"There is no economy in the world.. that will be immune to the crisis we see not only unfolding, but escalating," Christine Lagarde, the head of the International Monetary Fund (IMF) said on Thursday, warning that the eurozone's crisis threatens not only the developed world, but the entire global economy.
Nothing short of a miracle will stop the eurozone from falling back into a recession, but how deep and how long that recession is depends on how quickly the politics can be fixed and money can be found to reassure not just investors, but corporate financiers and ground-level enterprises that the single currency can be saved and growth restarted.
As economists at Bank of America Merrill Lynch wrote in their global economic outlook, released on Friday morning, "We're all Europeans now."
"While US events have had a strong 'CNN effect' on global markets, European news has rarely been as powerful. For example, the US payroll report is much more impactful than the German IFO index and the Fed usually overshadows the ECB," The outlook said.
"Apparently, when the US sneezes the world catches a cold, but when Asia or Europe sneezes the world offers a handkerchief. Unfortunately, the current strain of euro-flu is more contagious. Europe matters a lot more today due to capital market linkages."
This is a universal across the bank research outlooks being released in the run up to Christmas. Deutsche Bank's macro strategy report warned that nearly anything could happen, but that the risks were all to the downside.
Expectations that rich emerging markets - or the US - might come to the rescue by increasing their commitments to the IMF or directly to the EU's bailout mechanisms have, so far, been met with insistences that Europe must solve Europe's problems.
European markets opened slightly up and had fallen flat after a couple of hours trading. Many investors have probably priced in the longer term macro risks now, and are waiting for someone - possibly the ECB - to deliver a Christmas miracle.
Follow our liveblog below to keep up-to-date with the action.
The move - agreed on Thursday night in a telephone call between Mr Cameron and the President of the European Council, Herman von Rompuy - is likely to be seen as an olive branch both to the other EU countries and his Liberal Democrat coalition partners.
"The Prime Minister reiterated that he wants the new fiscal agreement to succeed, and to find the right way forward that ensures the EU institutions fulfil their role as guardian of the EU treaty on issues such as the single market," a No 10 spokesman said.
After the crisis deal was agreed last week, there was immediate criticism of Cameron's stance, which many said would not protect the City of London from regulation from Brussels.
There are a few reasons why there never is a contagion of higher borrowing costs for other U.S. states when one state runs into budget difficulties, The Wall Street Journal's David Wessel wrote on Thursday.
A new working paper by the International Monetary Fund found that a rise in borrowing costs in one state resulted in lower borrowing costs in other states: the opposite of the contagion effect of higher borrowing costs in countries across Europe, Wessel noted.
Wessel wrote that there are a few possible reasons why: the markets trust that the federal government (unlike Germany) would bail out a state if necessary, the markets are not concerned that the dollar-union could split apart, and the markets still view the creditworthiness of different states as essentially different. Thus, a fiscal union in Europe both could help and not be enough to prevent higher borrowing costs for struggling countries.
Read the whole story on The Wall Street Journal's website.--Bonnie Kavoussi
The European Central Bank said in a report on Thursday that Europe needs to adhere to stricter budgetary rules than agreed to at the Brussels summit last week.
The ECB particularly faulted the "discretion" that the European Commission and European Council will have in enforcing budgetary discipline, complaining that the European Union would take relevant factors into account and that the punishment of countries that spend more than allowed would not be automatic.
-- Bonnie Kavoussi
Mario Draghi, president of the European Central Bank, said in a speech on Thursday that there is "no external savior" for the eurozone and that struggling countries should supposedly save themselves by cutting spending and agreeing to more control of their budgets by the European Union, according to the Associated Press.
"There is no external savior for a country that doesn't want to save itself," Draghi said in Berlin.
Draghi claimed that countries could restore "financial markets' confidence" on their own by committing to restrained budgets over the long term.
Nobel Prize-winning Princeton economist Paul Krugman has dismissed attempts to restore business confidence by slashing government spending as an irrational belief in "the confidence fairy" which never arrives.
Draghi said in response to a question after the speech that he is skeptical about the potential economic impact of buying large amounts of securities, which in this case many observers would want to be European government bonds, according to The Wall Street Journal.
"I don't think quantitative easing leads to stellar economic performance. I see no evidence that quantitative easing greatly boosts the U.K. and U.S. economies," Draghi said.
--Bonnie Kavoussi
European stock markets clawed back some of the losses made over the last two days as US jobs data gave them slight hopes that the world's largest economy might pull itself out of its slump.
In Germany, the DAX gave back some of its early gains but closed up 0.98%, while the French CAC-40 ended the day up 0.76%. The FTSE-100 was up 0.63%. The euro came off its 11-month lows, but only just. The day's main highlights:- The Anglo-French rift on Europe is widening, as both the president and the central bank governor make digs.
- ECB chief Mario Draghi said very little in a speech, but indicated that there will be no infinite bond buying.
- Technocratic Italian PM Mario Monti got a taste of the fractious politics that finished off his predecessor, and will face a vote of confidence.
- Both the Markit Purchasing Managers Index and Ernst & Young forecast a eurozone recession early next year.
Investors, as they have since the EU summit last Friday, been trading into an information vacuum, with little, apart from speculation over the tangled legalities of the summit document.
European Central Bank (ECB) president Mario Draghi gave little away in a speech in Berlin, and the release of the monthly bulletin was equally unenlightening.
There were more weak projections of the eurozone's economic growth, which hit at its debt reduction strategies, but they failed to scare markets any more than they already are. Likewise, the fact that Mario Monti's government will have to face a confidence vote on austerity measures passed without real alarm.
It is possible the market was oversold on Tuesday and Wednesday, but with the way the politics has proceeded to date, it is unlikely that many investors will want to take long positions into the weekend.
This morning's robust rally on the stock markets has come off the boil a bit - the DAX is still on to gain 1.06% but the CAC-40 is now up 0.81% on the day, and the FTSE-100 up 0.77%.
The euro is off the floor - yesterday it hit 11-month lows - but is still below $1.30.
European Central Bank (ECB) head Mario Draghi said today that the need to recapitalise struggling banks needed to be balanced by the need to free up credit into the real economy.
He said:
Banks in the euro area have recently come under pressure both as regards their capital bases and their funding conditions.The plan to strengthen their capital bases is an attempt to reinforce their standing in financial markets, but this is not an easy process. There are essentially three options for banks to pursue to raise their capital ratios as demanded by the European Banking Authority: they can raise their capital levels, sell assets or reduce their provision of credit to the real economy.
The first option is much better than the second, and the second option is much better than the third.
Speaking at the Ludwig Erhard Foundation's annual lecture - named after the economist who helped to shape Germany's postwar recovery - Draghi also made what could be a pointed remark about the pressure on the bank itself, saying:
Ludwig Erhard also helped to enshrine the principle of central bank independence. When in the early 1950s the independence of the German central bank system was not yet settled, he as minister of the economy argued that the government should not issue instructions to the central bank. You all know that the statutes of the ECB inherited this important principle and that central bank independence and the credible pursuit of price stability go hand in hand.
Here's the speech in full.
The morning's rally has held firm into the afternoon, as European stock markets keep the faith ahead of the US open. Solid job data from the US added to the positive sentiment. As of 2pm GMT, the German DAX had gained more than 1.85% and the French CAC-40 was up nearly 1.25%, reversing some of the big losses made over the previous two days. In London, the FTSE stayed strong over 1%.
This comes despite Mario Draghi, the president of the European Central Bank (ECB) reiterating that he does not see any extension of the bank's bond buying programme, and continuing worries about Italy.
Many investors expect the ECB to relax its stance and print money.
There is a very brief story on the Reuters wire that quotes a Russian aide to Vladimir Putin saying that the country could put $10bn into the IMF to help the EU.
Jose Manuel Barroso and Herman Van Rompuy are meeting with Russian President Dmitri Medvedev today to discuss possible contributions.
In the scheme of things, $10bn (?7.7bn) is not a great deal, when the EU is seeking hundreds of billions of euros.
In the face of renewed pressure over the strict austerity measures that Italy is going to have to undergo if it is to climb out of its debt hole, the technocratic government is to hold a vote of confidence. The move was announced after the session in the lower house had to be suspended this morning, AP reports.
Votes of confidence are relatively commonplace in Italy - Silvio Berlusconi survived more than 50 - and the move is a calculated gamble to reduce the dissent that saw lawmakers from the Northern League protesting in parliament.
From AP:
The vote of confidence was announced in the lower house, where the speaker earlier suspended the session and ejected two lawmakers from the unruly right-wing Northern League who held up banners against the resurrection of a tax on primary residences. The Northern League caucus, the only party not to support Monti's government in a vote of confidence confirming the new Cabinet last month, also whistled in protest of the measures before the chamber."Shepherds whistle, not lawmakers," a clearly agitated Gianfranco Fini told deputies as he sought to bring order.
Yet more bad news out of Italy, via the Financial Times.
The FT reports that the main lobby of Italian employers, Confindustria, is forecasting a contraction of 1.6% in the country's gross domestic product (GDP) in 2012. The group actually predicted a slight rise in its last release, in September, so the number seems indicative of a real worsening of sentiment amongst domestic employers.
Guy Dinmore writes:?We are in recession,? Corrado Passera, minister for development, told a Confindustria conference in Rome. ?but this is not our fault,? he said, blaming the crisis on Europe?s ?inadequate management of the Greek crisis?.
Mr Passera warned that without economic growth the government?s programme would be ?unsustainable?, with its emphasis on social equity at risk.
The eurozone looks likely to fall into recession next year, according to a major business survey - the Markit Eurozone Composite Purchasing Managers Index (PMI).
A score of over 50 on the PMI is indicative of positive economic growth, while a score below that means recession. The survey compiles the investment activity of companies across the single currency area.
Better-than-expected results in Germany and France cause the index to beat expectations of a decline, as the PMI rose from 47.0 to 47.9, but it remains firmly in negative territory.
Ernst & Young also released their eurozone forecast this morning, and said that the economy in the region is likely to contract in the first quarter of 2012.
Spain has sold ?2.5bn of five-year bonds with a yield of just over 4% - considerably less than the 6% that investors demanded of Italy for debt with the same maturity earlier this week. The auction was covered twice over, showing that markets are still clinging onto confidence in Spain, if not in Italy.
The scale of Italy's debt problems, relative to the amount of money available in European and IMF coffers to backstop it, are coming to the fore, as Italy's politics shows signs of the kind of polarity and tension that characterised the Berlusconi government.
The European Financial Stability Facility (EFSF), the bail out fund, has ?275bn left, after committing to support Greece, Ireland and Portugal. The IMF has, possibly, ?100bn ready to deploy this year. Add to this the ?150-200bn (dependent on who agrees to pay) from the December 9 summit, and the total is between ?495-545bn that is deployable in the short term. By the summer, Italy's debt was more than ?1.8tr. Italy and Spain between them are going to need to find nearly ?600bn next year, as existing stocks of debt mature. Their costs of borrowing are well above sustainable levels - Italy paid euro era record highs on its five-year debt auction earlier this week.It is a concern echoed by John Paulson, the hedge fund manager, in an op-ed in the Financial Times this morning. Saying that the amount of money available was inadequate, he called on policymakers to learn from the US experience:
"Drawing on our experience restructuring companies along with lessons learned in the US following the bankruptcy of Lehman Brothers, we suggest the ECB consider a sovereign debt guarantee programme as a solution to the European sovereign debt crisis."'; var coords = [-5, -72]; // display fb-bubble FloatingPrompt.embed(this, html, undefined, 'top', {fp_intersects:1, timeout_remove:2000,ignore_arrow: true, width:236, add_xy:coords, class_name: 'clear-overlay'}); });
Source: http://www.huffingtonpost.com/2011/12/16/eurozone-crisis-liveblog-_n_1153027.html
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