Nicolas Sarkozy and Angela Merkel before their meeting at the Elysee palace on Monday. Photo: Remy de la Mauvinere/AP
Welcome back to our live coverage of the eurozone crisis. By Esther Bintliff on the world news desk in London, with contributions from FT correspondents around the world.
This post should update automatically every few minutes, but it may take longer on mobile devices. All times are GMT.
19.40: So, after a relatively quiet morning, this afternoon and evening have proved to be a bit of a rollercoaster.
- First, Nicolas Sarkozy and Angela Merkel surprised everyone by announcing they had reached “comprehensive agreement” on a new set of fiscal rules ahead of the EU summit later this week. Of course we knew they were going to meet, but to be honest, we hadn’t expected them to say very much in public at this stage. So stock markets rallied, bond yields fell and suddenly it looked like a resolution to the eurozone crisis might be in sight…
- Then, just when you thought it might be safe etc etc, this story broke. In brief: Standard and Poor’s has warned Germany and the five other triple A members of the eurozone that they risk having their top-notch ratings downgraded as a result of deepening economic and political turmoil in the single currency bloc. The US ratings agency is poised to announce later on Monday that it is putting Germany, France, the Netherlands, Austria, Finland, and Luxembourg on “creditwatch negative”, meaning there is a one-in-two chance of a downgrade within 90 days.
Understandably, investors took fright, and stock markets pared many of the gains made earlier in the day. There will be more news on this story tonight – see FT.com for all the latest. In the meantime thanks for reading, and for all the comments.
18.36: The full story on S&P’s move is here.
18.30: BREAKING - Standard and Poor’s, the US ratings agency, is poised to announce later on Monday that it is putting Germany, France, the Netherlands, Austria, Finland, and Luxembourg on “creditwatch negative”, meaning it is likely to make a decision on any downgrade within 90 days. It has warned all six governments that their ratings could be lowered to AA+ if the creditwatch review failed to convince its experts. Full story on FT.com soon…
18.15: The IMF has approved its €2.2bn part of the next tranche of bail-out money for Greece (see our 17.44 update).
18.07: Speaking of the International Monetary Fund, the FT’s Alan Beattie ponders what role it might be required to play in the light of the Merkozy agreement:
In theory, if the Franco-German plan works and the EU is going to set the rules as well as provide the money, there may be little future role for the IMF. Yet given the long string of failed eurozone crisis summits and masterplans so far, that is one of the “ifs” of the century…
At the moment, the fund is conducting “enhanced monitoring” of Italy’s policies, which some officials regard as in effect leading to an IMF shadow lending programme. And as every financial market trader must surely know by now, given the string of rumours that a gigantic bailout is imminent, the ECB can use the IMF as a conduit if it wants to turn that shadow into substance and lend large amounts direct to eurozone governments to prevent default…
Read the full Global Insight column here.
17.44: With everything that’s happened today, it seems hard to believe that there might be *more* eurozone-crisis news this evening. And yet… One place we’re keeping an eye on is the International Monetary Fund in Washington. Kerin Hope reports:
The IMF’s executive board is due to decide later today on disbursing its share of the next €8bn tranche of Greece’s current bail-out loan.
Greece is expecting a positive decision after the eurogroup finance ministers gave their own go-ahead last week.
The IMF pay-out is the equivalent of €2.2bn – roughly the amount that Athens raises from its monthly auctions of treasury bills. That might not sound like much, but it is sorely needed. Greece’s coffers are emptying fast as the disbursement is already two months behind schedule.
The transfers from Brussels and Washington are due to land by December 15, just in time to pay public sector workers before Christmas, and to meet a December 20 debt redemption.
The IMF is also expected to release its latest review of Greece’s progress with fiscal and structural reforms. Up till now it has been spotty at best, Greek officials concede. But political will for reform seems to have strengthened in the three weeks since Lucas Papademos, a former vice president of the European Central Bank, took over as prime minister, heading a three-party coalition government.
A five-day parliamentary debate on the 2012 budget, which includes deep spending cuts and more taxes, reached the halfway point today with only routine mumbles of dissent from leftwing and communist deputies. It is expected to be pass tomorrow with a record two-third majority.
17.40: Another update on Italy, from our Rome correspondent Guy Dinmore: the country’s three main trade union federations have announced nationwide strikes of two to four hours for next Monday, in protest against the government’s proposals, particularly the later retirement ages for workers.
17.30: Our colleagues on the Lex Column have some thoughts on Italy, where prime minister Mario Monti impressed the markets by unveiling tough new austerity plans:
It is worth pausing to consider two things… First, Italy needs growth, not austerity. And second, parliament may well water it all down. The measures are a welcome but small step on a very long journey.
Read the full note here. The Lex view on growth seems to be echoed by Angel Gurría, secretary-general of the OECD, who welcomed the new measures but also said in an official statement:
“Given Italy’s long-standing structural impediments to growth we encourage the government to introduce as early as possible additional measures aimed at facilitating productivity growth and resource reallocation in product and labour markets.”
17.20: Some early accounts of Herman Van Rompuy’s briefing to foreign ministers on treaty change and economic governance are starting to emerge, reports Alex Barker, our correspondent in Brussels:
The European Council president opened his lunchtime talk to Europe ministers by bluntly stating that this had become a question of the survival of the euro, and that everything was focussed on ensuring that the single currency remained intact.
These essential changes to governance in the eurozone are, in his view, best delivered through an agreement between all 27 European Union member states. But he made clear that if this is not possible than changes would need to be made among the 17 members of the eurozone club, or at an inter-governmental level between willing member states.
Van Rompuy recommended that heads of government should be ready for a long discussion at the summit on Thursday evening, as he wanted treaty change talks to be wrapped up by Friday morning, when the Council will focus on a ceremony to mark Croatia joining the union. This may be wishful thinking and I expect most prime ministers are well aware that they need to pack a few shirts to get through this meeting.
Herman Van Rompuy in Washington on November 28. Photo: Kevin Lamarque: Reuters
The EU president then went on to broadly outline some of the themes of the discussion paper he will distribute ahead of the meeting, without going into great detail, which is probably a reflection of the fact he was speaking before the Merkel-Sarkozy press conference. Most of the work relates to what changes are necessary to the excessive deficit procedure in the Lisbon treaty, and whether this requires a full treaty change.
Van Rompuy concluded the preliminary discussion by making clear that eurobonds are for the end of the process of strengthening economic governance, not for the beginning. For those cash-strapped countries on the periphery of Europe, the stick will come before the carrot.
17.10: US stock markets have advanced on the back of the Merkozy accord, with the S&P 500 up almost 1.6 per cent:
16.43: One of our readers, “Sophos”, asked in the comments section:
“No further PSI. Does that mean all Member State debt is now guaranteed and effectively a Eurobond?”
Good question. We understand that as a result of this deal, the treaty establishing the eurozone’s permanent bailout fund, the European Stability Mechanism, will be changed. Clauses that specifically allowed for private holders of eurozone bonds to take a hit in any future bailout plan will be dropped. It’s our understanding that collective action clauses (CACs) – which would make it easier to bring about a debt restructuring if required – will still be inserted in future eurozone bond issues. So the legal basis for having a voluntary rescheduling (CACs) will exist, but not the requirement to use them.
16.15: One of the areas where Angela Merkel appears to have backed down is around the role of the European Court of Justice, reports Joshua Chaffin, our correspondent in Brussels:
Ms Merkel had wanted the ECJ – the European Union’s highest court – to become the ultimate enforcer of new budget rules for the eurozone countries.
But Herman Van Rompuy, the European council president, and José Manuel Barroso, his counterpart at the European Commission, have been lobbying Germany not to pursue this line. Nicolas Sarkozy said today that it would be “impossible” to give the ECJ the power to veto national budgets.
“Instead, we want all euro members to adopt laws obliging them to move towards balanced budgets,” Sarkozy said. “What more can you ask than balanced budgets? The court can certainly help verify that countries are respecting their balanced budget rules. That’s the compromise we found.”
An artist's impression of the ECJ? Image courtesy of the EU
By backing off from one of its key demands to reform the eurozone’s fiscal and economic governance, Germany will do away with the need for a full re-opening of the European Union treaties, according to EU officials, including the need to convene and intergovernmental convention to draft the document and then seek ratification in Ireland and other member states.
15.45: In brief, here’s what you need to know about the Merkel/Sarkozy press conference that took place this afternoon:
- The French and German leaders have agreed that private sector bondholders will not in future be asked to bear some of the losses in a future debt restructuring – Greece will be a one-off
- Both Sarkozy and Merkel would prefer treaty change for all 27 European Union members. However, if this cannot be reached, they are happy to move forward with a treaty for the 17 eurozone members alone
- The treaty favoured by Sarkozy and Merkel would include automatic sanctions for countries that breach the rule on deficits below 3 per cent of gross domestic product
- Primary tool for enforcing balanced budgets will be a “golden rule” written into the constitutions of all 17 eurozone member states; to be verified by the European Court of Justice, but the ECJ will not have direct powers of sanction over national budgets
- Today’s Franco-German agreement will be written up in “a letter” and presented to Herman Van Rompuy – head of the EU Council – on Wednesday; to form basis for agreement at EU summit on Friday
- The two leaders agreed to bring forward the launch of the European Stability Mechanism, the eurozone’s permanent bailout facility, from 2013 to 2012
- Both leaders said they wanted a clear decision by the end of the week on whether to proceed as 27 or 17. The treaty text would then be worked out by mid-March, and open for ratification thereafter
15.30: Not everyone agrees with FT Alphaville’s “Germany 1- France 0” score card:
What do you think? Give us your verdict in the comments.
15.20: The European Central Bank has slashed the pace of its government bond buying, reports Ralph Atkins, our Frankfurt correspondent:
Purchases in the seven days until the middle of last week totalled €3.7bn, down from €8.6bn the previous week.
The slowdown is not going to stop speculation that the bond buying programme will be ramped up significantly if politicians make progress this week on a new eurozone “fiscal compact,” as demanded by Mario Draghi, ECB president.
Last week, the ECB was trying to keep maximum pressure on politicians and was not going to expend any more firepower than strictly necessary.
15.14: We know Nicolas Sarkozy and Angela Merkel wanted different things from the new “fiscal union”, so who’s gained the most in these latest talks? Is it too early to say? Our colleagues over on FT Alphaville have a post entitled “Germany 1 – France 0”…
15.05: The markets have perked up in response to the Merkozy press conference, reports Chris Adams, FT markets editor:
Investors have given a cautious thumbs-up to the Merkel and Sarkozy agreement. The talk of a “new” treaty, with automatic sanctions for budget busters, has helped push European stocks higher.
The FTSE Eurofirst 300 index of blue-chip stocks is up 1 per cent.
Ten year Italian bond yields – a measure of Italy’s borrowing costs – have fallen below 6 per cent. Remember they were as high as 7.48 per cent only a few weeks ago. A big move.
The euro has risen against the dollar, from $1.3448 to $1.3464.
A comment from Robert Peston, the BBC’s business editor:
14.55: Ben Hall, the FT’s Europe news editor, says the conclusions announced by Angela Merkel and Nicolas Sarkozy just now are more significant than we might have expected, with the two leaders outlining a compromise on tougher fiscal rules for the eurozone:
The pieces of the eurozone’s grand bargain to prevent the collapse of the single currency continue to fall into place.
The look of relief: German chancellor Angela Merkel and President Nicolas Sarkozy following their meeting in Paris. Photo: Remy de la Mauvinere/AP
Perhaps most importantly, the French and German leaders have agreed that private sector bondholders will not in future be asked to bear some of the losses in a future debt restructuring. Greece will be a one-off.
Ms Merkel said it was imperative to show that Europe was a “safe place to invest”.
Mr Sarkozy has agreed to more “automaticity” in the process of punishing states that breach the EU’s 3 per cent public deficit limits. A move to fine a country will in future only be overturned if a qualified majority of eurozone countries agrees to overturn it.
Ms Merkel has watered down her demand that the European Court of Justice adjudicate on breaches of fiscal rules. Under their compromise, each eurozone government will have to adopt in its constitution a “golden rule” that prevents it from persistently running budget deficits. These rules will be harmonised under a new treaty. The ECJ will merely rule as to whether each eurozone country’s “golden rule” complies with the new treaty.
The two leaders also agreed to bring forward the launch of the European Stability Mechanism, the eurozone’s permanent bailout facility, from from 2013 to 2012.
14.52: Sarkozy said Germany and France want “a golden rule that is reinforced and harmonised on the European level so that the budgets of all 17 [eurozone states] have a constitutional rule to ensure that national budgets move toward a return to equilibrium”.
14.47: Sarkozy was careful to keep schtum on the issue of the European Central Bank’s role:
“We express our confidence in the ECB,” he said. There will be “no comments, positive or negative, on its actions”.
14.41: The markets seemed to like the tone of the Merkel/Sarkozy press conference, according to Chris Adams, the FT’s markets editor:
14.37: Merkel said she hopes to “win back a bit of trust” at the summit later this week:
“We are in a difficult situation and we have to win back confidence, because the issue of our reliability has suffered,” she said.
14.35: Sarkozy also said that, if necessary, treaty change could be just for the 17 eurozone members, not the full 27:
“Our preference is for a treaty with all 27 so that no one feels left out, but we are ready to move ahead with a treaty with 17 that others are free to join.”
14.33: Sarkozy said that the Franco-German agreement is complete and will be sent to Herman Van Rompuy, head of the European Council, on Wednesday.
14.30: Eurobonds are “not a solution to the crisis”, says Sarkozy
14.28: Only a qualified majority of 85% could block sanctions, says Sarkozy
14.27: Sarkozy is saying there should be automatic sanctions in the event of a breach of a deficit ceiling of 3%.
14.26: The Merkel/Sarkozy press conference has begun.
14.22: An update from Hugh Carnegy, the FT’s Paris bureau chief, who is waiting to hear what Sarkozy and Merkel might have to say:
14.10: In these troubled times, you’ve got to take your good news where you can get it. So here’s an update from Stanley Pignal, who has two positive updates from Belgium:
1) An end to Belgium’s marathon 588-day political crisis is but moments away: party leaders are finalising the ministerial slate. The only confirmed name is that of the prime minister, the socialist Elio Di Rupo. There are persistent rumours that Didier Reynders, finance minister since 1999, will be handed the foreign affairs brief. Steven Vanackere, currently foreign minister, would take over the finance portfolio. Still to be confirmed.
2) It was announced that Belgium in the past few days has raised no less than €5.7bn from the general public to finance its debt. The quarterly bond issue aimed at retail investors typically attracts under €100m. The bonanza means Belgium can stay away from international debt markets for a few months in early 2012 should it choose to, though not indefinitely – it has to issue €80bn worth of fresh bonds next year. But it shows that even if international investors shun it, Belgium can still rely on domestic savings to stave off a cash crunch.
13.35: An update from Giulia Segreti, our reporter in Rome, who has been attending a press conference given by Mario Monti, Italy’s new prime minister:
Ahead of his speeches to both chambers of Parliament, scheduled in the afternoon, Mr Monti briefed the foreign media at the Foreign Press Association in Rome on the austerity measures and economic reforms that were approved on Sunday by his technocratic government.
Mario Monti speaks at Rome's Foreign Press Club on Monday. Photo: Pier Paolo Cito/AP
Mr Monti pointed out that this week would be “crucial” for the euro and said that the Italian government had “done its part”.
“In order for Italy to play a credible… role [in Europe], it first has to resolve its serious internal problems”, he said.
The prime minister said he “trusted that [the government] would be supported in parliament”, where the approved decree will have to be converted into law, with a vote in both the Senate and the lower chamber.
Mr Monti insisted “We do not have our hands tied,” referring to pressure from several parties. He explained that the current national unity government “has no ambitions beyond the current legislation” and “has the advantage of thinking exclusively about the interests of the country”.
“Without this package, Italy would collapse and end up in a situation similar to Greece, a country towards which we have a great liking but that we do not want to imitate”, he added.
13.20: The role of the European Central Bank continues to be a bone of contention between Germany and France amid the eurozone’s sovereign debt crisis. Francois Hollande, the French Socialist who will run against Nicolas Sarkozy in next year’s presidential elections, has been speaking at the German opposition Social Democrat party conference in Berlin today, and has taken the opportunity to call for the ECB to take a more aggressive stance:
“I accept [the ECB's] independence but at the same time I want it to pay more attention to the situation in the real economy,” Mr Hollande said. “I hope that it extends its role as lender and acts efficiently against speculation in the framework of its current statutes.”
13.10: The meeting between Angela Merkel, Germany’s chancellor, and Nicolas Sarkozy, France’s president, has begun.
Angela Merkel and Nicolas Sarkozy before their meeting at the Elysee palace on Monday. Are they doing a mini-version of the Bee Gees' Stayin' Alive? Photo: Remy de la Mauvinere/AP
12.46: Miles Johnson, our reporter in Madrid, highlights an interesting observation from Moody’s – the rating agency – on Spain’s heavily indebted regions:
Data from Spain’s ministry of finance last week, trumpeted by the outgoing socialists as evidence of their success, showed that the regional government deficit for the first nine months had held steady at 1.2 per cent, and even reported a collective 0.02 per cent surplus in the third quarter.
Mariano Rajoy, Spain's incoming prime minister, has committed himself to deficit reduction targets and tough austerity. Photo: Miguel Vidal/Reuters
Moody’s, however, is not buying it, and argues in its Weekly Credit Outlook released today that the regions are still going to overshoot the overall 1.3 per cent deficit target by about one percentage point.
Not only will cuts in capital expenditure by regional governments (amounting to 14.7 per cent year-on-year) continue to slow growth, but the encouraging third quarter figures are likely to be erased by a sharp jump in spending in the last part of the year.
“Because regions spend a large portion of their expenditures during the final quarter of the year, the actual year-end deficit figure is likely to exceed the year’s target, ” the ratings agency said. “In fact, the accumulated deficit at the end of fourth-quarter 2010 was 2.8% of GDP, more than double the 1.2% recorded at the end of third-quarter 2010”.
12.25: The big item on today’s agenda is the meeting between president Nicolas Sarkozy and chancellor Angela Merkel, but what can we expect to come out of it? Hugh Carnegy, our Paris bureau chief, says we shouldn’t get our hopes too high…
Attention will swing to the elegant Elysee palace in Paris in the next few hours where Mr Sarkozy and Ms Merkel are due to give a press conference after a working lunch. The meeting starts at 12.30pm GMT, but no precise time has been given for the press conference — no doubt to allow room for overrun on what are clearly still a number of tricky issues as they work towards agreement on a “fiscal compact” for the eurozone.
Angela Merkel and Nicolas Sarkozy at the Elysee Palace in August. Photo: Charles Platiau/Reuters
Officials on both sides have cautioned against expectations of an announcement of a detailed plan by the two: even if they do edge closer to accord, protocol demands that the two leaders allow Herman Van Rompuy, the European council president, to present proposals to the European summit in Brussels at the end of the week.
The German-French partnership may be the driving force in the 17-strong currency union, but the two are (more or less) sensitive to concerns among other members that they should not be dictated to by the big powers.
So will we get *any* hints on the nature of Merkozy’s discussion?
The key interest at the press conference will be to look out for signs of how close – or far – Paris and Berlin are on resolving the points of difference between them. Mr Sarkozy has agreed in principle to Ms Merkel’s demand for changes in the European Union’s founding treaties to cement budget discipline among the eurozone’s chronically debt-addicted members. He has also agreed that there need to be more “automatic, rapid and severe” sanctions against nations which transgress the rules in future.
But Paris – and other EU countries – are wary of handing over more powers to the unelected European Commission in Brussels, or the European Court of Justice, to act as judge and jury over elected governments on their national budgets. Some way of reconciling the balance of power on this issue has to be arrived at.
What kind of treaty change is also a big question: Germany wants a protocol inserted in the full EU treaty covering fiscal controls for the eurozone; France is worried this will take too long – and provoke a host of concerns, including among the 10 EU members not in the eurozone such as the UK, which will bog down the whole process. In that case, a legally-enforceable deal among the 17 would be the quicker alternative – but it is very much regarded as a second-best solution by Berlin.
Paris is also looking for “solidarity” measures to sit alongside the governing structures of a “fiscal compact” – in other words, providing ways to give financial support to ailing eurozone members. This means persuading a reluctant Germany to accept ways of further beefing up the eurozone rescue fund, the EFSF, possibly by involving the IMF, and – above all – by acquiescing to more forceful intervention by the European Central Bank on financial markets.
12.17: In Athens, US vice-president Joe Biden has made some comforting noises towards Greece, a country in the grip of recession and tough austerity. This from Reuters:
Lucas Papademos, right, shakes hand with Joe Biden in Athens on Monday. Photo: Thanassis Stavrakis/AP
“I am here to tell you that we stand with you in solidarity as you meet some difficult requirements of the IMF and European Union,” Biden told reporters before a meeting with Greek Prime Minister Lucas Papademos.
“It is a difficult time for Greece and we stand ready to help in every way we can.”
12.07: An update from our markets editor on lending by the European Central Bank. The data is interesting because it’s one sign of the levels of strain in the financial markets:
11.45: The service sector purchasing managers’ survey from Markit is out today. The data for the UK surprised to the upside, says our economics reporter, Sarah O’Connor:
The UK services sector grew more quickly than economists expected last month, tempering fears that the economy as a whole has started to shrink again. Markit’s purchasing managers’ index rose from 51.3 in October to 52.1 in November, suggesting that activity in the services sector picked up slightly. Economists had expected the index to fall in light of other data showing consumers retrenching and manufacturers struggling.
But the picture from the eurozone was less positive…
Howard Archer of IHS Global Insight comments:
Despite limited improvement compared to October, the November service sector purchasing managers’ surveys make grim reading and fuel concern that the eurozone is set for clear contraction in the fourth quarter and is sliding back into recession.
11.35: Elsewhere on the eurozone periphery, Spain is also benefiting from more gentle treatment in the sovereign debt market, says our markets reporter Duncan Robinson:
11.10: In the markets, stocks are edging ahead, reports Jamie Chisholm, the FT’s global markets commentator:
Wall Street’s S&P 500 futures point to a pop in New York of 1 per cent and the FTSE All-World equity index is up 0.3 per cent, taking its advance over the past six trading days to 8.7 per cent…
The global surge has mainly been predicated on investors’ belief that political and monetary institutions are making progress in dealing with the issues that have caused sovereign debt contagion, interbank tensions and a lack of faith in the euro project.
And Italy’s new austerity measures seem to have given sentiment an extra boost. Italian bond yields are showing much less stress in the secondary market, says Michael Hunter, FT markets reporter:
Yields on Rome’s debt in the secondary market eased further under 7 per cent – down 25 basis points to 6.5 per cent on 10-year bonds – and the premium investors demand for taking on the extra risk of investing in Italian compared to German debt also fell, by 30 basis points.
11.00: As the two leading figures charged with negotiating a solution to the eurozone crisis, Angela Merkel and Nicolas Sarkozy have become a kind of political double-act, constantly photographed together, shaking hands, grinning/grimacing, chairing joint press conferences and whispering in each other’s ears at larger meetings. But how do they really get on? In case you missed it, the FT’s Quentin Peel and Hugh Carnegy had a good look at the Merkozy relationship in Saturday’s paper:
Merkel and Sarkozy say goodbye after a meeting in November in Strasbourg. Photo: Michael Probst/AP
As they struggle to reach agreement on how to rewrite the rules on restructuring the stricken eurozone, Mr Sarkozy and Ms Merkel look – to mix a metaphor – like two stars in a celebrity dance show, locked in an awkward waltz and having trouble keeping in step.
The mercurial French president and the stubborn German chancellor are very different personalities who have never enjoyed much natural personal chemistry. But as the financial crisis has raged around them, they have been forced to reconcile deep differences of approach to the governance of the European Union and the common currency, knowing that if they fail, the euro could face collapse.
Read the piece in full here.
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