Eurozone debt crisis: Eurozone lurches closer to recession

• Worse-than-expected eurozone data reignite recession fears • European markets extend gains on hopes EU leaders inch closer to a eurozone deal • Today’s agenda 7.33am: Good morning. Welcome back after a weekend that saw European leaders adopt a broad framework drafted by their finance ministers for recapitalising European banks. But final decisions were deferred until a second summit on Wednesday, amid differing views over the size of losses private holders of Greek government bonds will have to accept. Banks have offered to extend the voluntary “haircut” on Greek debt to 40% from the 21% agreed in July, but politicians are thought to be looking for writedowns of at least 50%. The other issue is the future shape of the EFSF, the eurozone bailout fund. It appears that leaders are moving towards a solution that would combine using the fund to provide partial guarantees to buyers of new Italian and Spanish bonds, while also creating a special purpose vehicle to attract funds from major emerging countries that could guarantee bonds in the secondary market. Markets in Asia climbed overnight, with Hong Kong’s Hang Seng adding more than 4% and Japan’s Nikkei rising 1.9%. You can view more indices here . Financial spreadbetters expect Britain’s FTSE 100 index to open 41 to 62 points higher, or up to 1.1%. It closed over 100 points higher on Friday at 5488.65, a gain of nearly 2%. Germany’s Dax is seen climbing 44 to 68 points, or 1.1%, while France’s CAC is set to gain 22 to 35 points, also a 1.1% increase. Michael Hewson, market analyst at CMC Markets, said about Sunday’s summit: Greece remains the bone of contention for Europe’s leaders as they look to come to some form of agreement about the extent of haircuts for private creditors, after the Troika report indicated that bondholder losses would need to be in excess of the 21% agreed in July for Greece’s finances to return to a sustainable path. Bankers however are not in favour of haircuts in excess of 40% for fear it could well trigger a credit event, while IMF officials, along with other politicians believe that only haircuts in excess of 50% would be seen as credible, given the recent deterioration in the Greek economy. France is also uneasy with higher debt haircuts due to the vulnerability of its triple “A” credit rating, especially in light of ratings agency Standard and Poor’s warning on Friday, that its rating would be cut due to a worsening economic climate. 8.07am: The FTSE has edged up some 12 points to 5500, a 0.2% gain. Spreadbetters were expecting a stronger open. Stronger Chinese manufacturing data has lifted Brent crude oil to close to $111 a barrel. China’s factory output picked up in October, ending a three-month contraction, according to HSBC’s China Flash Purchasing Managers’ Index. Gold prices have gained 1% amid the more positive mood in markets. 8.11am: Here’s a list of today’s scheduled events (all times are UK local): • Stronger Chinese manufacturing data • Eurozone manufacturing and services PMI • Andy Haldane, Bank of England executive director of financial stability, gives Wincott lecture at 17.30 8.15am: The FTSE is up about 30 points now at 5518, a 0.5% increase. The Dax in Frankfurt and the CAC in Paris have risen between 0.6% and 0.7%. Some strategists warn the rally could be short-lived, though. Jeremy Batstone-Carr, strategist at Charles Stanley, said: I would still be looking to sell into this rally, rather than believe that ‘this time it’s different’ because it absolutely isn’t. How much longer is it going to take before they realise there is no solution to this [crisis] or at least not one that doesn’t involve a vast amount of money? 8.20am: This video of Angela Merkel and Nicolas Sarkozy is all over the Italian frontpages today. At their big press conference on Sunday, they were asked what they thought of Italy’s commitment to reforms. You don’t even need to speak French to understand it… The pair, known as ” Merkozy,” held a series of face-to-face talks with the Italian prime minister Silvio Berlusconi to get him to stop the rot and get a grip on the country’s debts as EU leaders get more and more worried that the eurozone is close to slipping into another deep recession. 8.54am: Merkel handed Sarkozy a German Steiff teddy bear for his newborn daughter at the weekend summit and told him they had all suffered with the French as they were narrowly defeated by New Zealand in the Rugby World Cup final. And of course Merkozy had a good laugh together at the expense of the Italians. So how does their new chumminess compare with previous Franco-German leaders? Find out in David Gow’s sketch “Sarkozy talks of one voice – but it’s in German”. He argues that Merkozy is a myth. 9.02am: “If it weren’t so tragic, the current European crisis would be funny, in a gallows-humour sort of way,” writes Paul Krugman in his blog on the New York Times site. It has had him humming the old children’s song “There’s a Hole in My Bucket.” Read more here . 9.10am: The FTSE has climbed nearly 40 points to 5527. The miners are leading gains on the bluechip index, boosted by the pick-up in Chinese manufacturing. UK banks Lloyds Banking Group, Royal Bank of Scotland and Barclays are also among the top risers, encouraged by the progress made on recapitalisation plans at the weekend summit. French banking shares BNP Paribas and Société Générale along with Germany’s Commerzbank also rose. Markets are hopeful of a deal at the second EU summit on Wednesday, lifting the euro to a six-week high versus the dollar. 9.14am: Here are Evolution Securities’ head of fixed income Gary Jenkins’ latest musings on the debt crisis and how to solve it: In order to resolve the crises, or at least buy some time, the minimum that the EU needs to achieve is to restore investors’ confidence in Italian government bonds. If they can achieve that one aim then they will also go a long way to stabilising the banking sector. Put another way the recapitalisation of the banks in isolation will be a pointless exercise if the market is unwilling to buy Italian debt. Lending is of course all about confidence and that is clearly lacking when it comes to Italy at the moment. It appears that the idea of creating unlimited firepower by converting the EFSF into a bank that could obtain credit from the ECB is no longer on the agenda. The problem then is that the self-imposed limit of €440bn of the EFSF is not sufficient for this stage of the crisis when it is required to lend to Ireland, Portugal and Greece, potentially provide capital to banks and to support the Italian and Spanish government bond markets. Thus it appears that the only EU directly controlled option left on the table is somehow making the EFSF “more efficient” via using it as a guarantor of debt rather than a direct lender. In theory this makes the little that is left in the EFSF go a long way as if for example they guarantee 20% of bonds on a first loss basis then it is equivalent to 5x leverage. I don’t think that this is really leveraging the fund, but the idea is that it will encourage bondholders to provide finance to Italy. The only way to test whether this would actually work is to implement it and then analyse the results of the Italian auctions. My own problem with the EFSF as a guarantor is that I was always taught that you should analyse the guarantor as if they were the principle and indeed you should try and ascertain the probability of the guarantor being able and willing to pay you at a time when the principle has failed to pay. I find it difficult to believe that under a scenario where a country such as Italy which has the 3rd largest bond market in the world has just gone bust that the EFSF would be able or indeed willing to pay bondholders. If I am wrong on that point it might still be the case that under this scenario the first loss only covers a portion of the required write down for bondholders. What I think is however irrelevant. If investors view the guarantee as part of a commitment from the EU to ensure that no other Eurozone sovereign defaults, or if they think that the EFSF would pay up, then they might be encouraged to buy Italian bonds. 9.21am: The eurozone’s private sector tipped further into decline this month, exacerbating fears that the area is about to lurch back into recession, according to business surveys. The October services PMI fell to 47.2 from 48.8 in September. The manufacturing index also worsened, to 47.3 from 48.5. Both were the lowest readings since July 2009 and worse than economists had expected. The composite PMI, which combines data from both sectors, dropped to 47.2 from 49.1 in September, also the weakest reading since July 2009. Markit, which compiles the surveys, warned that the worst was yet to come. 9.30am: Here is some instant reaction to the poor eurozone numbers. Peter Vanden Houte, chief economist at ING Financial Markets, described the survey as a “miserable report highlighting the fact that the eurozone is falling into recession again”. Commerzbank economist Peter Dixon concurred, saying: We are heading towards a recession. This is the third month in a row that the manufacturing index is below 50. It tells us the economy is in some difficulty so we might be heading into a mild recession in the next six months [with] at least one quarter of contraction. 9.54am: Paul Donovan of UBS has launched his latest podcast . His verdict on the weekend’s talks: The 13th Eurozone crisis summit has not yet produced details (how many summits before the crisis loses its sense of crisis?). Sarkozy and Merkel had a “conversation amongst friends” with Berlusconi, and then left an economic horse’s head in his bed (a ‘reform or else’ warning, basically). 10.31am: The FT’s Wolfgang Münchau reckons Europe is now leveraging for a catastrophe. Read the full article here . It is time to prepare for the unthinkable: there is now a significant probability the euro will not survive in its current form. This is not because I am predicting the failure by European leaders to agree a deal. In fact, I believe they will. My concern is not about failure to agree, but the consequences of an agreement. 10.58am: China has told the EU to get a move on. Its foreign ministry spokeswoman Jiang Yu said: We hope that the EU countries concerned will reach a comprehensive settlement plan as soon as possible and adopt effective measures to ease the euro debt crisis and prevent the crisis from spreading further. China is confident that the EU has the ability and wisdom to overcome these straits. We have always provided what help we can to the countries concerned via bilateral and multilateral channels. 11.09am: Our man in Brussels, David Gow, has just sent this over. The rise and rise of Herman Van Rompuy is a wondrous sight. At his final news conference last night, around 2230CET, he continued to look like an impeccably-dressed Mr Pastry, exuding calm, eyebrows raised, quizzical smile fixed on his face. Beside him, José Manuel Barroso, the European Commission president, looked a diminished, almost crumpled figure. Van Rompuy is now not only president of the European Council (EU-27 leaders) but of the eurozone too (the 17 ‘ins’). Ridiculed in some parts of the UK media, he is blessed with a formidable intellect and political shrewdness combined with a waspish sense of humour. So, he was asked, what happens if all these countries – cue Italy – fail to live up to their promises to get their debt and budgets in order. “They will meet the commitments,” he smiled. “All member states need to give clear signals of their commitments. This is understood by everybody.” Does that mean only Italy? Smile. What about Belgium (his home country)? Do they need to carry out further reforms, fiscal consolidation etc? “No, no, the Belgians have just formed a government after 18 months without one. That’s a big enough achievement.” Huge grins and laughter among the news-free zone kn own as the Brussels press corps. Even Sarko likes him – and laughs at his jokes. Meanwhile, the barbed-wire barriers – festooned with a few chrysanths – and the rest of the “security cordon” have simply been pushed to the side in view of Wednesday’s second round of summitry. Even the satellite transmission vans are still parked at the side of the Justus Lipsius building across the street where the EU leaders meet. One UK official thinks they should just stay in permanent session until they cut a deal. My solution to the crisis is for the 800 accredited journos to ignore them and write the same pooled dispatch every day – that’ll force them to come up with some breaking news, if not a breakthrough. 11.39am: Silvio Berlusconi has summoned his cabinet for an emergency meeting after being urged by Angela Merkel and Nicolas Sarkozy to stop the rot at home. The Italian prime minister is trying to push through reforms to the pension system, including raising the pension age to 67 from 65, but faces resistance from his coalition partners in the Northern League. 11.43am: Closer to home, David Cameron faces the biggest rebellion of his premiership over Europe. Dozens of Tories are set to back calls for a referendum on Britain’s membership of the European Union. William Hague, the foreign secretary, has told backbench Eurosceptics that Monday’s Commons vote on pulling out of Europe “is the wrong question at the wrong time”. Some 78 MPs, many of them Conservatives, have signed a parliamentary motion calling for a referendum on whether Britain should leave the EU or renegotiate the terms of its membership. Although the vote looks set to fail, it will test Cameron’s authority. It comes a day after his spat with Sarkozy, who told him at the EU summit that he was “sick of you criticising us and telling us what to do”. 12.00pm: European markets have just turned negative. Spain’s Ibex has edged down 0.1%, Italy’s FTSE MIB has tumbled 1% and Portugal’s PSI 1.3%. The FTSE is down 0.8 points at 5487. 12.07pm: Louise Cooper, markets analyst at BGC Partners, has looked at the prospects for Italian reform. How keen will Ms Merkel be to help Italy given that she has personally been the butt of many of Berlusconi’s “jokes” for years. Only last month it was widely reported that he called her an “un****able lard arse’ and back in April 2009, he kept Merkel waiting on the tarmac for 15mins on his arrival at the NATO summit while he took a phone call. I wonder if her regrets such rudeness now given that Germany holds the purse strings should his country need more help? And make no mistake, the elephant in the room is Italy. There may a lot of comment and attention on Greece, the banks and the EFSF, but what really is causing sleepless nights is Italy. It has the third largest debt market in the world, well over €1trn of outstanding debt, and is too big to have concerns about credit quality. And so Merkel and Sarkozy are pressurising Berlusconi to institute structural reform. And Berlusconi’s response? To blame “bad press” and an “anti-Italy faction” within the country. this a man taking the problems seriously? I think not. Italy has failed to reform its economy for decades, preferring instead virtually no growth for 10 years. Berlusconi, like the majority of 75 year old men, is highly unlikely to change and start becoming a zealous reformer. 12.38pm: While everyone is trying to guess how much extra capital European banks will need, Bank of France governor Christian Noyer has helpfully provided some guidance. He said French banks would need less than €10bn to raise their core capital ratio to levels agreed by EU finance ministers at the weekend. He added that French banks, which are heavily exposed to Greek debt, could raise their capital levels without needing an injection of state funds. 1.10pm: There will be a full German parliamentary session to vote on a proposal to leverage the EFSF, Reuters is reporting. It had been thought that only the budget committee would vote on the proposal, but it now seems that Germany’s lower house of parliament will vote on the issue. 1.20pm: Stock markets around Europe have been yo-yoing around this morning – but within a pretty tight range. One set of equity investors were sitting on some big losses today however – those with stakes in Greek banks. The suggestion that the private sector could increase its haircut on Greek debt from 21% to 40% has, perhaps not surprisingly, knocked the big holders of that debt – the Greek financial institutions. The Athens banking index is down 15% on the day. Attica Bank is almost 22% down, and Eurobank is down 19.5%. 2.27pm: More from David Gow in Brussels: It’s not only Sarko who has been laying into David Cameron. A high-ranking EU official I’ve known for several years has just joined in the “make your mind up time: either you’re in or you’re out” political onslaught on the Brits who are seriously pissing off a lot of people in Europe. This official said, with an anger I’d never seen before: “We’ve all had enough now of being told off by the UK. We thought Tony Blair would have sorted this relationship out once and for all when he took office or, at least, in 2005 when Britain held the EU presidency. But no, he didn’t, and now it’s getting worse and worse.” What bemuses people in Brussels is that eurosceptics in the UK are constantly complaining that the EU stifles growth (through over-regulation etc). Britain’s net contribution to the EU budget is running at around €2bn a year (compared with €6bn each for France and Germany). But the government’s own figures (BIS) show that the single market generates for the UK economy between £30bn and £90bn – or, roughly, 15 to 50 times what the British taxpayer contributes. It is estimated that completion of the single market – a key demand of Gordon Brown as well as Cameron – would add 7% to UK GDP. Cameron conceded on Sunday night, too, that 40% of UK exports go to the eurozone. So the EU plays a big part in ensuring British growth and jobs. That’s the message from Brussels. But, as usual, is anyone across the Channel listening? 2.52pm: Angela Merkel put the size of a Greek haircut for private creditors between 50% and 60%, according to the German Green party’s Jürgen Trittin, when she briefed him and other parliamentary group leaders on the progress made at Sunday’s EU summit. Asked whether Merkel had specified a size for the proposed writedown for private holders of Greek government bonds, Trittin, the floor leader for the Greens, said: “above 50 and below 60[%]“. 3.15pm: It’s good-bye from me, Julia Kollewe. My colleague Alex Hawkes is taking over now. 3.38pm: George Soros, the currency speculator who made huge sums shorting the pound during the Black Wednesday crisis in 1992, has offered a seven-point plan to save the euro on the FT’s website. You can read it here . 3.51pm: Markets around Europe have been boosted by a confident start on Wall Street . We’re now almost 50 points up on the FTSE 100, a 0.9% climb. The French CAC is up 1.6% and the DAX has risen by almost 1.5%. 4.51pm: The FTSE 100 has closed the day up 59 points, a rise of 1.1%. France’s CAC is up 1.6% and the DAX has closed up 1.4%. And with that (perhaps surprising) lift in stocks we are also done for the day. Thanks for joining us and thanks for all your comments – do join us tomorrow as we inch closer to some kind of eurozone deal. European debt crisis Julia Kollewe Alex Hawkes guardian.co.uk

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