August 2012

31 August

Today the worlds leading bankers and economists met in Jackson’s Hole in the US to discuss the world economy, including the Eurozone Crisis. Speakers at the conference included Ben Bernanke (Federal Reserve chairman), Andy Haldane (Bank of England’s financial stability executive director) and Christine Lagarde (IMF chief). ECB president Mario Draghi was also due to speak at the conference but he pulled out earlier this week citing work commitments. Expectations were high that Ben Bernanke would be announcing further quantitative easing measures for the US, but he disappointed the markets which fell as a result.

Spain approved its new banking reform law today. The law provides for a “bad bank” that absorbs real estate assets (although Spanish finance minister De Guindos points out that this is an incorrect term as it will be a company rather than a bank) at a “price” that will allow it to book profits in the long-term. It will run for 10 - 15 years and private investors will be sought to take stakes. The exact “price” the toxic bank has to pay for the assets will be determined at a later stage, but most analysts agree that it will be the determining factor of the success of the reform. Too high and not enough profit will be booked; too low and additional financial assistance may be required. Heavy bank provisioning against toxic real estate that was ordered by earlier reforms (for example 80% against empty building land), should absorb the brunt of the blow to banks hiving off their toxic assets. The “bad bank” will only take assets from bailed-out banks. Banks that are beyond saving will be broken up with any viable business sold on. Preference shares in rescued banks can be exchanged for shares and convertible bonds under the new law, but at a maximum of market price plus 10%. The exact amount of the losses to those shareholders is not yet available.

The Spanish bank rescue fund (FROB) announced that it intends to make an immediate cash injection to BFA / Bankia Group as an advance under its European financial assistance programme to guarantee the “solvency and long term viability of BFA / Bankia Group”. Bankia posted first half losses of EUR 4.5 bn this year. Private sector deposits fell by EUR 12.8 bn while client funds dropped by EUR 37.5 bn, qualifying it for financial aid according to the FROB.

Eurozone unemployment has risen to 11.3% in July; a record high. Inflation rose from 2.4% in July to 2.6% in August. Most experts agree that this is mainly driven by the rise in oil prices which is also indirectly having an effect on retail sales. Germany saw its retail sales drop in July by 0.9% which is being attributed to consumers saving in other areas to compensate the rise in fuel costs. Experts agree that the higher inflation rate reduces the chances of an interest rate cut at the ECB’s next meeting (next week Thursday). The ECB targets inflation at on or close to 2% but they are still expecting a fall in inflation by the end of the year.The EC plans to create an agency to wind down problem banks. This has so far been left to national governments, but in connection with the blue print for a “banking union” this may change according to Michael Barnier, the European Commissioner in charge of financial regulation, who intends to propose further steps building on the concept of common supervision. The ECB continues to work on its bond buying scheme. So far nothing has been announced, but analysts and experts believe it will be based on the following. The ECB will:

• buy sovereign bonds on request and subject to certain conditions;
• operate in the secondary markets providing the EFSF/ESM buys bonds in the primary market (i.e. directly at auction)
• buy short-term bonds – this is different from its current programme which focuses on long-term debt; and
• ensure transparency with regard to which countries participate and the amounts purchased.

30 August

German Chancellor Angela Merkel flew to China today to discuss trade deals and the Eurozone crisis with Chinese leaders. Speaking after their meeting, Chinese premier Wen Jiabao said he was concerned that the Eurozone crisis was dragging down the rest of the world economy. He urged for leaders to resolve the crisis swiftly but confirmed that China would continue to support Europe and buy European government debt. Spain’s Prime Minister Mariano Rajoy and French President Francois Hollande also held talks today. At the press conference the leaders agreed that closer integration and a pact for growth were necessary in the Eurozone. Hollande offered his support to Spain saying that Spain’s borrowing costs are too high and that he would support the ECB’s plan to intervene in the bond markets. He also said it was sensible of Rajoy to wait until the terms of any financial aid were known before requesting it. Spain faces more financial problems at home as the region of Valencia today increased the amount of its aid request from EUR 1 bn to EUR 4.5 bn, just two days after the region of Catalonia announced it would need EUR 5 bn in aid. That will bring the total amount requested under Spain’s special regional financial aid fund of EUR 18 bn to approximately EUR 10 bn for just three of Spain’s regions. Another four regions are expected to request financial aid from the fund.

As economic confidence in the Eurozone fell to its lowest level in more than three years, from 87.9 in July to 86.1 in August, Germany’s unemployment rate reportedly increased slightly to 6.8% (still far below the Eurozone average of 11.2%). Analysts see it as a sign that German economic growth is further slowing. However, still riding the wave of optimism that the ECB is going to announce measures to combat Spain’s and Italy’s rising borrowing costs, Italy successfully sold EUR 4 bn of 10-year bonds at an average yield of 5.82%, down from 5.96% last month. In Greece, Prime Minister Antonis Samaras has warned members of his party that Greece may well be forced out of the Eurozone unless the additional EUR 11.5 bn of spending cuts can be found and finalized. Samaras said that the package of cuts were “painful and necessary” and promised they will be the last of their kind as Greece simply cannot take any more austerity measures. Slovakia’s Prime Minister Robert Fico has said at a televised news conference that he sees a 50/50 chance of the Eurozone breaking up saying much will depend on how leaders handle the situation in Spain and Greece.

EC President José Barroso confirmed today that the much-anticipated proposals for a Eurozone banking union will be unveiled on 12 September, the same day as the German constitutional courts give their verdict on the status of the ESM (which Estonia ratified today) and the date of the Dutch general elections. In an article published by The Guardian, Barroso sets out the three key principles on which any such union should be based according to him*.

• Single supervision: within the Eurozone common banking supervision is needed for strengthening confidence among countries using common financial backstops.
• Credibility: the Eurozone's new banking-supervision mechanism will have the ECB at its heart ensuring rigorous, high-quality, and equal prudential supervision of Eurozone banks, increasing financial stability throughout the Eurozone. The ECB's supervisory role will be fully separated from its monetary policy responsibilities.
• Broad coverage: all banks in the Eurozone will be covered by the new European supervisory system.

You can follow this link to read the full article.

* Edited by PLMJ.

August 29

Italian technocrat prime minister Mario Monti met with Germany’s chancellor Angela Merkel in Berlin today where they informally discussed the Eurozone crisis over lunch. At a joint press conference they seemed to be agreed on Italy’s reform efforts but there was a subtle difference of opinion on whether the ESM should be given a banking licences or not. Ms. Merkel pointed out that this was off the table as the relevant EU treaties do no provide for it. Mr. Monti agreed but suggested that those treaties should perhaps be changed.

ECB President Mario Draghi has written a paper called the “The fuiture of the euro: stability through change” in which he outlines his vision for the future of the Eurozone. He explains how the ECB recognises that the Euro is “insufficiently equipped to ensure sound economic policies and effectively manage the crises” because of decisions taken at its creation. But instead of making a choice between the “binary” options of losing the Euro and going back to multiple currencies or keeping the Euro and moving to a United States of Europe, he suggests that “to have a stable euro we do not need to choose between extremes”. He sets out a middle of the road path looking at “the minimum requirements to complete economic and monetary union”. He finishes his paper with the following statement: “Those who want to go back to the past misunderstand the significance of the euro. Those who claim only a full federation can be sustainable set the bar too high. What we need is a gradual and structured effort to complete EMU. This would finally give the euro the stable foundations it deserves. It would fully achieve the ultimate goals for which the Union and the euro were founded: stability, prosperity and peace. We know this is what the people in Europe, and in Germany, aspire to.” You can download a copy of the paper here.

Shares in Banca Monte dei Paschi di Siena (the world’s oldest bank) fell by almost 10% in early trading following the news last might that the bank – Italy’s third largest lender -  reported a EUR 1.67 bn net loss in Q2 2012. In connection with a EUR 2bn aid package granted to the bank earlier this year in June, the government was issued convertible bonds. These bonds will now be converted into shares making the government a shareholder in the bank. For more information on the bank and its bail-out, please see our post dated 26 June 2012 here. Despite the news, Italy did manage a successful short-term debt sale this morning which was oversubscribed with bonds selling at sharply lower average yields. Experts see this as a sign of confidence from investors that the ECB will announce new measures to bring down Spanish and Italian borrowing costs next week.

Spain is preparing for another round of bank reforms which are planned for Friday. These reforms are necessary to bring Spain’s banking system into shape ready to receive up to EUR 100 bn in funds that have been made available. The plans include a “bad bank” that will absorb an unknown quantity of toxic loans and tens of thousands of smaller savers will find out how much money they have lost on their investments in bank shares.

28 August

The Spanish region of Catalonia announced today that it needs a bail-out from Spain’s central state liquidity facility of EUR 5 bn. That amount will cover the regions borrowing needs for this year according to an official but Catalonia is rejecting any political conditions that may come with that funding. Catelonia is one of a number of Spanish regional governments shut out of the financial markets in need of government help to roll over debt and fund budget deficits. Catalonia is now expected to miss the deficit target of 1.5% coming in at 2.5% instead as the second worst performing region in Spain*. The news comes as official data released today shows Spain’s recession is deeper that feared. The Spanish economy shrank by 1.3% in Q2 20012 (year-on-year basis) which is worse than the estimated 1% drop. The contraction in Q1 2012 has also been revised down from -0.4% to -0.6%. Revised data published yesterday showed that Spain’s economic growth has been weaker over the past two years than previously reported. GDP contracted 0.3% in 2010, compared with an originally reported 0.1% drop in output. GDP last year was reported at 0.7% growth, however, this has also been revised down to just 0.4%, according to the country’s National Statistics Institute. Spain’s recession has been mainly driven by a drop in domestic demand. GDP data shows that consumer spending fell by 1% over the last quarter. Experts fear that Spain ahs not yet seen the worst of it with the new EUR 60 bn package of austerity measures yet to take effect. Spain entered its second recession in three years at the start of 2012. Unemployment is currently above 20% and the economy is expected to continue to shrink over the rest of this year and during 2013, with government estimating a drop in output of 1.7% over 2012. Most experts expect Spain to request some form of formal financial assistance from the ECB once the conditions have been made clear. Spain did manage to get a short term bond sale away successfully today with three – and six-month bond yields averaging significantly lower.

Mario Draghi has cancelled his appearance at the Jackson Hole Forum, the annual summer meeting of the Federal Reserve. The ECB president was due to speak at the conference the day after Federal Reserve Chairman Ben Bernanke. However, due to the “pressure of work over the next few days” Draghi felt he had to pull out. Experts have been speculating that this may be yet another sign that the ECB is preparing to announce a new bond buying programme soon. The programme is expected to involve the ECB intervening in the secondary markets only after the Eurozone bail-out funds (ESM/EFSF) have been triggered. Doing so will trigger some kind of conditionality, something that Spain and also Italy have been wary about since the plan was first announced. The European Commission is also expected to unveil proposals for a new Eurozone banking supervision regime next week. The ECB has confirmed that it is prepared to take on the role subject to it acquiring “all the instruments needed to carry out the tasks of bank supervision effectively. In particular that means access to all the necessary information, intervention rights and the right to close down non-viable banks” (Jörg Asmussen – member of the executive board of the ECB). EC President Herman van Rompuy spoke at a press conference in Spain today reiterating the urgency of moving forward with a banking union and confirmed that concrete legislative proposals would follow in September. He also echoed Mario Draghi’s original comment that “the Euro is irreversible” and that Greece’s future is within the Eurozone. You can download the full press release here.

* Statistics courtesy of Fedea think tank.

27 August

The Troika arrived in Portugal today in time for their fifth monitoring mission tomorrow. The Portuguese government may ask for a relaxation of its deficit target for 2012, after data published by the Portuguese Finance Ministry last week revealed that the country will not be able to bring its deficit down to 4.5% of GDP by the end of the year unless additional austerity measures are adopted. The main reason given is the sharp fall in tax revenue: -3.6% during the first seven months of the year, as opposed to the 2.6% increase the Portuguese government forecast for 2012.

German Finance Minister Wolfgang Schaeuble said that German and French finance ministries are planning to launch a working group which will prepare joint proposals on Eurozone for the Eurogroup meeting on issues like the fiscal and banking union said on Monday. Schaeuble: "We will start in the next days and weeks a working group between our ministries to prepare forthcoming decisions in bilateral cooperation". 

A Cypriot government spokesman told reporters yesterday that the island's public deficit at the end of the year will be around 4.5% of GDP – significantly higher than the 3.5% of GDP initially forecast. This is likely to increase the amount of the EU-IMF bailout Cyprus is currently negotiating. The Troika are due to arrive in Cyprus soon (although no clear date has been specified yet).

24 August

Greek Prime Minister Antonis Samaras made his first official visit abroad today when he met with German chancellor Angela Merkel to discuss Greece’s situation and its request for more time to implement its bail-out reforms. The
leaders gave a joint press conference at which Merkel said that she wanted Greece to remain in the Eurozone and that she is convinced that Athens will do everything in its power to solve the country’s problems. Regarding Greece’s request for more time, she said that Greece must meet its commitments and the Germany will not make any “premature judgements” but will wait for the Troika report (expected mid-September). Samaras in turn reiterated his plea that Greece be given “an opportunity to grow”. He also spoke out against European politicians (including Volker Kauder, leader of Germany’s conservative party and part of Merkels governmental coalition) who continue to talk about Greece leaving the Euro. Samaras pleaded for such talk to end as it made it even more difficult for the country to sell off its assets.

According to the UK Office for National Statistics the UK economy contracted by 0.5% in Q2 of 2012, 0.2% less than predicted but still leaves the UK in a double dip recession with the Diamond Jubilee and the Olympics failing to give enough of a boost to the economy to see it back to growth.

23 August

PMI data released today by Markit revealed that it is likely that the Eurozone has fallen into recession. Eurozone PMI composite output index, which measures activity in services and manufacturing (any number below 50 shows a contraction), was at 46.6 this month, slightly better than last month’s 46.5, but still contracting. The main downturn is in the manufacturing sector but in the services sector, business activity declined at an accelerated pace. The graph below (courtesy of Markit) shows how PMI tracks GDP, fuelling expert’s suspicions that the Eurozone has fallen into recession. That won’t be confirmed for a few months yet though.

The full Markit (flash) report can be downloaded here. Eurozone consumer confidence fell sharply this month and hit a 38-month low according to the EC’s “flash estimate” coming in at -24.6 down from July’s -21.5.

Germany’s chancellor Angela Merkel met with French president Francois Hollande today for a working dinner to discuss the Eurozone crisis and in particular Greece and its recent request for more time to implement its bail-out measures. Speaking at a press conference, both leaders stressed that Greece needed to continue on its reform path. Merkel also confirmed that she would not make any decisions without first seeing the Troika report which is expected mid-September. Hollande reiterated his hopes to speed up the creation of a full European banking union and supervisor.

22 August

Greek Prime Minister Antonis Samaras publicly called for more time to implement the measures required under Greece’s bail-out programme, including the necessary deep spending cuts and economic reforms. Speaking to German newspaper Das Bild, Samaras confirmed that Greece is committed to the terms of the programme, but that the impact of the measures need to be relaxed saying “let me be very clear, we demand no additional money” and “all we want is a bit of ‘air to breathe’ to get the economy running and to increase state income. More time does not automatically mean more money”. Dutch Finance Minister Jan Kees de Jager, who has always taken  tough line when it comes to Greece’s bail-out programme, spoke against relaxing the terms of Greece’s bail-out and German MP Michael Fuchs commented that he doesn’t believe that Greece leaving the Euro will have a “great impact any more”. Jean-Calude Juncker, head of the Eurogroup, who met with Samaras in Athens today, berated those who suggest that Greece should walk away from the Euro, saying at a press conference that such talk makes it harder for Greece to realise the necessary privatisations to raise the funds it needs. Asked about Greece’s public request for a two year extensikon, Juncker, like many other leaders today, said that the decision would have to wait until the Troika report on the status of the Greek programme is available. The report is expected to be ready in time for the conference in Cyprus on 14 September where leaders will meet to discuss the crisis.

• Most analysts agree that any extension of the Greek bail-out programme would likely result in additional costs of around EUR 20 bn. Greek officials have proposed (in a preliminary plan) to fund this by:
  prematurely tapping a EUR 8.2 bn IMF credit line reserved for use in 2015;
• delaying the repayment of the current bail-out loan from 2016 to 2020; and
• issuing more short term debt.

Regarding the last point, Greece successfully issued over EUR 4 bn of three-month bonds last week. The funds were used to repay a EUR 3.2 bond that matured on 20 August. See our special summer weekly post 13-17 August for more information. Mr. Samaras has a busy schedule with meetings in Germany and Paris on the agenda for tomorrow and Friday where he will propose and discuss the extensions plans with the respective leaders.

The stock markets appear to have lost momentum after a week of optimistic trading as the focus returns to the consistently bad economic data, including (i) a record trade deficit in July for Japan which was posted today, driven by a 25% slump in exports to the EU as well as a decrease in exports to the US and China as the Eurozone crisis continues to have an effect on the rest of the Global economy and (ii) a potential new escalation of the crisis with Greece requesting an extension. However, the Euro was pushed to an 11 week high upon news that the Fed’s Open Market Committee discusses whether further quantitative easing might be necessary in the US.

21 August

Moody’s has issued a report warning that the task of rebalancing the Eurozone Economy is only halfway through. According to Moody’s, if all goes according to plan, Spain, Portugal and Italy should be in better shape by 2013. Ireland and Greece will need up to 2016 (past the dates of their respective bail-out programmes) to rebalance their economies though. The speculation and rumours in the market that the ECB will launch its government bond buying programme soon have been continuing to drive the stock markets and the Euro up and bond yields down. Spain sold EUR 4.5 bn of short term debt today with yields much lower than the last sale and 10-year bond yields were also down with Spanish bonds trading at 6.231% (down from 6.33%), Italian bonds at 5.69% (down from 5.79%) and Portuguese bonds at 9.467% (down from 9.691%) which is lower than the rate they were trading at when Portugal formally requested financial assistance in April 2011.

Picture courtesy of Bloomberg

20 August

Luxembourg’s Prime Minister Jean-Claude Juncker, who is also head of the Eurogroup (the Euro finance ministers group), spoke up for Greece over the weekend. Speaking to an Austrian newspaper, he said that there was almost no chance of Greece being kicked out of the Eurozone. Greek finance minister Yannis Stournaras has also insisted that Greece must remain in the Eurozone to survive. In the meantime prominent German politicians (including Volker Kauder, the leader of Angela Merkel’s conservative coalition partner and Steffen Kampeter, the deputy finance minister) have been insisting that Greece must meet its commitments under its bail-out programme. Alexander Stubb, Finland’s minister for European affairs, also came out saying that Greece will not be given any extra financial aid unless it can show it has reformed its economy. These remarks come just days before Greek Prime Minister Antonis Samaras is due to meet with Eurozone leaders (including Merkel and Hollande) to discuss (informally), among other things, a possible extension of their bail-out programme.

Today marks the 30th anniversary of the Latin American debt crisis which was triggered my Mexico’s decision to suspend repayments on its international debt. Much like Greece (and other countries in the Eurozone), in 1982 the IMF lent Mexico USD 4 bn when it found itself bankrupt after overspending on cheap credit. Most of that funding went straight back to Western creditors. The IMF required strict austerity measures including heavy government spending cuts. The Mexican economy collapsed and stagnated as a result, leaving around 800,000 out of work and the economy 11% smaller than the year before. In the meantime, Mexico’s debt to GDP ratio doubled from 30% in 1982 to 60% by 1987.

The ECB confirmed that, for the 23rd week running, it did not activate its SMP programme last week. Spanish 10-year bond yields dropped today to 6.31% (down from 6.49%) amidst rumours that the ECB may be prepared to step in if yields went over a fixed threshold. While the ECB did not categorically deny these rumours, they did make a statement saying that no official decision on action had been taken yet and that it would act “strictly within its mandate”.

13 – 17 August

General
GDP figures for Q2 were released this week with most Eurozone countries doing better than expected but the Eurozone as a whole contracting by 0.2%. On a year-on-year basis the Eurozone economy is now 0.4% smaller than last year which is broadly inline with forecasts. By comparison, the US posted 0.4% and Japan 0.3% increases in GDP. There were some positives: Germany, the Netherlands and Austria all posted growth. Portugal, however, took a hit in Q2 with its economy shrinking by 1.2% and unemployment rising to 15% (up from 14.9% in Q1 and much higher than the same time last year at 12.1%). Portugal’s economy is now 3.3% smaller than last year.

Below we have set out a summary table of some of the more relevant and interesting Q2 GDP figures (rounded) which gives some context as well as an overview. The full statistics can be found on Eurostats’ website.

Eurozone inflation came in at 2.4% in June (Consumer Price Index) for the third month in a row.

China’s Commerce Ministry reported that foreign investment in China has already fallen steadily this year. Spokesman Shen Danyang issued a warning that, with the Eurozone debt crisis spreading and the global economy recovering at a slower than expected pace, China’s trade situation in the second half of 2012 is expected to be become more severe.

Germany’s chancellor Angela Merkel visited Canada this week for talks on the Eurozone debt crisis and possible trade agreements. Canadian Prime Minister Stephen Harper, however, seemed reluctant to move on Canada’s position not to make further contributions to the IMF for Eurozone bail-outs. At the ensuing press conference, Ms. Merkel reiterated that “time is of the essence” and that the move towards a closer union in Europe is a positive development. Mr. Harper confirmed he had confidence in Europe’s “ability and willingness” to address the debt crisis. Both leaders confirmed their support for a proposed new trade deal between Canada and Europe aimed at boosting both economies.

Greece
Greece’s economy shrank again in Q2, although slightly less than predicted. GDP data showed a 6.2% contraction on a year-on-year basis while most analysts expected a 7% drop. The Greek economy is now 13% smaller than two years ago. Analysts reacted without surprise, predicting that the Greek economy is likely to continue shrinking well into next year.

Various German parliamentary members have been speaking out on Greece this week making it clear that Germany will not agree to further aid packages to Greece unless Athens meets all its targets and makes clear commitments to economic reform. With Germany’s economy beginning to slow down, German leaders are keen to stress that Germany has its own limits and cannot be expected to prop up the Eurozone indefinitely. Greek officials have confirmed that Prime Minister Antonis Samaras will bring up the subject of an extension of Greece’s bail-out terms when he visits leaders of Luxembourg, Germany and France this month, although no formal request will be made at this time. Analysts expect Greece to ask for at least a two year extension of its programme which could mean an additional EUR 20 bn in funding.

Greece did manage to comfortably sell EUR 4 bn (more than the targeted EUR 3.125 bn) of three-month bonds this week. Borrowing costs were up slightly from 4.28% to 4.43%.The funds will be used to repay a EUR 3.2 bond which matures on 20 August.

France
54% of French voters, polled by French newspaper La Figaro, are unhappy with President Hollande’s overall performance, just 3 ½ months into his term. Only a third of those polled thought him capable of addressing France’s debt problems. Economic data published this week showed the French current account deficit to have increased from EUR 4 bn in May to EUR 4.9 bn in June and French GDP has remained flat for the last three quarters. In September, the French government will need to find an additional EUR 33 bn in tax increases to meet next year’s budget. The present tax increases, which are aimed at the wealthy, are not enough to meet budget targets.

ECB
The ECB refrained from buying Eurozone government bonds again last week. The SMP (Securities Markets Programme) has been dormant for 22 weeks after an active period in November last year when the ECB rallied in an attempt to bring Spanish and Italian bond yields down.

The ECB cut its emergency liquidity funding to Greek banks in July by almost EUR 50 bn to EUR 24 bn, leaving the Bank of Greece to plug the EUR 106 bn gap in funds required by Greek banks. Analysts see the move as the ECB taking a harder line given the risks involved in lending to Greek banks at the moment.

Stock markets and bonds
In general, as the holiday period sets in, stock markets in the Eurozone and even in the rest of the world have been fairly subdued all week. European stock markets did end the week on a 13-month high. 

Italy sold 364-day bonds this week at a slightly increased average yield of 2.767% (up from 2.697%). Germany and France both posted record low negative yield bond sales with Germany selling six-month bonds at - 0.05% (down from - 0.034%) and France sold 12-week bonds at an average yield of – 0.016%. Negative yields mean buyers are certain to receive less than the face value of the bond implying that markets are still looking for security rather than profit. Spanish 10-year bond yields ended the week on 6.48% and the Italian equivalent on 5.799%

6-10 August

Tensions continue in the Eurozone despite the summer recess and the start of the Olympics this week. This week marks the fifth anniversary of the crisis as many countries find themselves in recession. August 9 2007 was the date the ECB and the US Federal Reserve injected USD 90 bn into the financial markets, after seeing a sudden collapse of confidence. However, that coordinated action (the first of many) was not enough to prevent the credit crunch, the collapse of Lehman Brothers and the ensuing Eurozone crisis and global recession.

General Economic
The ECB predicted, in its monthly report released this week, that the Eurozone will only grow by 0.6% in 2013, not 1% as previously predicted. It also forecast a 0.3% contraction this year, slightly worse than its previous forecast of -0.2%. (The ECB reaches its forecast by surveying 50 economists and academics). A copy of the monthly bulletin can be downloaded from the ECB’s website here.

Shell has announced that it is pulling cash out of European banks due to a “shift in willingness to take credit risk in Europe”. McDonalds, which was largely thought to be immune to the wider economic problems, posted disappointing financial results. Sales in Europe fell by 0.6% due to weak demand in Germany and Southern European countries. ING also reported a 20% drop in net profits mainly due to the company being hit hard by the Spanish economy’s decline. The International Energy Agency has predicted a drop in 2013 oil demand due to a “worrying slowdown” in global economic activity.

Italian industrial production data for June, released this week, was worse than expected. Output fell by 1.4% rather than an expected drop of 1%. Year on year industrial output has fallen by 8.2%. UK industrial output also fell, but was less severe than predicted. Output dropped by 2.5% rather than 3.25%. In Germany, factory orders fell by 1.7% in June, almost double the predicted drop of 1%. Spanish industrial output fell by 6.3% on a year on year basis. Greek industrial production, however, rose in June by 0.3%, on a year-on-year basis. The Bank of France warned that the French economy is stalling estimating that French GDP slipped by 0.1% in Q2.

Italy
Italian GDP shrank by 0.7% in Q2 2012 resulting in a 2.5% decrease compared to last year. Prime Minister Mario Monti won a vote of confidence and approval in the lower house of parliament in respect of an additional EUR 4.5 bn in spending cuts as he continues to push through Italy’s financial reform before the end of his term next year. Spending cuts include cuts to pensions, earthquake aid, ministries and public officials, the health service and regional and local reform.

UK and Ireland
The Bank of England slashed growth forecasts for the UK from 0.8% to close to zero, as the UK’s double-dip recession intensifies. The bank’s quarterly inflation report indicated no growth for 2012, compared with 2% predicted a year ago. The Bank of Ireland posted first-half results showing its loss has doubled to EUR 1.26 bn as a result of an increase in bad loans.

Greece
Greece is pushing ahead with the planned privitisations which form part of its bail-out programme but which have, so far, received little attention. At the top of the agenda is the state lottery, Hellenic savings bank and government-owned real estate. Mr. Samaras, Greece’s newly elected Prime Minister, has said he wants “tangible results” before setting off on a tour of major Eurozone countries starting on 24 August. Greece’s budget deficit between January and July has fallen from EUR 15.98 bn a year ago to EUR 13.2 bn, that’s lower than the targeted EUR 14.83 bn. The Troika finished their latest two-week inspection of the countries’ finances, reporting that the mission had been “productive”. Their report is not expected until October. Greece may have to wait until then for the release of EUR 31.5 bn in rescue loans, delayed following the election problems. In the meantime, Greece needs to raise around EUR 6 bn on the debt markets to service maturing bonds and other debt needs. Rating Agency Standard & Poor cut Greece’s CCC (junk status) credit rating from “stable” to “negative outlook”, warning that Greece was likely to miss its financial targets. Greek unemployment hit another high at 23.1% in May (up from 22.6% in April). That's more than double the Eurozone average (which came in at 11.1% that month).

Stock markets
Stock markets have remained subdued all week, still riding off the back of the ECB’s promise to take all necessary measures against the Eurozone crisis including action to curb rising Spanish and Italian borrowing costs. However, disappointing Chinese trade figures did dampen spirits towards the end of the week. The ECB did not buy any government bonds last week which analysts see as a sign that it is reserving capacity for plans that may emerge as a result of the ECB’s announcement last week.

Rating agency Fitch has complied a report after polling London City investors which shows that few believe the Eurozone will actually break up: just 5% believe that a the Eurozone is heading for a full break-up with 33% believing that a fiscal union will hold the Eurozone together and 31% believing that the Eurozone will just continue to “muddle through”.

3 August

The IMF has warned that the worst of the economical impact of the Eurozone crisis has yet to hit, in its 2012 Spillover Report. According to the report, a big shock to the region (such as a jump in sovereign and private bond yields, a drop in consumer demand or shifting asset prices, for example) could cost the Eurozone more than 5% of economic output. Moreover, non-Eurozone regions would also suffer; the US could lose around 2% of output and Japan's economy could shrink by more than 1%. The IMF believes that not enough has been done to solve the Eurozone crisis. You can download a copy of the report here.

Market experts and analysts seemed more optimistic today with regard to the ECB's announcement yesterday that the bail-out funds could buy short-term debt of financially stricken countries to help keep their borrowing costs down if those countries agreed to reforms and officially sought help from the ECB (part of the so called non-conventional measures). The details of any such measures still need to be worked out. One interesting effect of yesterday's announcement regarding the purchase of short-term debt, has been the widening gap between short- and long-term bond yields; the ECB's announcement sent the price of short-term bonds up causing their yield to drop while traders were still uncomfortable with long-term debt, resulting in those bonds being sold at lower prices, driving yields up.

In his review of the Spanish government's actions over the past seven months, Spanish prime minister Mariano Rajoy called for debate and speed on reform work. He also noted that he wants to know what the ECB's non-conventional measures will be before he takes a decision on whether to request aid, stating that Spain will do whatever is best for Spanish interests with regard to asking for financial aid. Spanish bonds rose to above the 7% mark today but dropped back down to 6.97% as market sentiment improved during the course of the day.

While members of Angela Merkels coalition have said they will not stand in the way of the ECB buying bonds (as part of the newly announced non-conventional measures), a senior German finance ministry official wrote an opinion piece reiterating the fact that Germany is only liable for EUR 190 bn to the bail-out funds and that there can be no unlimited liability or direct recapitalization of banks without the cooperation of Germany's parliament.

2 August

The ECB announced its latest plans to tackle the Eurozone crisis today. The markets had been anticipating what action the ECB might be prepared to take after strong statements made by ECB President, Mario Draghi, and various Eurozone leaders throughout the week. The ECB announced that interest rates would remain unchanged at 0.75%. This was expected by the markets as a further cut could send the deposit facility into negative territory. Mr. Draghi went on to state that the present exceptionally high bond yields are “unacceptable” and that the ECB governing council discussed policy options. Summarised, Mr. Draghi confirmed that the bailout funds will intervene in the bond markets and the issue of seniority (i.e. private investors finding themselves subordinated to the ECB in terms of concrete action taken) would be addressed. He said governments must stand ready to activate the bailout funds in the bond markets “with strict and effective conditionality”. With regard to the potential new bond-buying programme, Mr. Draghi noted that it “falls squarely within our mandate and among the instruments of monetary policy”. It will undertake open market operations in a size “adequate to meet its objectives”. It will most likely focus on shorter-term bonds. However, the details of these so called "non-conventional" measures, are still to be worked out over the coming weeks. Mr. Draghi expressed surprise at the markets focus on a banking licence for the ESM (something which has been openly discussed and called for among market experts and various Eurozone leaders over the past weeks), stating; “It is not up to us to grant the ESM a banking licence, it is up to governments. The current design of the bailout funds does not allow for it”. This last statement was welcomed by Germany which has been publicly against giving the ESM a banking license since the idea was suggested. A banking licence would allow the ESM to tap the ECB for funds independently. Mr. Draghi also commented that that growth in the Eurozone is expected to be dampened by tensions in the Eurozone sovereign debt markets, high unemployment and even energy prices. He said the ECB expects inflation to decline further in the course of 2012 and be back below 2% in 2013. 
 
The markets reacted disappointedly as stock markets and the Euro fell and bond yields rose, with Spanish and Italian 10-year bond yields finishing on 7.224% (up 48 basis points) and 6.335% (up 40 basis points) respectively.

Spanish unemployment fell by 0.6% in July which is less than normally expected in the busy holiday season. In the UK, the bank of England decided not to make any policy changes, leaving it's key interest rate at 0.5% and its quantitative easing programme the same. In Greece, Yiannis Stournaras, the finance minister, will meet with Troika officials to discuss the planned EUR 11.5 bn of agreed spending cuts.

1 August

The manufacturing PMI figures were released today by Markit. The Purchasing Managers' Index is an indicator produced by Markit Group which shows financial activity reflecting purchasing managers' acquisition of goods and services. The survey is performed on a monthly basis by polling businesses that represent the make up of the respective sector. The surveys only cover private sector companies. The manufacturing PMI survey is important as it gives a good indication of the state of the real economy. The PMI numbers fro July showed continuing decline (any number below 50 shows a contraction of the market). Eurozone manufacturing PMI hit a 37-month low at 44. Even Germany registered its sharpest fall in output since April 2009 coming in at 45. Italy was also down at 44.3 from 44.6 in June although Spain did show a slight improvement at 42.3 compared to 41.1 in June. China fell to 50.1 and the US came in at 49.8 compared to 49.1 in June, despite forecasts of 50.2. You can download a copy of Markit’s statement on the Eurozone PMI numbers here.

After the latest round of talks, Greece’s government coalition leaders have finally managed to agree on a package of EUR 11.5 bn in additional spending cuts which are a requirement for Greece to receive the next tranche of bail-out funding. Other new austerity measures are already having an impact on citizens lives as thousands of bank employees of state-owned agricultural bank ATEbank protested today against the planned take-over by privately owned Piraeus Bank. The Greek government announced the privitisation as part of the measures required by its international creditors under its bail-out programme. Employees were protesting against planned cost-cutting and mass lay-offs as a result of the take-over.

Bundes Bank chief Jens Weidmann, spoke out against the ECB going beyond its mandate today in an interview issued by the bank marking its 55th anniversary. The statement comes after strong remarks from ECB chief, Mario Draghi and other Eurozone leaders over the past days regarding taking all measures necessary to save the Euro. It also comes a day before the ECB is due to meet to discuss policy with the markets anticipating decisive action to be announced.