Eurozone crisis live: Contingency plans ‘underway’ for Greek exit

Reuters says decision taken on Monday
David Cameron: Greek election is euro referendum
Markets gloomy ahead of EU summit
Germany sells bonds at record low yields
Papademos alarms traders with talk of Greek exit

1.56pm: French president François Hollande has stated that he is “not aware” of a call for contingency planning for a Greek exit.
Developing

1.39pm: Alongside calling for individually tailored plans to handle a Grexit (see 1.15pm), Reuters is also reporting that eurozone officials have been working out the potential costs to individual member states:

The document detailed the potential costs to individual member states of a Greek exit and said that if it came about, an “amiable divorce” should be sought.

It also said that Greece decides to leave, support could be given from the EU/IMF to help it do so.

That’s fits in with the way Roubini Global Economics sees a Greek exit panning out. It’s Megan Greene has predicted that Greece’s Troika of lenders would have to provide a bridging loan if the country did breach the terms of its aid package.

1.15pm: Breaking news on Reuters: it’s reporting that eurozone governments were asked on Monday to prepare “individual contingency plans” for the possibility of Greece leaving the euro.

Here’s the details:

Each eurozone country should prepare a contingency plan, individually, for the potential consequences of a Greek exit from the euro,” said one euro zone official familiar with what was discussion on the call.

“Nothing was prepared so far on the euro zone level for now, for fear of leaks,” the official said.

The message, delivered on a teleconference by the Eurogroup Working Group, appears to be the clearest sign yet that contingency planning is underway (something David Cameron just recommended in parliament – curious timing!)

There’s no immediate reaction in the financial markets, though.

12.56pm: Discussing the G8 summit in parliament, David Cameron told MPs that he believes Germany’s approach to the crisis has evolved.

But while Berlin does better understand the need for growth measures, it is not ready to take its foot off the pedal of deficit reduction until closer fiscal union is agreed, the PM said.

Cameron also mentioned tonight’s informal summit meeting, saying he would push issues such as the proposal for economic reform introduced by Mario Monti and himself last autumn, and the need to strengthen Europe’s financial sector to get “all banks properly capitalised and properly working”.

12.39pm: In the House of Commons, David Cameron has repeated his call for next month’s Greek election to be treated as a referendum on its future in the eurozone.

Updating MPs about last weekend’s G8 summit, Cameron said that while the future of Greece was a matter for Greeks alone, the question of its future in the eurozone cannot be “fudged or put off” anymore.

Instead, the June 17 election should be a treated as a referendum on Greece’s eurozone membership, with voters choosing whether the country decides to stick with its commitments, or takes “a different path”.

Europe should draw up “contingency plans for both eventualities”, Cameron added.

Update: Ed Miliband, leader of the opposition, responded to these comments by chiding the prime minister for speculating about the possible break-up of the eurozone.

My colleague Andrew Sparrow is reporting all the events in parliament in his Politics Live blog.

12.15pm: Ratings agency Fitch has warned today that non-resident investors have been pulling out of Spanish and Italian public debt in the last few months.

“Cheap ECB money” replaced funding from international institutional investors in the first quarter of 2012, Fitch said, adding that it expects this trend to continue in the coming quarters.

Fitch sees a high risk of outflows in Spain and Italy continuing in the coming quarters until either a more stable base of foreign investors with higher risk appetite is reached, or economic prospects for Spain and Italy improve.

The change in the investor base follows a similar shift in Ireland, Portugal and Greece, the three eurozone programme countries, and reflects a broader investor aversion to the peripheral debt markets.

More here.

11.44am: Looking at the newspapers, Greece’s Kathimerini reckons that a Greek exit from the euro would need to be squeezed into a 46-hour window.

That’s how much time the country’s leaders would probably have to enact any departure from the single currency while global markets are largely closed, from the end of trading in New York on a Friday to Monday’s market opening in Wellington, New Zealand, based on a synthesis of euro-exit scenarios from 21 economists, analysts and academics.

During this weekend, Greece would need to freeze bank accounts, put troops on the borders (to prevent a capital flight), and start stamping existing euros to work as a new currency while drachma are introduced. Greece’s banks could well be shut down for several more days (I’ve read reports that they might be reopened on a Wednesday following a weekend default).

11.23am: Luke Baker of Reuters points out that France and Germany have not held a pre-summit meeting ahead of tonight’s talks, for the first time in over two years.

Since the euro crisis blew up, it has been common for Angela Merkel and Nicolas Sarkozy to speak, and sometimes draw up a cunning plan, to drop on their fellow leaders. Not this time, though, with François Hollande at the helm, in “a significant shift in the traditional Franco-German axis.”

Instead, new French President Francois Hollande will meet Spanish Prime Minister Mariano Rajoy in Paris to discuss policy, before the pair travel to Brussels for the 1800 GMT summit.

Despite fears that Greece could exit the currency bloc, Spain, where the economy is in recession and the banking system is in need of wholesale restructuring, is at the frontline of the crisis, with concerns that it could follow Greece, Ireland and Portugal in needing a bailout.

Hollande’s election victory has significantly changed the terms of the debate in Europe, with his call for greater emphasis on growth now a rallying cry for other leaders.

More here.

11.10am: News in from Greece where our correspondent Helena Smith says the political establishment is hoping France’s new president François Hollande will bat for them at tonight’s informal EU Summit.

Helena writes:

The mass selling daily Ta Nea sums up the mood in Athens this morning: “The president of France is going to Brussels with Venizelos’ proposals to change the terms of the memorandum,” the paper proclaimed on its front page above a picture of the two men smiling and sharing a “warm” handshake.

Greek socialist leader Evangelos Venizelos held talks in Paris with Hollande on Tuesday after being unexpectedly called by the French president to brief him on the state of Greece’s problem-plagued economy.

A senior aide to Venizelos said the invitation was a total surprise but that when it did come the Greek politician jumped at it (even if he has lost two thirds of his Pasok party’s parliamentary group since the May 6th poll).

Hollande was described as “smart, warm, friendly, humble, the opposite of the impression you got from Sarkozy….He showed a very deep interest in Greece and wanted to know everything,” said the source. “And he briefed us on the G20 and his experiences with president Obama.”

Venizelos, who had openly supported Hollande’s election, presented him with a six-point package of proposals aimed at stimulating growth in the debt-stricken country. The proposals, which range from ruling out further cuts to wages and pensions to combating youth unemployment by reinvigorating the European Social fund, amount to a revision of the controversial €130bn loan agreement Greece signed up to earlier this year with the EU and IMF (and which ironically Venizelos helped secure as finance minister).

Venizelos, who subsequently travelled onto to Brussels by train, is due to present the proposals at a meeting of European Socialist party heads ahead of the informal EU summit at 2PM local time. Hollande is also expected to attend the meeting with insiders saying it is likely to evolve into a “big chin wag” on how development and growth can be expedited in Europe’s vulnerable southern periphery.

Greece’s conservative party leader Antonis Samaras, a long-time opponent of the fiscal remedies meted out to redress the country’s financial woes, is also resting his hopes on Hollande. On Tuesday Samaras referred to him as “a politician whose views are so obviously in favour of our homeland.”

10.55am: Sweden’s prime minister has just crushed any lingering thoughts that Europe might move towards eurobonds at this evening’s meeting, dismissing them as a “bad idea”.

Fredrik Reinfeldt told a parliamentary committee in Stockholm this morning that Sweden opposes collective borrowing, as it would mess up the debt markets (which are already in enough trouble, as this morning’s German debt auction showed)

Reinfeldt added:

It is a way to mess around with yields which is not good.

Although Sweden isn’t a eurozone member, its opposition will surely make it easier for Angela Merkel to rebuff this particular proposal from François Hollande.

10.36am: Germany has just managed to sell two year bonds at its lowest borrowing cost ever — with a yield of just 0.07%.

This morning’s sale of two-year Schatz bonds proved popular with investors, even though the bonds won’t pay a coupon (a regular payment). Investors snapped up €4.555bn of the bonds, at prices that mean they will have received just 0.07% per year when the money is repaid in 2014. That’s down from 0.14% previously.

Germany had offered €5bn of bonds, and could have sold the lot if it had accepted higher yields in return.

This is the first time that Germany has sold a 0.0% coupon* bond – it took the move after seeing record demand for its debt. This indicates that investors are prioritising capital safety at any price, rather than worrying about profitability.

Annalisa Piazza of Newedge said Lucas Papademos’s comments overnight about preparations for Greece to leave the euro (later denied, see 8.12am), had made markets “extremely worried”. Michael Leister of DZ Bank said “demand for safety is well intact” (quotes via Reuters).

Sony Kapoor of the Re-Define think tank cautioned Germany against being too encouraged by the result:

* Technical point: Why is there any rate of return at all, if the coupon is zero? Because in today’s auction, investors offered to pay various amounts for the bonds on offer (so Germany will get slightly less than the face value of the bonds)

10.20am: The FTSE 100 just tumbled into a triple-digit loss, down 103 points at 5299, as pessimism abounds.

Traders, rather like readers below the line*, are weary of the ongoing saga. Chris Beauchamp, market analyst at IG Index, sums the situation up well:

Today is the anniversary of the Defenestration of Prague in 1618, the start of the 30 Years’ war. Frankly, it seems as if this crisis has been going on for 30 years.

Hopes for today’s EU summit have been well and truly chucked out of the window, as the Germans once again state their firm opposition to eurozone bonds as a means of solving the crisis. Berlin has ignored the pleas of the OECD, IMF and its allies in Paris and Rome, believing that such a solution would only worsen the spendthrift ways of their southern neighbours.

Chris is, of course, citing the second Defenestration of Prague, in 1618.

As AussieAnalyst pointed out down under:

The markets are rather directionless at the moment, so emphasis should be on EU/EZ leaders to provide some input into the EZDC so markets can react against something solid.

So perhaps we’ll get a rally tomorrow. Or perhaps not.

* – there’s some jolly banter about vegetables among the analysis of bond yields, sovereign defaults and euro break-up. Makes me a bit homesick 🙁

9.55am: Back in the eurocrisis, and the boss of Unicredit, Italy’s biggest bank by assets, has urged EU leaders to do everything possible to keep Greece within the euro.

Federico Ghizzoni warned against thinking that a Grexit would be easily handled, saying it would actually “create volatility for sometime”. Gzizzoni added:

I think the priority should be to keep Greece in the euro…Nobody knows what would happen if it were to leave.

Seems sensible enough, given the warnings that a Greek exit would be more serious than Lehman Brothers. But some analysts have been speculating that the eurozone could come back stronger without its debt-laden partner — much to the chagrin of certain experienced fund managers:

9.38am: New sales figures from the British high street have dealt a blow to hopes that the UK economy is recovering.

UK retail sales fell by 2.3% month-on-month in April, much worse than the 0.8% decline predicted by economists. That’s partly due to a drop in fuel sales (after motorists rushed to fill up in late March after a brief panic over a truck drivers strike). On a year-on-year basis, sales were also disappointing – down by 1.1%, versus a forecast of an increase in 1%.

So the UK consumer is reining in its spending, in the face of cutbacks and slowing economy at home and the euro crisis abroad. Not good. As Howard Archer of IHS Global Insight said:

It is evident that there are currently a lot of pressures on consumers as they face uncertain and worrying times, so they seem likely to be cautious overall in their spending over the next few months at least.

9.32am: Breaking news from the Bank of England – the Monetary Policy Committee voted 8-1 against increasing quantitative easing again, at its meeting this month.

Minutes just released showed that David Miles was the only member of the MPC to vote for more electronic money. But for several other members, the decision was “finely balanced”.

The committee voted 9-0 to leave interest rates unchanged at 0.5%.

You can see the minutes here.

9.29am: The euro selloff has continued – it just hit a new 21-month low of $1.2615 against the dollar.

9.10am: AFP is predicting a ‘no-holds barred’ debate in Brussels today, when Angela Merkel and François Hollande tussle over how to develop measures to kickstart growth.

There was one interesting development yesterday, when EU governments agreed to experiment with a new security called ‘Project Bonds’ — commonly backed bonds that will fund pan-European infrastructure projects across borders.

They are seen as a first step to full-blown eurobonds, and important because they will see European nations pay for work that will happen in another country – such as motorways, energy networks, and communications links.

But although “Project Bonds” are pooled borrowing, they are not mutually backed.

A ‘high-ranking EU diplomat’ told AFP that they’re very different than Eurobonds, saying:

Paris and Berlin understand each other completely: they’re both called ‘Bond’, but these are very different animals.

There’s more on Project Bonds in the FT, and on CNBC.

8.50am: There were alarming scenes in Greece last night, where supporters of the neo-Nazi Golden Dawn party clashed with police during an anti-immigrant protest in the western port of Patras.

Reports from the scene stated that the incident began after a local man was fatally stabbed, allegedly by an illegal migrant from Afghanistan. As we reported overnight, an initially peaceful protest outside an old factory inhabited by migrants turned violent when Golden Dawn supporters arrived at the scene – resulting in Greek police protecting those in the factory and firing teargas after stones were thrown.

It’s a worrying sign of the escalating tensions in Greece, and the pressure on law on order. Golden Dawn, of course, won 21 seats in this month’s election, on a virulently anti-immigrant campaign.

Theodora Oikonomides, who reported the clashes on Twitter last night, reports this morning that five people have been arrested.

8.41am: Analyst Gary Jenkins of Swordfish Research also isn’t optimisic of much progress today, pointing out that the invitation letter from the EU President referred to “the longer term perspective”.

That means that the immediate crisis raging across Europe will only be raised at the end of the meeting, at the “coffee and mints stage of the evening”.

Jenkins adds:

There is still a part of me that believes that somewhere in a dark corner of an office in Brussels a group of hyper intelligent EU officials are working on a contingency plan [in case Greece leaves the Eurozone and undertakes a disorderly default].

8.36am: While Germany is unlikely to cave in to pressure over eurobonds today, Elisabeth Afseth of Investec reckon Berlin will eventually capitulate – and will look all the more daft when they do.

Germany risks appearing a bit like Jim Trott in the Vicar of Dibley, ‘no, no, no, no, no…..yes’. It remains firmly against common bond issuance and measures to increase the lending power of the European Stability Mechanism (ESM) such as granting it a banking licence or lending directly to banks. All are likely proposal at today’s leaders’ meeting, and some way of boosting the firewall is required fairly soon. The OECD and the IMF both joined the chorus calling for greater fiscal liability-sharing yesterday. But the single currency probably has to be closer to the end of the cliff before Germany’s ‘no’ turns to a ‘yes’.

[If the Vicar of Dibley has passed you by, this video explains all.]

Investec are hopeful, though, that EU leaders will agree on ways to use infrastructure spending to enhance growth.

8.12am: Today’s early selloff in the stock markets (see 8.08am) was triggered by an interview given by former Greek prime minister Lucas Papademos last night.

Speaking to Dow Jones, Papademos appeared to warn that preparations for Greece to leave the eurozone are being drawn up. Here’s the key quote from the story:

Although such a scenario is unlikely to materialize and it is not desirable either for Greece or for other countries, it can not be excluded that preparations are being made to contain the potential consequences of a Greek euro exit.

This was enough to send the euro falling, and push the Dow Jones into negative territory (as Business Insider reported). But was it all a mistake? By 1am Greek time, Papademos was telling CNBC that there were no plans underway in Greece for a euro exit. Indeed, the former ECB vice-president was eager to sound reassuring, saying that “pressure on the banks has eased” in recent days.

Still, the euro remains under pressure at $1.267 this morning – proof perhaps that it doesn’t take much to alarm traders right now….

8.08am: European markets have fallen sharply at the start of trading, as Tuesday’s optimism vanishes.

FTSE 100: down 64 points at 5338, – 1.2%
German DAX: – 1.3%
French CAC: – 1.2%
Spanish IBEX: down 97 points at 6560, -1.5%
Italian FTSE MIB: down 227 points at 13228, – 1.7%

That follows a grim day in Asia, with Japan’s Nikkei falling almost 2%.

Traders fear that today’s EU summit will fail to make a significant leap forwards, which seems particularly likely as it’s only an ‘informal’ summit.

Michael Hewson of CMC Markets warned that share prices are likely to keep falling:

Even though markets have rallied in the past couple day’s further gains are likely to prove much more difficult especially given EU leaders track record for over promising and under delivering. The potential for disappointment therefore remains extremely high.

7.50am: Good morning, and welcome to our rolling coverage of the eurozone debt crisis.

Coming up today — European leaders are heading to Brussels for an informal summit to discuss the financial crisis, and ways of boosting growth. Issues such as collective borrowing (eurobonds) and a beefed-up European firewall will be discussed, while the prospect of a Greek euro exit looms.

Analysts fear that the talks will not yield much progress, with François Hollande and Angela Merkel likely to disagree on the best way to tackle the crisis. Indeed, the euro is back below $1.27, and Asian markets have fallen overnight.

Also on the agenda: the minutes of the Bank of England’s last monetary policy meeting will be released at 9.30am, showing how many committee members voted for more quantitative easing.

And Germany will sell €5bn of bonds with a zero coupon this morning – which means investors would not get any interest payments on the debt. As I blogged yesterday, analysts fear this shows the financial system may be drifting off the rails …

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