• King calls for ‘real change’ in banking culture
• FSA chairman talks of ‘shocking’ cynicism and greed
• FSA to ease liquidity rules for banks to kickstart lending
• EU summit agrees restructuring of Spain’s bank bailout
• Today’s agenda
• Live blogging now: Nick Fletcher
7.45am: Good morning and welcome back to our rolling coverage of the eurozone debt crisis. After Italy’s shock win over Germany in the football last night, has it also won some concessions with the summit agreement reached this morning after 13 hours of talks?
Italian prime minister Mario Monti is certainly hailing it as a triumph and couldn’t resist slipping in a dig about the football when he spoke to journalists this morning, saying: “It is a double satisfaction for Italy.”
Here’s a quick take on the agreement. The basic points are:
• EU leaders have agreed to use the eurozone’s bailout fund to support struggling banks directly. This will initially be used for Spain’s banking bailout but could also be used for Ireland.
• A eurozone-wide supervisory body for banks will be created.
• ESM loans to Spanish banks will not have seniority and so will not push other bondholders down the pecking order.
• Countries that want the bailout fund to buy their debt (therefore lowering their borrowing costs) will not be subject to Greek-style monitoring programmes. (That’s the second win Monti was referring to).
More from the FT here (behind the paywall). And there’s a good story on the BBC.
The leaders also agreed to the jobs and growth pact, including €120bn for growth measures, which my colleague Ian Traynor describes as:
More of a symbolic exercise in shifting the emphasis from austerity, involving little new money.
8.07am: Back in the UK, the Bank of England’s financial policy committee will publish its quarterly recommendations for regulatory action today. Markets are hoping it will allow banks to release billions of pounds from their cash buffers to help kick-start the economy.
There’s undoubtedly more to come out of Brussels, and plenty of economic data to keep us busy. Here’s today’s agenda.
• France GDP for Q1: 6.30am
• Germany retail sales for May: 7am
• France consumer spending for May: 7.45am
• France PPI for May: 7.45am
• Swiss KoF business survey for June: 8am
• UK services index for April: 9.30am
• Eurozone CPI for June: 10am
• UK Financial Policy Committee minutes released: 10.30am
• Canadian GDP for April: 1.30pm
• US personal income/spending for May: 1.30pm
• US Chicago PMI for June: 2.45pm
• Angela Merkel speaks at parliamentary vote on fiscal pact: 4pm
• Francois Hollande speaks: 5pm
In the debt markets, the UK is selling £3.5bn of one, three and six-month treasury bills.
8.08am: Let’s have a look at what the analysts are saying about the eurozone agreement. The focus seems to be on whether the bailout funds are big enough to keep down borrowing costs. Marc Ostwald of Monument Securities, for one, is highly sceptical:
While there may be some temporary sense of relief that the summit has not descended in to acrimonious discord, what has been thus far agreed is nothing more than sticking plaster. One presumes that the agreement to allow the ESM to buy government debt effectively puts the ECB’s SMP programme to bed, though what happens with its existing holdings may be a point for some debate. There will of course be plenty who point out that the EFSF/ESM simply does not have enough capacity to buy Italian and Spanish debt indefinitely, let alone directly recapitalise eurozone banks.
The dissent within Merkel’s CDU has already been voiced by one arch critic of the ESM, Wolfgang Bosbach, who has said: “If the ESM is approved today” in Germany’s two chambers of parliament (as has been agreed), “the currency union widens to become a liability union.” Bosbach also said: “The liability union will become a transfer union” because euro members will continue to violate deficit rules, he said.
Michael Hewson at CMC markets writes:
The EFSF is soon to be wound down and needs to raise its funds on the open market, while the ESM doesn’t exist yet, though its biggest contributor Germany should ratify it today in the German parliament. The problem with that is the fund has a maximum capacity of €500bn and that includes Spain and Italy’s contribution, so it could well run out of money quite quickly.
Nothing has been agreed on a roadmap to a fiscal compact, a banking union and further fiscal integration meaning that while this may have given a short term pop to markets there still remain a lot of unanswered questions and the fear is that Monti’s intransigent tone may well have damaged relations irreparably in the longer term, especially with Germany.
Holger Schmieding of Berenberg bank highlights the role the European Central Bank must play to provide some stimulus to the region following the summit.
Whether or not it will calm markets for long will likely depend on the ECB, in our view. Last October, when the ECB merely reacted to an EU summit with a 25bp rate cut, turmoil intensified shortly thereafter. But last December, when the ECB rewarded a new summit agreement on a strict fiscal pact with a major liquidity infusion on top of a rate cut, markets calmed down for some four months.
As discussed before, letting the EFSF or ESM buy Spanish or Italian bonds could backfire badly. These funds have very limited resources. Official market interventions work if and when they impress markets. Stepping in with limited resources is an invitation to markets to speculate against them. The fear that the EFSF/ESM funds could soon be depleted could further spook markets. But if the ECB were to massively support EFSF/ESM interventions (or an EFSF/IMF credit line, they could be very successful. Over to you, Mr. Draghi.
8.23am: And the BBC’s Robert Peston suggests the Germans might have something to say about their taxes being channeled directly to Spanish and Irish banks (see 7.45am).
How will the German people react to idea that they are being forced to invest in insolvent Spanish and Irish banks?
— Robert Peston (@Peston) June 29, 2012
8.26am: For now though, the bond markets appear to be impressed.
The yield on Spain’s 10-year bonds (effectively the interest rate) dropped 44 basis points to 6.47%. The yield on Italian 10-year bonds is down 30bps at 5.89%.
The impact on shorter-dated debt is even more dramatic, with the yield on Spain’s two-year bonds down 86bps at 4.64%. And on Italy’s 2-year debt, down 63bps at 3.96%.
8.34am: The stock markets are also rallying on the back of the agreement out of the most recent eurozone summit. We’ll wait and see how long this lasts.
UK FTSE 100: up 1.5%, or 80 points, at 5573
France CAC 40: up 2.5%
Germany Dax: up 2.5%
Italy FTSE MIB: up 3.5%
Spain IBEX: up 4.2%
Greece ASE: up 3.99%
8.43am: German retail sales edged down for a second consecutive month in May, falling by 0.3% . The declines come after the strong increase in March (+2.1%), so that monthly average sales in Q2 so far were 0.8% higher than in Q1. Sales of cars and related service, which are not part of headline retail sales, increased by 1.4% in May.
Christian Schulz of Berenberg writes:
Indicators of consumer confidence in Germany have held up despite the latest wave of the euro crisis. The fundamental situation of German households remains benign. Disposable income rises as wages increase and fuel prices fall. The labour market may have slowed but employment keeps rising and mass unemployment is becoming a distant memory. Despite stable private consumption, Germany’s economy is likely to take a hit to growth over the summer. Uncertainty over the outcome of the eurozone crisis will hurt business investment and exports suffer from austerity in important markets.
8.47am: And just a reminder of the man who booted Germany out of the euro…. championships last night.
As the FT markets editor Chris Adams (@chrisadamsmkts) put it:
This week’s double winners: Spain and Italy. Stitch up Merkel at EU summit and boot out Germany to make final of #Euro2012
After Italy beat Germany 2-1 in Warsaw, Italian prime minister Mario Monti was asked whether he expected they would go on to beat Spain in Sunday’s final. He deadpanned:
I never speculate about financial markets or football.
9.01am: Already the contradictory statements are emerging from the summit. Financial reporter Fabrizio Goria (@FGoria) writes:
Monti says no troika for EFSF/ESM, now Merkel and Holland say access to bailout funds to be reviewed by troika… Who is the liar?
9.10am: Our European editor Ian Traynor reports from Brussels, where eurozone leaders have come to an agreement after apparent deadlock last night, sending markets soaring (see 8.34am).
European leaders pulled back from the brink of disastrous failure in their attempts to rescue the euro early this morning, throwing a lifeline to the weakest links in the eurozone by agreeing to shore up struggling banks directly, remove disadvantages for private creditors, and move quickly towards a new eurozone supervisory regime for banks.
Amid bad-tempered drama that continued through the night, Italy and Spain stunned the Germans by blocking progress on an overall deal at a two-day EU summit in Brussels until they obtained guarantees that the eurozone would act to cut the soaring costs of their borrowing.
The tough negotiations were deadlocked for hours, prompting the departure from the summit after midnight of the 10 non-euro countries, including Britain and leaving the eurozone leaders to fight it out. After 14 hours of wrangling, they emerged with a three-point statement rewriting the rules for the eurozone’s new bailout regime in a way likely to soften the draconian terms that have accompanied the rescue programmes for Greece, Portugal, and Ireland over the past two years.
The leaders said a new eurozone banking supervisory system should be established as a matter of urgency, by the end of the year and that once it is operational, the eurozone new permanent bailout fund, the European Stability Mechanism, would be able to recapitalise failing banks directly, without the loans going via governments as at present and adding to national debt burdens. The shift had been demanded particularly by Mariano Rajoy, the prime minister of Spain.
The new supervisory system is likely to come under the authority of the European Central Bank. Under plans being mooted, the new banking regime is to entail pooling eurozone liability for guaranteeing savers’ deposits and a common resolution fund for winding up bad banks. But the statement mentioned neither of these two points which are controversial especially in Germany which is reluctant to accept responsibility for the conduct of other countries.
The statement added that in drawing up the terms for up €100billion for Spanish banks, private creditors would enjoy the same status as the bailout fund in the event of a debt rescheduling. Previously the fund enjoyed “seniority” over private investors.
9.17am: And my colleague John Hooper is gauging the reaction to news of the successful summit and, of course, the football over in Rome.
Radio 24, Italy’s business talk radio, hailed it this morning as the night of the two “Super Marios”: after Mario Balotelli had humbled Germany in Warsaw, Mario Monti forced a reluctant Angela Merkel to give him what he wanted to bring down Italian interest rates. Well, that was how it was being told here. Mariano Rajoy may also have played a part, of course.
In an interesting comment on Italian priorities (and not one that will particularly amuse the Germans), the websites of both the country’s biggest newspapers, Corriere della Sera and La Repubblica, felt Italy’s semi-final victory in Euro 2012 was the more important story and put it at the top of their home pages.
Vittorio Da Rold, writing for the financial daily Il Sole 24 Ore (which did at least think the EU deal was the more significant), said Monti’s refusal to sign up to a growth pact until he had a deal marked the first time that an Italian leader had used a veto since Italy joined the original EEC.
“It is also a historic step [because], even though we still don’t have eurobonds, for the first time the principle has been approved that … interest rates are a common problem,” he wrote.
9.24am: There’s a good headline from Nicolas Doisy, an analyst at Cheveureux Credit Agricole, on the eurozone agreement…
The EU summit that finally did not fail
He argues that this summit is the first concrete step towards closer political and economic union in the region.
Contrary to expectations, the EU summit has eventually delivered a strong political signal last night: the eurozone federalisation has started for real with the direct mutualisation of Spain’s banks. Although seemingly a technical and legal measure, this means the eurozone is really kick-starting its banking union by addressing Spain’s legacy.
This first serious step toward a crisis resolution will help contain Spain’s deflationary pressure by reducing the country’s overhang of private debt. It is also an implicit mutualisation of Spain’s sovereign debt right now via the eurozone’s funds, which allows to postpone the issue of eurobonds. So, this is also a first step toward a fiscal union.
Meanwhile, Monti intimated once again that the eurozone fund would take over bond purchases: this will clearly help better contain market pressure. This is yet a second (more obvious) sign that the eurozone has really started its federalisation, while preserving the ECB’s independence.
9.31am: And just to bring everyone down a bit, Japan’s industrial output fell the most in May since the March 2011 earthquake, partially hit by weak demand in Europe for Japanese cars.
Production declined 3.1% in May from April, the Trade Ministry said in Tokyo today.
The data showed clear signs of the risk to Asia from the eurozone crisis. Production of transportation equipment, including automobiles, slumped 11.1% in May, the biggest drag on output overall.
9.40am: UK services sector stagnated in April, weighed down by a slump in retail sales. Output of the services sector was flat, compared with a 0.6% increase in March. The main drag was a 2.4% slump in retail sales.
The Office for National Statistics also put out data on productivity, which fell 1.3% in the first quarter, on a per hour basis.
9.51am: Gary Jenkins of Swordfish Research is cautiously optimistic about the agreement out of the eurozone summit.
These steps are the obvious ones to take to try and restore some confidence in the market in the short term. Alone they do not solve the underlying problems but they might buy a bit of time which is probably about the best they can do right now. Obviously the bailout funds as they exist are not large enough to fund the likes of Italy over the medium term and the challenge remains to encourage the private sector to invest alongside them and on that point they have at least removed some key obstacles.
It will be interesting to see if they can make any progress towards a proper fiscal union on day 2. The problem might be that if you give politicians much needed access to liquidity that their incentive to give up sovereignty recedes somewhat. Or maybe I am just a cynic.
10.06am: Data coming out of Greece shows that retail sales dropped 13.5% in April, compared with the same month last year. That is actually an improvement from March, when retail sales dropped 16.2%.
Inflation has also eased very slightly with producer price index inflation at 5% in May, compared with 5.1% in April.
10.10am: In the Eurozone annual consumer price inflation held steady in June at 2.4%, in line with expectations.
Inflation is now is at a 16-month low, leaving the door open for the European Central Bank to cut interest rates.
10.18am: Back to Brussels where a German official is talking about the change to the terms of the bank bailouts, which means bailout funds will not have seniority over other creditors. This alteration will apparently be limited to Spain’s banking bailout.
Traders are sceptical about that clause anyway. One analyst writes:
Loans to Spanish banks will not be senior to other bondholders.
- sure, in the legal documents perhaps. BUT like ECB/IMF interventions, subordination will remain assumed
He lists some other flaws he sees in the headline results from the summit…
Direct re-cap of banks.
- this can only happen once a move to a pan-euro supervisory regime has happened. It doesnt look to us that the initial EFSF/ESM assistance to Spain will be direct. Of all the bank/sovereign loops, the most significant is in Spain, so the headline is not as good in reality.
EFSF/ESM secondary bond purchases.
- no available funds until the EFSF issues bonds or the ESM is paid into. yes, the ECB will act as the buying agent, but its unlikely they will be too active before a funding programme is in place for the EFSF. Also – for any such purchases an MoU would be needed. We expect Italy to resist such a move (hence Monti’s comment about hoping the threat of bond purchases will be enough in itself).
10.29am: German publication Der Spiegel’s certainly clear on who lost at the euro summit, with the headline:
How Italy and Spain Defeated Merkel at EU Summit
Carsten Vokery writes:
Angela Merkel took a tough stance ahead of the EU summit, insisting she would not make concessions. But Italy and Spain broke the will of the iron chancellor by out-negotiating her in the early hours of Friday morning. Germany caved in to demands for less stringent bailouts and direct aid to banks.
10.39am: Bank of England governor Mervyn King is speaking at the press conference of the financial policy committee.
He says the committee recommends that “taking into account the risk profile” of the specific bank, the FSA works with banks on what level of capital they need to hold. He said it may temporarily be above the standards set by Basel III.
Importantly the committee is not recommending that banks hold permanently higher cushions of capital. If risks materialise, the cushion will be used to absorb losses. At that point capital ratios could fall back to Basel III standards.
10.43am: Mervyn King, Bank of England governor, says the risks facing banks haven’t diminished, and increases in bank aggregate capital have been small. He also said manipulating Libor was deceitful.
“There’s something very wrong with UK banking industry and we need to put it right,” he said.
10.58am: On Libor, King says:
We will make sure that this system which was rigged in the favour of at least one or several institutions will be changed. I hope that … we will end up with a new regime based on actual transactions.
Looking ahead its very important that people don’t expect too much from regulation. Regulation doesn’t stop bad behaviour. We have to change the structure of the industry to make sure they have the right incentives.
Adair Turner adds that the Libor emails showed “a degree of cynicism and greed that is shocking”.
That does suggest there are some very wide cultural issues that need to be very strongly addressed in trading and investment banking activities of major banks. I think we would be fooling ourselves if we thought some of the behaviours are not found in other areas of trading activity as well.
11.06am: Andy Haldane, the Bank of England’s executive director for financial stability, who sits on the FPC, said he expects the Financial Services Authority to translate relaxed liquidity rules into bank-specific guidelines within the next few weeks.
He believes relaxing the rules on liquidity buffers banks have to hold could make a “big impact” on new lending to Britain’s businesses.
11.07am: Mervyn King reiterates the need to split investment banking from retail banking activity. He says the Bank of England wants to underpin lending to individuals and SMEs, not risky bets on markets.
The two should not be on the same balance sheet.
11.09am: Mervyn King says the eurozone banking supervisor is not going to fix the eurozone crisis:
I don’t think creating a single banking supervisor is a solution to the euro crisis. They might see it as a broader move towards fiscal union, but it is not germane to the problems they have.
Adair Turner is bit more upbeat, calling it a “major step forward to a banking union for that unit”.
11.15am: On the new liquidity rules, FSA chairman Adair Turner said:
The new liquidity facilities and policy of the Bank of England provides additional contingent liquidity available to banks to use when they need it. That means that from a regulatory point of view, there is a somewhat reduced need to have self-insurance on the liquidity side, and we can take that into account.
So we will be issuing a press release, which will say that we will adjust our liquidity guidance in the light of these improved BOE facilities. In particular, we will be stressing the point that we’ve made before… that liquid asset buffers can be drawn down in the event of liquidity stress and used for the duration of that period of stress.
We’ll also announce that in current conditions, and in light of the improved liquidity insurance provided by the bank, we’ll look at the specific guidance that we give to individual banks. And for those banks that have preposition collateral at the BOE, we will take account of that potential access to liquidity when formulating our guidance on appropriate liquidity buffers.
11.25am: King called for a “real change in the culture of the banking industry” in the UK.
He ruled out a Leveson-style inquiry into a series of scandals in the industry, including the Libor scandal – which he described as the “deceitful manipulation of one of the most important interest rates”.
He said the situation required “leadership of an unusually high order and changes to the structure of the industry”.
11.29am: Adair Turner, chairman of the FSA, says on interest rate swaps:
Many were correctly sold, they can be good products…but sadly our investigations show significant minority were missold.
Andrew Bailey of the Bank of England says the biggest headwind for bank’s building up capital buffers is PPI, “having to pay redress for the misdeeds of the past”.
And finishing off the press conference, Mervyn King raises more questions about the Libor scandal:
It goes to the heart of how a rate that is used in many transactions should not depend on the answer to a question, because they have many motives for changing their answer.
He reiterated his preference for using actual quotes, and said there was a deeper question over why they used that particular metric for so many transactions, when the market is sometimes too thin to actual come up with a meaningful figure from transactions alone.
11.39am: Goldman Sachs is apparently recommending buying Spanish, Irish, Italian bonds, prompting cynicism from trader website @zerohedge.
Goldman recommends buying Spanish, Irish, Italian bonds. Which means Goldman is selling
11.43am: Spain loses most foreign portfolio investment since the introduction of the euro, as investors sell bonds and stocks. Non-residents withdrew €24.6bn from the country, up from just €4.54bn last year. Thanks to Bloomberg economics editor @lindayueh.
11.48am: And finally, for those who haven’t had enough of the Bank of England’s financial policy committee, the Financial Stability Report is up on their website. Some key recommendations from the committee:
• The FSA should make it clear to banks that they can use the cushions of liquidity they are required to hold in the event of a crisis. He said the ability to do so would be enhanced by liquidity made available to banks by the Bank of England.
• The FSA should work with banks, taking into account each institution’s risk profile, to ensure they build a sufficient cushion of loss-absorbing capital in order to help to protect against the currently heightened risk of losses. That cushion may temporarily be above that implied by the Basel III standards.
• The FSA should encourage banks to improve the resilience of their balance sheets, including through prudent valuations, without exacerbating market fragility or reducing lending to the real economy.
• Banks should work to assess, manage and mitigate specific risks to their balance sheets stemming from current and future potential stress in the euro area.
12.08pm: Eurozone summits have more than a little in common with Samuel Beckett’s Waiting for Godot. Thanks to reader APG123 for a brilliant comment. Here’s an excerpt:
I was reading Samuel Beckett’s Waiting for Godot last night and I had to laugh about its ironic relevance. I’ve changed the names to expose the guilty.
MERKEL: Well? What do we do?
HOLLANDE: Don’t let’s do anything. It’s safer.
MERKEL: Let’s wait and see what he says.
HOLLANDE: Good idea.
MERKEL: Let’s wait till we know exactly how we stand.
HOLLANDE: On the other hand it might be better to strike the iron before it freezes.
MERKEL: I’m curious to hear what he has to offer. Then we take it or leave it.
HOLLANDE: What exactly did we ask him for?
MERKEL: Were you not there?
HOLLANDE: I can’t have been listening.
12.16pm: There’s some analyst reaction out about the financial policy committee’s recommendation that banks use their liquidity buffers to support lending to households and companies (see 11.48am and earlier). Simon Hayes of Barclays Capital says the lack of specifics in the announcement means the Bank of England is still likely to increase its quantitative easing programme next month:
The committee’s policy action has amounted only to asking the FSA to examine whether the specific liquidity requirements on banks are appropriate, in light of the fact that the Bank of England stands willing to supply emergency liquidity (as the activation of the Extended Collateral Term Repo Facility demonstrates).
It is therefore left to the FSA to translate this guidance into specifics, and the FPC was unable to give an indication of the effects of the guidance beyond Lord Turner’s comment that the ECTR meant there was “a somewhat reduced need” for banks to self-insure against a liquidity crisis, and Andrew Haldane’s observation that the stock of liquid assets held by banks exceeds £500bn, implying that the effect could be substantial.
This policy announcement was of particular interest because the minutes of the June MPC meeting showed that some members wanted to wait and see what the FPC’s decisions might mean for the economic outlook before considering the case for more QE. The possibility was that if the FPC had announced measures that were likely to provide a substantial boost to aggregate demand, the case for more QE would be reduced.
However, the absence of any detail in today’s announcement means the MPC is probably none the wiser as it prepares for the July MPC meeting next Thursday. As a result, we do not think this guidance will stand in the way of a QE expansion, and continue to forecast an additional £50bn in asset purchases next week.
12.46pm: The deal announced early this morning – and more importantly the concessions the Germans are seen to have made – could make this afternoon’s vote in the Bundestag on ratifying the ESM permanent bailout fund interesting.
A bit of noise about the vote is hitting the wires, with the opposition SPD party saying it is an open question whether it can actually go ahead.
Meanwhile Angela Merkel is giving a press conference, and is repeating the line that the ESM’s exemption from seniority only applies to Spain. She said many countries did not want the preferred creditor status removed as a general measure.
And – probably to no one’s surprise – she says her stance against eurobonds remained unchanged and she repeated that to the summit.
12.59pm: More from Merkel. She says she is working well with French president Francois Hollande. And she maintains the vote on the ESM in the German parliament will take place today as planned.
1.11pm: French president François Hollande is giving his version of events, saying no one should say they had won or lost. The eurozone as a whole had been strengthened by the agreement.
He said the financial transaction tax would be defined and in place (for the countries involved) by the end of 2012.
1.16pm: More from French president François Hollande, who is speaking after the eurozone summit in Brussels.
He says that France will submit the growth and fiscal pact to French parliament for ratification when everything else is agreed (such as the financial transaction tax, the banking union, growth). So that will be next year at the earliest.
He says Germany strongly backs the financial transaction tax, but says the rate has yet to be decided on.
He’s defended Spain and Italy for their hardball stance last night pushing for stability measures, saying they were aimed at benefiting the whole eurozone.
1.24pm: François Hollande says the timeframe for eurobonds could not be decided on today, but remains an aim for the future.
He says nothing has been decided on who will take over as head of the eurogroup (which brings together all the finance ministers of the eurozone). Prime minister of Luxembourg Jean-Claude Juncker is currently in charge and Hollande said prolonging his tenure was an option. Wonder what Juncker would say to that.
1.34pm: François Hollande says a new authority may be created to handle bank restructuring and that it is not the job of the European Central Bank.
1.37pm: Spain’s prime minister Mariano Rajoy has also been giving a press conference. He said:
My government is not planning to ask the EFSF [bailout fund] to buy Spanish bonds.
He hopes the direct recapitalisation of banks could start by the end of the year.
1.42pm: The stock markets continue to shoot up on the back of the news coming out of Brussels.
Spain IBEX: up 4%
Italy FTSE MIB: up 4.5%
France CAC 40: up 3.4%
Germany DAX: up 3.2%
UK FTSE 100: up 2.16%
The euro has hit a high of the day of $1.2681. While the yield on Spain’s 10-year bonds is down 36 basis points at 6.55%.
1.50pm: David Cameron is now giving a press conference.
I don’t want UK taxpayers underwriting other country’s banks. I want the Bank of England supervising UK banks.
I was not happy with the draft that implied a banking union may apply to the full EU, it should only apply to the eurozone.
He also suggests the UK has been driving the debate on how to tackle the growth cirsis in Europe. I’m sure Francois Hollande et al might have something to say about that.
1.55pm: The political editor of the Evening Standard has a good take on Cameron’s comments on stronger regulation of the banks.
Cameron:We will also varnish stable door and oil the lock with WD40, after shutting it
— Joe Murphy (@JoeMurphyLondon) June 29, 2012
1.59pm: What David Cameron actually said:
We know what’s gone wrong and what needs to be done to put it right. We’re changing the regulatory system and putting the Bank of England in charge. We’ve put in place the bank levy.
2.01pm: So did David Cameron get what he wanted out of the eurozone summit? The FT markets editor is not sure:
Cameron asked if he’s got the big bazooka he wanted? Answer: “There were one or two important things…” (translation: “No”)
— Chris Adams (@chrisadamsmkts) June 29, 2012
2.03pm: David Cameron says he understands those who want an in/out referendum, but does not agree with them as it only gives two choices. Instead, he says most people want a government that stands up and fights for them in the EU.
Europe is changing, Britain is not going to cede more powers to Europe. Britain has every chance of securing the sort of position we want.
2.11pm: Over to Italian prime minister Mario Monti, who is holding a press conference at the same time. He says that Italy’s 2012 budget deficit could be worse than expected.
2.12pm: US consumers spent $4.7bn less in May than the previous month even as incomes rose 0.2%, the commerce department said, confirming the economy’s sluggish turn in the second quarter.
Personal incomes grew by 0.2%. But wages and salaries, the largest component of incomes, were unchanged in the month.
Consumer spending fell just 0.1%, reversing the previous month’s trend in which spending surpassed income growth and consumers ate into savings.
2.19pm: Back to Brussels and Mario Monti who says Italy may need to apply for help to stabilise bond spreads but does not intend to so now.
He also says he does not know if summit agreement is enough to stabilise markets.
2.26pm: Over in the US, traders are also excited about the eurozone summit agreement. The Dow Jones opened up 0.569%, the S&P 500 was up 0.76%, and the Nasdaq opened up 2%.
2.38pm: We’ve barely mentioned Ireland but that seems to be one of the biggest winners from today’s eurozone summit agreement. The yield on its 10-year bonds have come down almost 76 basis points to 6.38%. That means traders consider it a better bet than Spain at the moment, where yields are at 6.5%.
Ireland’s central bank governor Patrick Honohan said:
It remains to be seen whether the initiatives in this direction [banking supervision, deposit insurance and resolution] will be enough in themselves to reassure markets. It may take time for market yields to converge to the extent desired.
But he said this could be a turning point for Ireland:
If financial markets and growth conditions in Europe can indeed be stabilised, if financing conditions for Ireland can be improved, and if restraint remains the policy watchword at home, the corner can soon be turned.
2.50pm: And with that it’s time to hand over to my colleague Nick Fletcher.
3.04pm: Away from the eurozone crisis for a moment, and we’re back to a mixed picture from the US after a series of recent fairly positive data.
On the one hand, the Chicago purchasing managers index of business activity rose to 52.9 in June from 52.7, up slightly from the expected 52.5. Annalisa Piazza at Newedge Strategy said:
Today’s report confirms that business confidence has lost some steam in the second quarter. However, the picture for activity is not too gloomy. We expect the US economy to run at around 1.5% quarter on quarter annualized in the second quarter from 1.9% in the first. A painfully slow pace of activity but at least a collapse doesn’t seem to be the baseline scenario.
However US consumer sentiment fell to a six month low in June, according to the Thomson Reuters/University of Michigan index. It came in at 73.2, down from 79.3 in May.
This does not appear to have dented investors’ enthusiasm, with the Dow Jones Industrial Average up around 205 points at the moment, as the euro euphoria continues.
3.12pm: Markets continue to soar but as a tweet from the FT’s James Macintosh says:
Reminder for those getting excited: Euro has gained most v $ today since Oct 27, 2011, when EFSF leverage and Greek PSI agreed. Didn’t last.
— James Mackintosh (@jmackin2) June 29, 2012
3.24pm: Portugal has announced its budget deficit for the first quarter of 2012 was 4.3%, on course to meet the target set by the EU and IMF in return for the country’s bailout.
Last year its deficit reached 4.2%, well within the 5.9% level demanded when it received €78bn in bailout funds. But the 4.2% was reached only with the help of a one-off transfer on bank pension funds to the state, and some economists have warned Portugal may not be able to meet the strict goals set by the EU and IMF.
3.53pm: Back with the US, and you may recall there was some disappointment last week when the Federal Reserve announced it was increasing its bond buying programme, after many had been hoping for more aggressive action to boost the world’s largest economy.
Well, that hope may have dimmed a little more. James Bullard, president of the St Louis Federal Reserve, said a third round of quantitative easing (QE3) would only happen if the US economy received a shock, rather than just weak growth in employment. He told reporters:
To get to QE3 you’d have to see a sharp drop-off in economic activity in the US or a clear threat of deflation. I don’t think, at least as things stand right now, we don’t see either one of those.
4.08pm: For anyone anxiously awaiting the German vote on the ESM bailout fund … you’ll have to wait a bit longer:
Merkel’s statement & vote have been delayed by half an hour, now due to begin 16:30 UK time, 17:30 CET bit.ly/jV0bdx
— Open Europe (@OpenEurope) June 29, 2012
However the signs suggest it will probably be approved:
#Germany Opposition Says Will Support ESM/Fiscal Pact In Today’s Parliamentary Vote [Dow Jones]
— DJ FX Trader (@djfxtrader) June 29, 2012
4.21pm: As we await the German vote news, Europe editor Ian Traynor has assessed Chancellor Angela Merkel’s actions at the two day summit. Here’s a flavour:
When Angela Merkel rushed back to Berlin for a crucial vote on the euro before the Bundestag’s summer recess, she returned to headlines screaming “An assault on German savers” and “The night that Merkel lost”.
In Brussels she had made unusual concessions to the European Union’s “Club Med” which left Spain delighted, Italy imagining it had won a points victory, and France’s new president satisfied with his first substantive EU summit.
For those who view this endless euro crisis summitry as a gladiatorial zero sum game, Merkel lost this week. Not a common event in the 30 months of crisis that have thrust Germany into a difficult and unwanted role as the EU’s indispensable power. The other way of seeing the summits is as a marathon round of muddling through; of bluff and counter-bluff resulting in mushy compromise.
There was plenty of that in the decisions announced on the banks and bailouts on Friday. But the summit surpassed expectations by adding urgency to the effort to establish a new regime of eurozone bank supervision under the European Central Bank; by agreeing to try to break the damaging feedback loop between over-indebted governments and their weak banks by injecting funds directly into ailing banks; and, most radically and most politically dangerous for Merkel, by awarding private creditors the same status as the eurozone bailout fund in the Spanish rescue. That means German taxpayers will have to join the queue to get their money back.
5.14pm: The Bundestag debate on ratifying the fiscal treaty and ESM permanent bailout fund is underway, despite an attempt by left wing party Die Linke to have the motion struck off in the light of the summit agreements.
Chancellor Angela Merkel, fresh from that very summit, said a fiscal treaty was necessary because irresponsible budgetary policies of one state had an impact on everyone else.
The ESM and the fiscal treaty belonged together, she added. There was a need to draw up a memorandum of agreement with Italy and Spain in the event of the purchase of their government bonds on the primary and secondary markets.
She also said proposals to give the European Central Bank new supervisory powers for banks in the eurozone would be ready by the end of the year.
She finished her statement by appealing for everyone to ratify the fiscal treaty and ESM.
5.32pm: As the German debate continues – leader of Germany’s opposition Social Democratic party Sigmar Gabriel is currently speaking – it’s time for a quick look around the markets.
The EU summit agreement to aid Spain and Italy has been enthusiastically received by investors, if not by all politicians. The FTSE 100 has closed 78.09 points higher at 5571.15, up 1.42%. Germany’s Dax is up 4.33%, France’s Cac has climbed 4.75%. Italy’s FTSE MIB has done even better, up 6.59%, while Spain’s Ibex is up 5.66%.
As for bond yields, Spanish 10% yields have slipped back to 6.34% while Italy’s are down to 5.82%.
In the US the Dow Jones Industrial Average is currently 1.7% or 215 points higher.
David Jones, chief market strategist at IG Index said:
It would be dangerous to assume that the crisis is on its way to a lasting resolution, but for now at least markets are just glad that some progress has been made. Whether the line can hold in the weeks to come remains to be seen, but investors for now are happy to believe that this represents the start of something far more lasting.
5.44pm: Some positive responses to the summit.
Ratings agency Fitch said the summit exceeded expectations, even though it agreed these had been low in the first place:
[It] marks a positive step that eases near-term pressure on eurozone sovereign ratings.
Eurozone leaders’ decision to create a ‘single supervisory mechanism’ for banks is an important step towards ensuring the long-run viability of the euro. Once such a mechanism has been created, the soon to be established European Stability Mechanism (ESM) could recapitalise banks directly. In Fitch’s opinion, the creation of a single pan-eurozone bank supervisor with the power to intervene and, if necessary, directly capitalise banks could greatly improve the functioning of Economic and Monetary Union (EMU).
By weakening the link between the financial health of banks and their domestic sovereign governments, it will enhance the effectiveness of ECB monetary policies and moderate the vicious cycle between sovereign and bank creditworthiness that has been a pernicious feature of the eurozone debt crisis.
But it warned resolving the eurozone debt crisis will take a long time, and the risks associated with successfully implementing the agreement are high.
Meanwhile the International Monetary Fund said deepening financial sector intergration in the eurozone would “help break the feedback loop between banks and sovereigns.” A spokesman said:
These are the right steps towards completing monetary union which will also benefit from further action for deeper fiscal integration.
5.49pm: Some colour from the Bundestag debate:
Die Linke’s Sahra Wagenknecht wearing hooded top with ‘No to fiscal pact’ badge #bundestag twitter.com/OpenEurope/sta…
— Open Europe (@OpenEurope) June 29, 2012
8.36pm: After all the debate in the Bundestag, the vote results are finally in and the motion to ratify the fiscal treaty and the ESM permanent bailout fund has been passed by the lower house.
So with that, it’s time to close up for the day, after an unexpectedly positive outcome from the two day EU summit sent markets soaring. Thanks for all the comments, have a good weekend and we’ll be back again on Monday morning.