berlusconi about to announce formally his personal and party support for Mr Monti to head an emergency government once the prime minister steps down, possibly this weekend? In messages to the media on Wednesday morning Berlusconi was still insisting that the only way forward was early general elections. But markets and his own allies are piling pressure on him to admit game-over.
10.02: CORRECTION to yesterday’s blog. At 18.53 we published a table of sovereign credit ratings for euro member countries. This table was originally posted with Austria’s ratings as A from S&P, AA from Moody’s and Aaa from Fitch. These should have been AAA from S&P, Aaa from Moody’s and AAA from Fitch. These ratings have now been corrected in the table in yesterday’s post. We apologise for the error.
9.55: Back to China, where Christine Lagarde, the managing director of the IMF, has been giving a press conference. She said nothing earth-shatteringly new but here’s what she said on Greece and Italy:
“Political clarity. That is what we need as a lender. And I believe that many lenders, many investors actually expect exactly that…. It is much needed in Greece. It is much needed in Italy. There are clearly some rumours, allegations, trepidation, expectations.
“No one really understands who exactly is going to come out as the leader and when, and I think that that confusion is clearly conducive to volatility. So from my perspective as a lender, as the IMF, political clarity is conducive to more stability.”
And on China lending to IMF:
“Clearly there is a relationship of trust between the Fund and China, and if I was to discuss the terms of any particular loan, be it bilateral, administered or any other shape or form, I would not comment on it here, which does not mean to say that we are not discussing this.”
“The point that I can be clearer about is that most of those emerging market economies and their leaders who have indicated a willingness to participate in the strengthening of the institution, the IMF, have done so with the explicit indication that is should not be specifically targeted for the eurozone but should be available for the strengthening of the institution.”
“It is in that context, of serving the entire membership under the circumstances, that quite a few emerging market economies have indicated their willingness to participate in the process of strengthening the institution.”
9.50: Kerin Hope, the FT’s Athens correspondent, reports that Greece’s political leaders seem to be getting serious at last about finding a new prime minister to head the coalition government they agreed on last Sunday.
An hour into this morning’s meeting at the presidential mansion, the word was that Lucas Papademos, former vice-president of the European Central bank, was again the favoured candidate.
Mr Papademos was the initial frontrunner but was dropped on Wednesday in favour of Philippos Petsalnikos, speaker of parliament and a a close ally of George Papandreou, the outgoing socialist premier.
But socialist backbenchers staged a mutiny on the ground that Mr Petsalnikos helped Mr Papandreou draft the disastrous plan for a referendum on Greece’s latest bail-out that triggered the current crisis.
Mr Papademos has so far kept a dignified central banker’s silence on his candidacy.
But Kathimerini, a respectable conservative daily, published a report on Thursday suggesting he is still ready to bargain for the premiership.
He has reportedly set out several conditions:
- the political leaders should put their signatures to a letter committing Greece to implement the terms of the new Euro130bn bail-out -a demand made earlier this week by Olli Rehn, the European Union’s economic commissioner. It is unclear whether Antonis Samaras, the conservative leader, is willing to do so.
- he should choose his own economic team (it would not include Evangelos Venizelos, the current finance minister)
- the government would not be simply a caretaker administration with a February deadline for holding elections but would have a longer mandate to implement tbe bail-out terms effectively.
- the conservatives should participate fully and take several key cabinet posts, rather than opting for a few portfolios not linked to controversial reforms.
And Mr Papademos would certainly be Olli Rehn’s choice, say European observers in Athens.
9.35: More global fallout of the eurozone crisis, this time from China. Exports from the world’s second largest economy slowed in October, thanks to pressure from the mounting woes in Europe.
Simon Rabinovitch, in the FT’s China bureau, reports that exports rose 15.9 per cent year-on-year, down from 17.1 per cent a month earlier. Imports increased 28.7 per cent, accelerating from a 20.7 per cent pace.
China’s trade surplus still widened to $17bn from $14.5bn a month earlier, though that was well below market expectations for a figure closer to $25bn.
The export numbers illustrated how the European debt crisis has caused real economic damage, while the US economy has held up reasonably well despite the global turmoil.
Chinese exports to the European Union were up 7.5 per cent year-on-year in October, down from 9.8 per cent in September. Exports to the US fared better, rising 13.9 per cent in October, up from 11.6 per cent in September.
But the numbers also confirmed that China itself remains the biggest source of growth in the global economy.
9.30: Guy Dinmore, the FT’s Rome bureau chief, reports that Silvio Berlusconi, increasingly isolated within his party and counting his last days as Italy’s prime minister, is expected to give up his push for early elections and lend his reluctant support to a caretaker government led by Mario Monti, former European commissioner.
Mr Berlusconi has made no official comment since insisting early on Wednesday that his resignation should be followed by snap elections, but newspapers on Thursday carried unsourced reports that he had decided under pressure from markets and his allies not to block Mr Monti – the choice of investors, Italy’s opposition parties and Giorgio Napolitano, head of state.
Even Il Giornale, the Milan daily that is part of the Berlusconi family media empire, recognised that the end-game was nearly over. “It is not what Silvio Berlusconi was hoping for but the outgoing premier will not raise barriers to block such a solution (an emergency government),” wrote editor Alessandro Sallusti.
9.20: If you want to know just how global the crisis is becoming, turn your gaze to Jakarta, where Bank Indonesia, the central bank, today cut its benchmark interest rate by 50 basis points to 6 per cent to shield the economy of the world’s fourth most populous nation from the impact of the faltering global economy. Bloomberg reports that not one of the 19 economists it surveyed predicted such an aggressive move.
Bloomberg quoted David Sumual, an economist at Bank Central Asia in Jakarta, as saying:
“This decision is shocking the market. This won’t be good for the rupiah and will increase imported inflation pressures. The central bank seems really worried that a global recession will hurt domestic demand.”
9.10: It’s been a grim day on the Asia markets – equities shed more than 3 per cent following yesterday’s sell-offs in Europe and the US. However, Jamie Chisholm, the FT’s global markets commentator writes that “not all the usual suspects are performing to character at times of strife, with moves also far milder than the lurches witnessed in the previous session”.
The dollar index is up 0.1 per cent, and the euro, which on Wednesday had its worst daily fall in more than a year, is down 0.3 per cent to $1.3507. Brent crude is down 0.5 per cent to $111.80 a barrel.
But yields on benchmark Treasuries, which usually fall when the going gets tough, are up 2 basis points to 1.99 per cent.
For views and opinions on the European Union from Peter Spiegel, Joshua Chaffin, Alex Barker and Stanley Pignal, follow the 
