Over in Ireland today, the prime minister has rejected claims that the country will need a second bailout.
Despite recent poor economic data (including a 1.9% drop in GDP), Enda Kenny insisted that Ireland still enjoys the backing of the IMF and European Central Bank.
Kenny also stressed that it was important that Britain remained at the heart of EU affairs and said that he would raise the issue of Europe with David Cameron at a meeting at Downing Street on Thursday.
PM Enda Kenny. Photograph: Georges Gobet/AFP/Getty Images
Citigroup’s chief economist, Willem Buiter, caused a stir yesterday when he predicted that Ireland should negotiate the terms of a second bailout now (details here). He argued that Ireland was in “very bad fiscal shape” because of the bad bank debts that now squat on the government’s balance sheet.
Buiter’s comments were dismissed as a “not particularly useful” contribution by Amadeu Altafaj, spokesman for Olli Rehn.
Our Ireland correspondent, Henry McDonald, has the full story here.
Has Hungary raised the white flag in its clash against the rest of the European Union and the International Monetary Fund?
It emerged this afternoon that Hungary is prepared to consider changing the controversial legislation that sparked weeks of bruising battles with the IMF and the US, and put a new bailout package at risk.
In a letter sent to the European Commission, released today, foreign minister Janos Martonyi said that:
We stand ready to consider changing legislation, if necessary.
The IMF suspended talks over a new €20bn credit line for Hungary after it refused to drop a new central bank law, that appears to compromise its independence and allow the government to control monetary policy.
Yields on Hungarian debt have shot up in recent weeks — it was forced to pay an interest rate of 7.98% on a sale of three-month bills today. Analysts have warned that, without a change of course, the country could be heading for a default.
“The future of the euro will be decided at the gates of Rome.”
Those were the words of David Riley, Fitch’s head of sovereign ratings, in London today as he explained the rating agency’s thinking on Europe.
As reported this morning, Fitch is reviewing all its European ratings and will announce its decisions by the end of the month. Italy, with its €1.9trillion debt pile, is the biggest problem by far, and faces a “significant” risk of a ratings cut.
Riley told his audience in London that:
Taking out the crisis premium means a credible firewall….At the moment, we don’t have that, and that’s a serious concern with respect to Italy.
The financial markets clearly agree — with the yield on 10-year Italian debt hovering around 7.17% today. Although Italy’s current deficit is quite small, over €300bn of debt matures this year and must be rolled over or paid off.
EU commissioner Olli Rehn. Photograph: Alessandro Di Meo/EPA
Afternoon all. Some interesting comments from Olli Rehn are just hitting the wires.
Europe’s economic and monetary affairs commissioner has declared that the future governance of Europe will be determined in 2012, and pleaded with the financial markets to give Europe time to fix its problems.
Addressing the European parliament, Rehn warned that:
The crisis has damaged the European economy and affected the jobs and the welfare of Europeans, and this crisis is by no means behind us
It will take time, structural reforms often take a long time…Markets however, tend to be impatient and this impatience can push sovereigns or banking institutions into a liquidity crisis that could surely endanger financial stability.
Rehn urged Italy and Spain to press on with labour market reforms, calling it a ‘pressing priority’. More curiously, he also said Europe must strike the right balance between “responsibility and solidarity” in its response to the crisis.
I’m not quite sure what that last point means — can’t see how ‘irresponsible solidarity’ or ‘responsible isolationism’ would improve matters. #lostintranslation?
Speaking of Olli Rehn, he is due to meet with Hungarian officials later this month to discuss the country’s troubled negotiations over a new IMF loan.
Just time for a lunchtime round-up, and then we’ll hand over to Graeme Wearden.
• The UK has issued £700m of long-term debt at a negative real interest rate.
• Fitch says it will not downgrade France, for now at least.
• Overnight deposits at the ECB have soared to €482bn, adding to fears of a new European credit crunch as banks hoard cash.
• Shares have performed strongly, with the FTSE 100 up 1.5% at 5,697.
• Portugal’s economy will contract by 3.1% this year, according to its central bank.
Shares in Unicredit, the Italian bank which recently launched a deeply discounted rights issue, have rebounded today.
They are up 9.3% so far – having almost halved in value since the announcement. The bank’s capital raising is being closely watched by other eurozone banks needing to raise capital.
Volumes were low, but even so, some regard the big falls as an attractive buying opportunity, Reuters reported.
Portugal’s economy faces “virtual stagnation” in 2013, and will contract by 3.1% this year, the Bank of Portugal has said.
The falls will come as a result of an unprecedented fall in private consumption, the bank said in its quarterly economic bulletin.
At midday the FTSE 100 is now up almost 60 points, at 5,670. That’s a rise of just over 1%.
The European markets are even more bullish. The French Cac is up 2.4% and the German Dax is up by the same percentage.
Whether or not Standard & Poor’s will eventually downgrade France, depriving it of its AAA credit rating, Fitch will not, at least this year.
“On the basis of some current economic and fiscal trends in France…we wouldn’t expect to downgrade France this year, unless there is a material deterioration in the eurozone”, Ed Parker, head of EMEA sovereign ratings, told Reuters.
Fitch has put Belgium, Spain, Slovenia, Italy, Ireland and Cyprus on negative watch, with a conclusion expected by March.
Austria, despite fears it is exposed to debt-laden neighbour Hungary, is also unlikely to be cut.
“One of the main risks when we look at Austria is that the exposure of its banks to Eastern Europe and Hungary at the moment is a concern.
“But overall in the portfolio a lot of the exposure is to the more stable and better performing economies in eastern Europe like the Czech Republic.”
Another recent UK flotation heads south…
Flybe, which floated in December 2010 at 295p, saw its shares fall 21% this morning following a warning that third quarter UK revenues were below expectations.
The shares are now trading at 54p.
Perhaps unsurprisingly, given negative interest rates, gold is rising. It’s trading at $ 1,632 an ounce, up about $ 20 on the day.
Gold, which by definition pays no interest or dividend, is more attractive when other assets are themselves paying no interest either. An alternative way to look at it might be that the euro has firmed slightly against the dollar, and dollar-denominated assets like gold attract more buyers when alternative currencies can buy more dollars.
Oil is up too today. Brent crude is trading at just over $ 113 per barrel, up almost 1% on the day.
The UK has issued £700m of long-term debt at a negative real yield.
A gilt due to mature in 2047 was issued today at a real yield of -0.116%.
Michael Hewson says the negative yield is “unusual but indicative of the times we are trading in” – the UK being a haven from the eurozone crisis.
Our economy is not immune to the eurozone troubles but the UK won’t default because the bank will print more money. Whether it will be the same value is another thing, but you will always get something back.
Two debt auctions to update you on.
Austria has got away its €1.2bn auction of five- and ten-year bonds. It reopened a bond due to mature in 2016, with the yield up to 2.213% from 1.960%, and also a bond maturing in 2022, where the yield fell to 3.322% from 3.528%.
Meanwhile Greece has sold €1.625bn of six-month debt at a yield of 4.9%, down from 4.95% on an equivalent sale in mid-December.
The supervisory council of the Swiss National Bank may have forced Philipp Hildebrand to step down, Swiss newspapers have reported.
Emails released on Monday showed that the central banker had been involved in discussions over his wife’s dollar trade, but had not made clear whether he approved it.
After looking at the emails, the SNB advisory council made clear to Hildebrand that his position was no longer tenable, according to two Swiss newspapers reported by Reuters.
In the UK there have been a huge bundle of Christmas trading updates from the high street.
• Food sales rescued Christmas for Marks & Spencer, as shoppers bought party food such as pork and mustard mini sausages and salted caramel profiteroles.
• Game shares have tumbled by more than a quarter after a disastrous Christmas put the retailer in danger of breaching covenants
• Debenhams sales were better than forecast, while Majestic Wine said like-for-like sales grew 4% in the nine weeks to the first week of January.
Jane Foley, a currency strategist at Rabobank, says that Swiss National Bank policy, of keeping down the value of the Swiss franc, is likely to remain unaltered following Philipp Hildebrand’s resignation yesterday:
The spike lower in EUR/CHF after yesterday’s news of the resignation was very short-lived suggesting that the market on balance expects no change in policy direction by the SNB board.
After all, there is no change in the fact that the Swiss economy is suffering from deflation nor in the risk that CHF strength could constrain growth potential.
That said the broad recovery of the USD which has lifted USD/CHF by around 35% from its August 2011 lows will be offering some comfort to SNB policy makers. While the USD move is significant, the EUR is far more important to the Swiss economy.
While it is possible that softer tone of the CHF vs. the USD will have reduced the risk that the SNB will act imminently to push higher its EUR/CHF1.20 ‘floor’, the risk of a move is still on the table particularly given the recession risk in the eurozone and the accompanying threat to Swiss export potential.
One euro currently buys you 1.2125 swiss francs.
Some more detail is coming in on the banks’ use of the overnight lending facilities at the ECB.
Just as a reminder – the banks can lend to each other at 0.372%, the interbank rate, but are choosing to leave their money with the central bank, where they will get just 0.25%. A clear sign of a lack of faith in the credit markets.
Reuters says overnight deposits tend to rise towards the end of the month-long reserves maintenance period, a period during which banks must maintain a certain level of reserves. The current period ends on January 17 – next Tuesday.
The deposits are still at historically very high levels. Before the crisis, banks left less than €100m overnight with the ECB. And during the last two reserves maintenance periods, banks left less than €300bn at the ECB, well short of the €482bn we saw today.
Reuters columnist James Saft has an interesting take on the Hildebrand affair.
Swiss National Bank chairman Philipp Hildebrand resigned yesterday after admitting he could not prove he had not discussed a huge dollar trade with his wife, which netted the couple tens of thousands of pounds after the SNB intervened to weaken the Swiss franc.
Saft says:
There is a very good chance that former Swiss National Bank chief Philipp Hildebrand will be remembered not for the scandal which forced him from office but for the folly of his policy.
His mistake, Saft says, was to overreach himself, and try to control something a Swiss central banker cannot control:
Thus far, the Swiss policy is almost universally acclaimed as a success. It has been successful; despite continued ructions in the eurozone the cap has not been truly tested.
In going it alone and seeking to single-handedly hold back the sea, Switzerland makes a very typical risk management error by selecting a policy that will improve outcomes marginally much of the time, but lead to disaster in isolated circumstances.
Saft concludes that Mrs Hildebrand’s trades were clearly ethically wrong:
That same arrogance colours the Swiss franc policy, even if the intentions behind it are benign. There are problems, globally, not just with the individuals making stupid or arrogant decisions, but with the culture in which they operate, one which has as its hallmarks a blindness to risk and a sense of entitlement.
OK, here is a proper agenda for today
• Greece will auction €1.25bn of six-month T-bills. Austria will also issue €1.3bn of ten-year bonds.
• German chancellor Angela Merkel is meeting IMF chief Christine Lagarde later today. The meeting, billed as an informal exchange of views, is happening at 7pm GMT.
• We’ve had French industrial and manufacturing figures, which came in better than expected.
• Meanwhile overnight borrowing at the ECB has soared to a new record of €482bn – we will have reaction to that as the day goes on.
And some more data for you…overnight borrowing at the ECB has risen further to €482bn.
That is up from €464bn, itself a record.
The huge amounts being stashed with the ECB overnight at low rates show the lack of confidence in the market – banks would rather keep cash safe at the central bank rather than with each other.
French industrial output has suprised on the upside – rising 1.1% against a flat forecast.
Manufacturing industry output was up 1.3%, against 0.2% in October.
The FTSE 100 has opened 45 points up at 5,657, a 0.8% rise, with Marks & Spencer leading the way.
M&S is the top riser among the FTSE 100, up almost 2.5% at 316p.
The French Cac is up 1.1% while the German Dax has risen 1.2%.
Morning everyone, and welcome back to our live coverage of the eurozone debt crisis.
Today we have another big meeting, this time between German chancellor Angela Merkel and IMF head Christine Lagarde. The pair are meeting in Berlin and are expected to give a press conference later.
Austria is auctioning €1.3bn of 10-year bonds – interesting not least because of the country’s exposure to neighbouring Hungary. The Netherlands is also issuing debt later.
We will have more reaction to yesterday’s resignation of Philipp Hildebrand from the Swiss National Bank – the key issue being whether or not the market decides to test the SNB’s resolve in keeping down its currency.
We also have some French manufacturing and industrial figures.
