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Eurozone crisis live: Christine Lagarde sees ‘light recovery, with dark clouds on horizon’

Category : Business

IMF says slow growth and oil shock could sink recovery
Spanish auction results
Verdict: qualified success, but Spain still faces big problems
$320bn pledged to IMF’s eurocrisis firewall
Spanish market falls, FTSE 100 flat
Today’s agenda

6.08pm: That’s all, folks, after a day where Spain got its debt auction away, and attention swiftly returned to the fundamental issues facing the eurozone.

But with Christine Lagarde taking a reassuring tone in Washington, it’s clear things could be worse.

Thanks, and goodnight.

5.55pm: From Washington, my colleague Larry Elliott reports on the IMF’s drive to raise funds for its new firewall:

Christine Lagarde is involved in a last-ditch struggle to raise funds for the International Monetary Fund amid fears that a fresh eruption of the global financial crisis will leave the organisation short of emergency cash.

The Fund’s managing director was lobbying hard for Britain and other developed nations that have yet to pledge money to build a bigger firewall to provide more than $400bn (£250bn) in fresh resources.

$400bn would appear to be the new $600bn — America’s refusal to chip in means the original goal has been scaled down to something more achievable. Sources at the IMF tell Larry that they can’t expect the US to respond to the call in an election year, as it would need to be approved by the House of Representatives and the Senate.

Speaking of the IMF firewall, Sky News are reporting tonight that Lagarde has made a ‘personal appeal’ to UK chancellor George Osborne for a new loan from the UK. That could be controversial – Osborne would need parliamentary approval for a loan greater than £10bn.

One to watch…

5.08pm: Adam Posen, the Bank of England policy maker, has explained why he dropped his call for more quantitative easing.

Writing on the Independent’s site, Posen said he believes inflation will be “below but close” to the Bank’s 2% target over the forecast horizon (don’t they always?…) and mounted a brisk defence of the QE programme to date.

Interestingly, Posen is sticking to his promise to not seek re-appointment to the MPC if he’s proven to have blundered. The goalposts may have moved, though — as inflation simply won’t fall to 1.5% by this summer, as he predicted. Posen writes:

In terms of accountability for my own record, I stand by what I said in March 2011 – if I am basically wrong about the forecast, I will not seek reappointment. When I forecast at that time 1.5% inflation and trending down for summer 2012, that was when some MPC members were voting to tighten policy and no one else was voting for additional ease. Of course, the inflation forecast is higher now than it was then precisely because rightly we did more QE.

And if you turn to the Evening Standard, you can see Posen being hailed as the “fireman” who helped extinguish the crisis (irking one reader).

Ths Standard even suggests Posen could be a future deputy governor, and the man himself doesn’t exactly haul his hat out of the ring, saying:

As far as I know, there is no legal barrier to it and obviously I’d be flattered to be considered but I’m not campaigning… I would be foolish, if not churlish, not to consider such a thing.

UPDATE: Andrew Sentance, a former MPC policy maker with a hawkish reputation, isn’t impressed by Posen’s u-turn:

@AlenMattich So 3.5pc is the new 1.5pc. So that makes the inflation target 4pc. Suddenly, MPC policy makes more sense!

— Andrew Sentance (@asentance) April 19, 2012

4.47pm: European stock markets are closed and what a mixed picture they paint.

Spain’s IBEX was the worst performer, hitting a new three-year low (again). The French stock market, the CAC, and the Italian FTSE MIB both also saw chunky selloffs. In London, though, the FTSE 100 was ended the day just where it began, all those long hours ago…

Roundup:

IBEX: down 2.4%
CAC: down 2.05%
FTSE MIB: down 2%
DAX: down 0.9%
FTSE 100: down 0.01% at 5744

And some comment from Joshua Raymond of City Index:

There has been lots of news and data to focus on today both from Europe and the US, and considering much of the news and data have been mixed, shares have struggled to maintain consistent pricing throughout much of the day, making stock indices trade very choppy as a result.

The choppy trading was typified by afternoon market rumours that France’s credit rating could be downgraded but whilst those rumours were put to bed by French sources, the fact that these rumours continue to infiltrate near term investor opinions reminds that traders remain on edge.

4.22pm: An interesting development in Spain this afternoon. Spain’s Cadena SER radio station is reporting that the government has decided to suspend the Schengen open borders agreement for the week up to the European Central Bank’s board meeting in Barcelona on May 3.

As our Madrid correspondent Giles Tremlett explains:

It fears violent protest groups from around Europe will converge on the city, so will reintroduce border controls. Barcelona has plenty of its own “anti-system” groups, though, who may also be out to disrupt the meeting.

The Schengen agreement allows free travel without border controls between the 25 countries who have signed up.

4.12pm: Morgan Stanley has stirred things up this afternoon with a research note predicting that Portugal will need a second bailout, “probably by September 2012″.

The analysis (which I’m speed-reading now) argues that Portugal’s “difficult debt dynamics and weak growth prospects” means it is unlikely to return to the international markets soon. As you may probably all remember, Portugal needs to repay €9bn of debt in September 2013, when a ‘partial’ return to the markets is forecast by the IMF.

The 46-page note broadly argues that Portugal’s is incapable of achieving enough growth to allow it to hit its debt reduction targets, thus satisfying its lenders. MS’s analysts write:

A fiscal-policy-induced belt-tightening points to a deepening recession. And any external shock (e.g., oil price increases) potentially hitting an already weak economy would add further downside pressure on activity.

Portugal’s problems are mainly structural. The government seems to be implementing a number of reforms quite swiftly, but potential benefits – which might lift GDP growth – will only be visible in the longer term.

The note ends with three scenarios:

• The Base Case: A second bailout – effectively more financing to keep Portugal afloat beyond 2014. This is given a 60% likelihood.
• The Bear Case: A bail-in — Greek-style debt restructuring. A 25% chance
• The Bull Case: An Irish-style recovery, bringing down Portugal’s debt/GDP ratio and allowing a return to the markets. Just a 15% chance.

3.17pm: In what can’t really count as a shock, World Bank president Robert Zoellick has criticised Argentina for its decision to nationalise energy firm YPF this week.

At a press conference in Washington, Zoellick said the decision to seize the majority stake owned by Spain’s Repsol was a “mistake”, and:

a symptom we have to watch out for.

Suspect that won’t force Cristina Kirchner to change course…

3.03pm: Delighted to report that the euro’s dip below $1.31 did not last, as that rumour of a French downgrade proved to be hot air. All calm again.

2.38pm: Finally, Christine Lagarde is asked about Greece, by a journalists who reminds her of her previous advice to “implement, implement, implement” (ie, put her financial reform plans into action).

What new guidance does she have today?

The IMF boss responds that Greece must continue to “implement, implement, implement”, and should also sort out its tax collection systems so ensure everyone is making a fair contribution”

On revenue collection, much work needs to be done.

Lagarde also flags up the commitment shown by technocratic prime minister Lucas Papademos.

2.30pm: Egypt’s shaky financial state following the Arab Spring is mentioned — Christine Lagarde says the IMF believes Egypt’s current request for a $3.2bn loan is ‘not sufficient’, and hopes to offer more hope. As she puts it:

I want to help Egypt no question about it…

[but] IMF programmes are like dancing: it takes two to tango.

2.17pm: On Spain, Lagarde says the Madrid authorities are taking the situation extremely seriously. She then argues that Europe’s bailout fund should be allowed to bail out Spanish banks directly, rather than having to work through its sovereign government (a view not shared by some EU states, including Germany).

Such an intervention, she says, “could and should” be accompanied by more global European supervision.

This is quite a hot issue, given the continuing slump in Spanish share prices and the record bad debt levels on Spain’s banks’ books.

2.13pm: On the issue of the IMF firewall, Lagarde says she expects its firepower to be “significantly” increased this week, but she does tries to steer the media away from focusing too much on the question of exactly how much new commitments she has received*.

* – $320bn at the last count

2.03pm: Christine Lagarde begins her press conference in Washington by reaching for a weather analogy to describe the economic situation:

We are seeing light recovery, blowing on the spring wind. But we are also seeing very dark clouds on the horizon.

Lagarde cited several dark clouds, including slow economic growth, the risks posed by bank deleveraging (yesterday the IMF warned we could see a new credit crunch), and the risk of an oil price shock.

She went on to warn that the eurozone is the ‘epicentre’ of the crisis, and said the world needs a ‘Washingon moment’, similar to the decisions taken in London in April 2009.

Lagarde’s message to the EU is to “keep up the better and more Europe”, with closer, deeper integration.

1.52pm: Over in Washington, Christine Lagarde is beginning a press conference to mark the official opening of the IMF Spring meeting.

You can watch it here.

Christine Lagarde arrives on crutches for the opening press conference of the official IMF summit twitter.com/EdConwaySky/st…

— Ed Conway (@EdConwaySky) April 19, 2012

1.38pm: French downgrade rumour latest: government officials in Paris are briefing that they have not been informed of any changes to the country’s credit rating.

Usually, the agencies give a day’s notice, privately, before making any changes. That led to a splurge of leaks back in January, when S&P cut the ratings of nine eurozone countries.

Despite this reassurance, the euro hasn’t really recovered – here’s a graph showing how it fell:

(timings in GMT).

1.09pm: And it’s another day of heavy losses on the Spanish stock market, with the IBEX 35 now down another 1.3%, or 97 points, to 6981.

This is the first time the index (which is dominated by bank shares) has been below the 7000 mark.

Louise Cooper of BGC Partners warns today that Spain’s banking sector is in a dire state, making an eventual Spanish bailout highly likely:

At the start of this financial crisis, the Spanish banking industry was regarded as being protected by superior local regulation and supervisory control- shares in the Spanish banks did perform better than other European banks for the initial years of the crisis. But we didn’t know the real situation, now we do, or are beginning to suspect….

Year to date shares in the two biggest Spanish banks are down sharply – Banco Santander is down 16% and BBVA down 22%. Over the same period, the Eurostox600 banking index is actually up a couple of percent.

So if you believe that this is a story of catch-up growth being given back, then Spain will inevitably follow the others into a bailout.

1.00pm: Quite a bit of confusion in the markets about the rumour of a possible French credit rating downgrade that surfaced around half an hour ago (see 12.31pm).

One suggestion, via Naker Trader, is that it’s been sparked by a Citi research note, prediciting that France could see a credit rating cut this autumn.

Presently, France is AAA with Moody’s (who said on Monday they had no plans for a downgrade, City guru Joe Bond reminds me), and Fitch (of Paris, who surely wouldn’t act this close to the presidential election?).

Three months ago last week, S&P downgraded to AA+.

All three agencies have France on a negative outlook – the first step to a rating cut.

12.31pm: In the last few minutes the euro has begun sliding sharply, hitting a low of €1.3078 (down nearly a cent on its earlier highs).

The relative success of today’s Spanish and French bond auctions appears to have ebbed away.

Another worry is that German bunds have just surged to a new record high. That has pushed the spread between German 10-year bond yields and the French equivalent to its widest point since January….

UPDATE: The chatter in the markets is that there’s a rumour of a French credit rating downgrade. Not substantiated……

11.40am: The prospect of fresh aid for Spanish banks was raised, and dismissed, at the European Commission’s regular media briefing in Brussels.

EC spokesman Olivier Bailly told reporters that there are still “no plans” to use the European Financial Stability Facility , or its replacement the European Stability Mechanism, to pump new capital into the Spanish banking sector.

Such a move would only happen if the EC reckoned that a banking sector could not recapitalise itself through the equity markets, or through a bailout from its national government, Bailly explained, adding:

This is not the case for Spain. This is not necessary for Spain, we believe.

Bailly’s optimism is not mirrored in the financial community, though. Analysts point to the huge, unquantified, levels of bad debt on the books of Spain’s banks following the (ongoing) property slump. Carsten Brzeski of ING has estimated that €80bn might be needed to clean up the mess.

The Spanish government could provide the funds itself, taking stakes in retail banks in return for cash injections. But as its own borrowing needs are so great, that might push Madrid to the point of needing its own bailout….

11.09am: The latest opinion polling from Greece is rather interesting – it suggests that the two main parties could manage to win a wafer-thin majority between them after next month’s election.

The survey, conducted by polling group, found that the right-wing New Democracy party would win 110 seats, while the socialist PASOK party would hold onto 41. With 300 seats in the Greek parliament, that would give the two parties a majority of just 1 seat — assuming that they could form a coalition.

An ND-Pasok coalition is the ‘best-case scenario’ the European establishment, really, as both parties support Greece’s current financial aid plan.

The poll also found that many of Greece’s smaller parties enjoy solid support. With New Democracy and Pasok winning just 37% of the vote in total, another eight parties would win at least 3% of the vote – enough for at least one seat under Greek election rules. Seven of those parties say they oppose Greece’s current austerity plan.

10.32am: Yusuf Heusen, sales trader at IG Index, reckons this morning’s Spanish auction was a “damp squib”, because the results contain something for both optimists (plenty of debt sold, strong demand) and pessimists (higher yields).

He adds:

Regardless of today’s sale, Spain remains the country to watch, given its size and the steady deterioration in both its banking system and economic situation.

10.23am: In other bond sale news, France just sold almost €8bn of debt. That is close to the maximum on offer (another €3bn is being sold separately).

The sale included €2.7bn of 5-year debt. which sold at a yield of 1.83%, up from 1.78% at a similar auction last month.

Probably a relief for Nicolas Sarkozy ahead of presidential election voting this weekend.

10.16am: There’s little cheer in Spain following the debt auction – the Spanish IBEX 35 index has now turned negative, down 35 points or 0.5%, having been up as much as 0.7% earlier.

Buy the rumour, sell the fact?

9.52am: The early reaction in the financial markets is that the Spanish auction (results at 9.45am) is a qualified success that shouldn’t detract from its deep economic problems.

The bottom line is that Spain has successfully raised the €2.5bn it needed, and a bit more on top. Demand, as measured by the bid-to-cover ratio, was also firm. But the rise in the yield on the 10-year bonds underlines the concerns over prime minister Mariano Rajoy’s efforts to cut Spanish borrowing without causing permanent damage to its economy.

Here’s some early reaction to the auction:

Peter Chatwell of Credit Agricole:

It’s a mixed auction. From the treasury’s perspective, it is good, selling the maximum amount…but, given the market volatility, I would not read too much into this. It’s job done for this round.

Marc Ostwald of Monument Securities:

The most encouraging part is they sold more of the 10-year than they did of the two-year…What does it tell us? Well, they got over this hurdle and the next one is not far away.

Nicholas Spiro of Spiro Sovereign Strategy:

This week’s Spanish auctions were a relative success, but this may be a temporary reprieve more than anything else.

And Spain’s long-term problems are not solved by one or two debt auctions, of course. Unemployment is still painfully high (over 23%) and the country is still heading into a deep recession this year….. as Sony Kapoor of the ReDefine thinktank pointed out on Twitter:

#Spain‘s problems go much beyond a good bond auction or a bad one. Little hope of #employment picking up, deteriorating #assets, #austerity

— Sony Kapoor (@SonyKapoor) April 19, 2012

9.45am: The results of the Spanish debt auction are in! And the good news is that Spain has actually sold slightly more debt than planned — €2.541bn, compared with a maximum target of €2.5bn.

The bad news is that the yield on the 10-year bond rose, but it did remain below the crucial 6% level.

Here are the results:

For the 10-year bonds:
€1.425bn was sold, at a maximum yield of 5.788% (up from 5.4%)
The bid-to-cover ratio was 2.4, up from 2.2 last time [that measures how much demand there was]

For the two-year bonds:
€1.116bn was sold, at a maximum yield of 3.463%
The bid-to-cover ratio was 3.3, up from 2.0 last time.

Reaction to follow

9.37am: On a lighter note…who’d like to see a picture of Angela Merkel with several multicoloured parrots on her head?

Merkel Smiling…. twitter.com/russian_market…

— Russia Business (@russian_market) April 19, 2012

The photo was taken a couple of days ago at a bird park in Marlow, northern Germany (according to our picture library, the birds are lories).

9.20am: The Spanish debt auction begins in just 10 minutes time, and we should get the results pretty quickly.

One hedge fund manager is taking a cynical view of the whole affair, suggesting on Twitter that the auction results will be massaged* to create a successful-looking sale:

If they can’t stage-manage a decent Spanish auction, we’re really in the shit. Expect something comfortable-looking, irrelevant.

— P M (@Pawelmorski) April 19, 2012

* – how could this be done? Spanish banks bidding heavily for their national sovereign debt would do the trick.

9.15am: Italy’s industrial sector continued to decline in February, according to data just released.

Industrial orders across Italian factories fell by 2.5% month-on-month in February, and a hefty 13.2% lower than a year ago.

8.48am: Overnight, the International Monetary Fund announced that it has now raised $320bn for its new firewall to protect the world economy from the dangers of the eurozone debt crisis.

Christine Lagarde, managing director of the IMF, said that $34bn of new pledges were received yesterday, including promises of loans from Poland and Switzerland. It means the IMF is now more than half-way to its target of $600bn of new loans from the international community (although the majority of new funding so far comes from the eurozone itself).

Lagarde urged other countries to make their own pledges, saying:

Ensuring that the Fund has sufficient resources to tackle crises and to promote global economic stability is in the interests of all our members.

However, reaching the full target still looks very difficult. America is still declining to contribute more, with Treasury secretary Tim Geithner reiterating yesterday that the US had done its bit.

Here’s a list of the commitments that we know about (some amounts are approximate):

• The eurozone: $200bn
• Japan: $60bn
• Sweden: $10bn
• Norway: $9bn
• Denmark: $7bn
• Poland: $9bn
• Switzerland: “a substantial amount” (probably approaching $26bn)

8.23am: In the currency markets, the pound has jumped in early trading. It hit a new 19-month high of €1.2245 against the euro, and a five-month high of $1.6071 against the US dollar.

The trigger appears to be yesterday morning’s Bank of England minutes, which revealed that long-time dove Adam Posen had surprisingly ditched his call for more quantitative easing. This means the Banks’ Monetary Policy Committee is much less likely to increase its asset purchase scheme in the coming months.

Speaking of Threadneedle Street… a former MPC member, David Blanchflower, has accused governor Mervyn King of ruling the Bank ‘like a tyrant’. Writing in the New Statesman, Blanchflower claims:

King has controlled the Bank with an iron fist, slaying any dissenters in his path. He follows in the tradition established by Montagu Norman, who was governor from 1920 to 1944: it’s his way or the highway. I recall a meeting in which King told the Treasury representative to tell the then prime minister to shut up. I have never worked at a place that had such low morale.

8.03am: European stock markets have opened higher, with the major indices gaining between 0.5% and 0.7%. Nothing spectacular, but a sign of optimism ahead of the Spanish auction.

7.55am: Here’s some early comments from market analysts on the upcoming Spanish auction (see 7.43am for details):

Lyn Graham Taylor of Rabobank: (via CNBC):

I wouldn’t say that Spain is heading the Greece way but definitely we are back in crisis mode. Spanish yields are rapidly on the increase and have been over the last couple of weeks.

We are really in wait and watch mode now to see what the next steps are that will be taken with regards to helping Spain out, I guess the most unlikely of those being in the first step of bank recapitalisations with the funds potentially coming from the EFSF (The European Financial Stability Facility).

Michael Hewson of CMC Markets:

Markets are becoming increasingly worried that in the absence of a much bigger firewall than the one which is currently available Spain will find itself in a similar situation to Greece, only without the luxury of a bailout to fall back on.

The auction should succeed given the amount but of particular interest will be the yield achieved and bid to cover ratio. Anything above 6% could put downside pressure on the single currency.

David Morrison of GFT:

Investors remain nervous…if yields jump back over 6.0 percent, then the European debt crisis will return centre stage, with Spain the leading lady.

7.43am: This morning’s auction will see Spain attempt to raise up to €2.5bn by selling two types of bond – one matures in 2014, and the other in 2022.

The 10-year bonds will be most closely watched, I think, as long-term debt is seen as a better measure of market confidence.

Analysts will look at four factors when evaluating the auction: how much debt was sold; how oversubscribed the auction was (bid-to-cover ratio); what interest rate (the yield) Spain has agreed to pay; and whether investors favoured the 2014 bond over the 2022 one.

On Tuesday, Spain held an auction of short-term bonds. Yields jumped, but the auction was still seen as a success because the Spanish authorities actually sold more than their maximum target of €3bn.

7.34am: Here’s today’s agenda, which shows that France and the UK are also holding government debt auctions this morning.

Italian industrial sales+orders data – 9am BST / 10am CET
Spanish €2.5bn bond auction – from 9.30am BST
• French €11bn bond auction – morning
• UK £1.35bn bond auction – morning
IMF’s Christine Lagarde holds press conference – 1.45pm BST / 8.45am EST
World Bank’s Robert Zoellick holds press conference – 2.45pm BST / 9.45am EST
Eurozone consumer confidence data – 3pm BST / 4pm CET

7.30am: Good morning, and welcome to today’s rolling coverage of the eurozone debt crisis.

Spain dominates the attention, with an auction of long-term debt taking place in around two hours time. The sale is a test of market confidence in the Spanish economy and its fiscal plans, following the escalation of concerns over the euro crisis in recent dats.

We’ll also be watching events in Washington, where the International Monetary Fund and the World Bank are holding another day of meetings to discuss the state of the world economy.

And on the economics front, new data will show how eurozone consumer confidence is faring, and the state of Italian industry.

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