? 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
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.
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.
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.
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: Who?
MERKEL: Godot.
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.
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.
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.
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
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.
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".
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.
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".
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.
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.
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.
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.
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.
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.
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).
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.
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.
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.
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.
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.
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.
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.
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.
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?
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.
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.
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%
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%.
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
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.
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.
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.
Source: http://www.guardian.co.uk/business/2012/jun/29/eurozone-crisis-live-summit-spain-wins-concessions
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