Eurozone crisis: "Worst ever" German debt auction sends euro sliding
2.4bn of German bonds unsold in 'worst auction ever'
Barroso proposes closer controls on eurozone budgets
....Germany: Eurobonds aren't the answer
1.06pm: Dynamite! EC president Jos Manuel Barroso just told the press conference that the euro will probably collapse unless his proposals -- or similar measures to bolster the single currency union -- are accepted.
He said:
Without stronger economic governance in the eurozone it will be difficult if not impossible to sustain the common currency.
The EC president, who sounds both desperate and exasperated to our ears, is admitting that the euro is under water -- and appealing to the 17 governments, especially Berlin, to get their act together and save it...
The euro itself has fallen today, hovering around $1.339 against the dollar.
The press conference finishes, with Barroso delivering a ringing defence of the ECB's independence and its "non-standard measures" - buying up sovereign bonds in the secondary market. He says:
We should not expect the ECB to do what our member states, our governments, should do, they are not in a position to replace the work our governments should do in terms of fiscal consolidation and structural reforms...
Memo to Berlin: I'm on your side really
1.00pm: One for history buffs -- Olli Rehn promises that eurobonds will not be introduced under the kind of "secret deal" concocted by Andrew Hamilton and Thomas Jefferson to set up what are now Treasury bonds.
David Gow explains:
12.53pm: A journalist asks Barroso how he can propose eurobonds (or 'stability bonds') when Germany has repeatedly criticised the idea?
Barroso responds that there is "no absolute opposition to the idea of stability bonds from any country", and that Germany is more concerned about the timing of their introduction.
Hmmm. "No absolute opposition" isn't quite the same as "absolutely no opposition". Wasn't it Angela Merkel who said this morning that eurobonds "wouldn't work"?
12.46pm: Olli Rehn tells journalists that, under the commission's plans, any decision to ask a eurozone country to seek financial help would be taken in consulation with other European authorities.
Here's the quote:
The Commission will have the right to propose to the council to recommend that a member state to request financial assistance. The proposal would be based on the commission's analysis in line with... the European Central Bank.
12.33pm: My colleague David Gow is watching the press conference, and reckons that Merkel's pre-emptive attack on eurobonds has 'got to' the EC president:
Barroso came over as angry and prickly...His performance on stability bonds was very weak, failing to answer German concerns, and admitting it is just a first draft - to be re-written in Berlin (?)...And he's too defensive over the democratic deficit...So he hands over to a Finnish safe pair of hands in Rehn who'll try and rescue the package with meticulous attention to detail....
12.22pm: Barroso justifies the proposal that the EC s! hould ha ve 'surveillance powers' over member nations, arging that it would prevent one country's policies endangering other nations.
Isn't it rather undemocratic? Barroso argues not:
We must not oppose the national democratic process to the European democratic process. We need both.
On Eurobonds, he says common borrowing would actually help to reinforce 'governance, discipline and convergence' in the eurozone.
12.11pm: EC president Jos Manuel Barroso is now presenting his plan to improve financial stability in the EU.
He kicks off by outlining why he wants the European Commission to have more control over national budgets:
Measures for tighter eurozone oversight are needed for growth, financial stability, and budget discipline.
The proposals break down into six parts:
1. all 17 euro area countries would send their draft budget plans to the Commission by 15 October each year.
2. the Commission be able to request a new draft budget if the original showed serious divergences with commitments made by member states.
3. the Commission carry out closer monitoring of Member States under its 'Excessive Deficit Procedure.'
4. the Commission would have the right to decide on enhanced surveillance of member states when financial stability is threatened.
5. The European Council could recommend to a Member State that it requests financial assistance.
6. All euro area Member States would be required to set up independent fiscal councils, and prepare budgets based on independent forecasts.
11.53am: The European Commission's press conference on eurobonds (recently renamed as 'stability bonds') has been postponed until noon - we'll bring you the action as soon as it starts.
Angela Merkel has an ally in her opposition to eurobonds -- UKIP leader Nigel Farage.
Farage claimed that the EC's talk was simply "Eurobluster" (or "stabilitybluster", perh! aps) -- as Berlin will block the idea:
The eurobond proposal would render all future general elections within the eurozone totally meaningless.
However, it is not going to happen because the Germans have said 'No', and they are in charge.
Euro MP Sharon Bowles, who chairs the European Parliament's Economic and Monetary Affairs Committee, was more encouraging. She agrees that full-blown eurobonds cannot be launched for at least two years, but suggested short-term debt ('eurobills') could provide a more immediate solution:
The average for one year bills at present would be 2% interest. Interest could be differentially distributed under a contract so the weaker countries are in effect purchasing the mutuality.There would also be an incentive for countries to stay on track with their reforms - if they did not keep on track they would not get to reissue the Eurobills next year.
11.34am: Kathleen Brooks, research director at Forex.com, described this morning's failed German auction as a "black swan" event, as investors have been rushing into Bunds for months.
Brooks offers three possible explanations:
The optimistic view:
German bonds are at record highs (yields at record lows) and so are extremely expensive at this level. Although the number of buyers disappointed, the yields charged to hold German debt are still very low at 1.98%. This compares with nearly 7% for Spanish debt of a similar maturity.
The pessimistic view:
Germany is being dragged into the fray...Now that France has come under pressure and its triple A credit rating is under threat that leaves Germany as the only big economy in Europe left to pay for cleaning up this sovereign mess. Since Germany al! ready ha s a fairly high debt-to-GDP ratio of 83.10% at the end of 2010, its debt dynamics may not be as strong as some think.
An alternative view:
The bond market is staging a buyers strike, essentially trying to push Germany to take action.... If this crisis isn't dealt with in the near-term then bond investors will ditch all of the Eurozone, even Germany. Thus, the effect of German belligerence in dealing with this crisis is today's failed auction.
11.08am: Looking at the bond markets, the yield on 10-year German bonds being sold between investors (in the 'secondary market') has now risen to 1.95%, from 1.91% overnight.
This means it has now overtaken the interest rate on US ten-year bonds for the first time this month (US yields are flat at 1.92%).
German Bund yields are now heading towards the yield on 10-year UK gilts (which has fallen to 2.135% from 2.17% overnight).
All very low rates to be borrowing at, of course.
10.47am: The news of Germany's dreadful debt auction (see last post has gone down extremely badly in the City.
Marc Ostwald of Monument Securities said the sale was the most disappointing he could remember:
I cannot recall a worse auction...If Germany can only manage this sort of participation, what hope for the rest? Yields are at completely the wrong level.
Achilleas Georgolopoulos of Lloyds Bank said the auction was "really bad", adding that "Bunds are starting to lose their appeal".
Annalisa Piazza of Newedge Strategy agreed that the auction was "extremely poor", with the worst demand on record for ten-year German debt.
Shaun Richards, an independent economist,
You see in many ways it is more of a surprise to me that anyone would accept an interest-rate of 1.98% for ten years in these "expect the unexpected" times than some have turned it down.
10.22am: Breaking news -- an auction of German debt just failed to find enough buyers.
Germany tried to sell 6bn of 10-year bunds this morning - the kind of debt that investors have been rushing to buy recently. But instead, it only managed to sell 3.644bn worth - leaving more than a third of the bonds unsold.
The average yield (interest rate paid by buyers) fell slightly, to 1.98% - from 2.09% at the last auction of 10-year bonds. But that was much less important than the shock news that the German debt agency had to retain so much of the debt.
This weak results spooked traders, sending the euro tumbling more than a cent against the dollar to $1.338. That's a six-week low.
German government bonds also fell slightly in value (which has the useful effect of narrowing the spread between bunds and other debt).
Stock markets also fell, with the FTSE 100 down 40+ points.
Germany's debt office commented that the weak result reflected the "highly nervous" environment in the financial markets. But it may also reflect that the financial markets are losing patience with the endless eurozone infighting and lack of agreement.
10.04am: Have Angela Merkel and Wolfgang Schuble actually read the stability bond proposals that Jos Manuel Barroso will unveil in 90 minutes time, and which they have already attacked this morning?
My colleague David Gow suggests not. Here's why:
First, the 40-page EC "green" paper sets out three options for issuing the bonds, only one of which would have "joint and several" guarantees for the common bonds.
Second, it does not plump for any of the three.
Third, it makes plain that there will be no "free-riding" or piggybacking on a sound country's lower rates (Germany) in this collectivisation of debt.
Indeed, there's even the suggestion that countries with a poor track record should pay higher rates for at least part of the bonds (these are the blue and red bonds as proposed by the Bruegel think tank). Fourth, and this is set out in the accompanying annual growth survey and two draft regulations, sanctions against countries running consistent excessive deficits will be automatic and tougher; there's even talk of being put "under administration".The markets and/or Berlin may not trust this "intrusive intervention" but to suggest that Barroso is letting "moral hazard" rip is just plain wrong.
9.41am: The minutes of the Bank of England's latest interest rate-setting meeting have just been released, and show that the Monetary Policy Committee is concerned that the eurozone crisis is putting intolerable pressure on the banking sector.
Here's the main quote from the minutes:
Concerns over the sustainability of the public and external debt positions of some euro-area countries had led to increases in the cost of borrowing for those countries and widespread falls in confidence.
While the worst risks had not so far crystallised, the threat of their doing so had increased, exacerbating the already severe strains in bank funding markets and financial markets more generally.
The committee also voted to leave rates at 0.5% and to leave the quantitative easing budget unchanged.
9.12am: The b attle is joined! Angela Merkel has declared that Brussels' plans for eurobonds "will not work".
Even before Jos Manuel Barroso has delivered his proposals, the German chancellor has reiterated that "Treaty Changes" -- setting the way for closer European integration and responsible fiscal policy -- are the key to solving the crisis.
Speaking just now in Germany, Merkel described the EC's focus on Eurobonds as "inappropriate", adding that treaty changes are the only way to rebuilt condfidence. She also ruled out altering the mandate of the European Central Bank, saying:
Europe must not change anything regarding the independence of the ECB.
That's a double-whammy of opposition from Berlin, following Wolfgang Schuble's comments this morning.
8.48am: The disappointing manufacturing data from China overnight send world stock markets down to a 6-week low this morning (as measured by the MCSI All-Country world index). But in truth, there's little real drama in the City yet - FTSE 100 lost 50 points at the start of trading, but is now down just 17 points.
8.39am: We're expecting Barroso, and Olli Rehn, to present their plans for eurobonds/stability bonds at 11.30am GMT, along with their new rules giving the EC the ability to request a rewrite if a euro-member's budget is deemed unacceptable.
Other key events on the agenda today:
Eurozone PMI data for services, and manufacturing - 9am
GMT/10am CET
Bank of England minutes - 9.30am GMT
US durable goods, personal income, + personal spending figures for October - 1.30pm GMT/8.30am EST
US University of Michigan Co! nfidence report for November
8.17am: For many ex-prime ministers, leaving power is the prelude to an agreeable life of directorships, speaking tours, and the autobiography.
Not for Silvio Berslusconi, though. The former Italian prime minister, who was replaced by a group of technocrats last week, faces months of legal battles -- and is due in court today.
My colleague Julia Kollewe explains:
Mr Bunga-Bunga is up in court today, accused of paying an underage girl for sex. That's just one of three trials. He also faces charges of fraud and bribery in separate hearings at the Milan courthouse. This will keep him busy until Christmas and beyond - on some days he faces several hearings.Berlusconi's trial for paying a Moroccan dancer, Karima "Ruby" El Mahroug, for sex when she was under 18 resumes today, followed by three more hearings in December that promise a parade of showgirls who will give evidence about the bunga-bunga parties at his Milan mansion.
Berlusconi's lawyers will try to convince an all-female panel of three judges that he showered Ruby with cash to prevent her from straying into prostitution. Bizzarely, when she was arrested on suspicion of theft he told Milan police he believed she was a relative of Egyptian leader Hosni Mubarak. Berlusconi is also charged with pushing police to free her.
8.06am: Nearly half of investors now believe at least country will crash out of the eurozone. That's the finding from a survey from Barclays Capital, who asked nearly 1,000 of its clients how they believe the crisis will pan out.
Just 3% of those surveyed believe they will see a workable solution to the crisis within the next three months. The number expecting at least one country to quit the euro has doubled - to nearly 50%, from just a quarter three months ago.
Early in the year, just 1% of BarCap clients! serious ly thought the eurozone would lose a member.
As Katie Martin writes in the Wall Street Journal today, Europe's dithering has turned the idea of euro break-up from fantasy into a serious threat:
As the markets grow increasingly convinced that the authorities are losing control of Europe's scariest crisis since World War II, calm, sensible people are taking the idea seriously. They're even calling in the lawyers, just in case.
7.41am: Confirmation from Berlin that Jos Manuel Barroso will struggle to persude the German government of the merits of eurobonds.
German finance minister Wolfgang Schuble hit the airwaves this morning, telling Deutschlandfunk radio that eurobonds (debt issued by one euro member but guaranteed by all 17) would simply lead to more reckless fiscal policy.
This is about creating rules for financial discipline in European countries. As soon as you start talking about eurobonds ... you take away the pressure on these countries.
Germany isn't implacably opposed to eurobonds -- its position is that they shouldn't be introduced until there is much more fiscal integration across the eurozone (which means EU treaty changes, which takes time). But then, full-blown eurobonds would also require treaty changes.
Incidentally, we learned yesterday that Barross has now rebranded eurobonds as 'stability bonds'. Schuble, though, may feel that a bond by any other name would smell as fishy.
7.32am: Traders in the City predict that shares will fall again this morning. The trigger for this latest sell-off -- after seven days of losses on the FTSE 100 -- is the news that China's manufacturing sector probably shrank last month.
HSBC's preliminary "flash" version of its monthly China manufacturing Purchasing Managers Index surve! y came i n at 48.0 -- crucially, below the 50 point mark that determines whether a sector grew or contracted. That's down from 51 last in September.
This is only one of several measures of the Chinese factory sector -- but given its importance to the world economy, the survey prompted the Hong Kong stock market to fall by 2%.
Spread-betters are calling the FTSE 100 down 55 points, or just over 1%. Terry Pratt, institutional trader at IG Markets, said:
Pessimism is continuing to flood markets across the globe...the release of the HSBC China PMI reading in the last few hours showing manufacturing output slowing is also giving traders cause for concern.Add to this suggestions that the US could see another of its AAA credit ratings disappear before the year end after the supercommittee's failure to agree a deficit reduction plan and there's certainly no sign of any festive cheer creeping onto the agenda just yet.
7.25am: Good morning, and welcome to our continuing rolling coverage of the European debt crisis -- and beyond.
Today's big theme is going to be 'eurobonds'. EC commission president Jos Manuel Barroso will unveil a report arguing that eurozone bonds would help solve the crisis.
Barroso will also propose giving the EU the right to question a country's budget -- another step towards closer fiscal and political union. Will this be enough to persuade eurobond sceptics - such as Angela Merkal - to change their views?
There's also a lot of economics news to watch out for, including the latest data from Europe's manufacturing sector. Statistics for China have been released overnight, and were disappointing (more soon) - that is likely to send European stock markets falling this morning.
The minutes from the Bank of England's last meeting will also be published this morning - revealing how concerned policymakers are about the euro crisis, and how close they came to taking more action.
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