Eurozone crisis live: EC denies working on secret Greek exit plan

EC: We want to keep Greece in eurozone, not out
Trade commissioner: contingency plans are in place
FTSE 100 hits new low for 2012
Asian shares fall sharply
Wolfgang Schäuble sees 12-24 months of turmoil
Spain hit by bank downgrades

2.58pm BST: Missed this yesterday. Boris Johnson, Mayor of London, has reportedly given his backing to Greece while visiting Athens for yesterday’s Olympic flame ceremony, as only Boris can.

Athens News reports that Johnson told them that Greece should take solace from the fact that there’s no mechanism to eject a country from the eurozone, and that Germany must accept the price of saving the euro.

Or, as he put it:

If the Germans want to sell washing machines to Greece then they have to pay for the single currency.

You could argue that the underlying trade imbalances in the eurozone would be eased if the Greeks sold washing machines to the Germans. But, I guess Boris is more of a classics man than an economist.

2.32pm BST: Just spoke to José Manuel Barroso’s spokesman, Simon O’Connor, who insists that Europe has not drawn up a emergency contingency plan for Greece today (despite various reports on this line today).

The commission is not working on the basis of a Greek exit scenario.

We are working to keep Greece in the euro.

The commission doesn’t want to be drawn officially on the comments made this morning by trade commissioner Karel De Gucht (see 10.15am), that the ECB and EC have ‘contingency plans’ to avoid a ‘domino effect’ from a Greek default. De Gucht’s comments are getting plenty of attention today, though.

It sounds as if Olli Rehn, the European Commission’s top economics official, has given Channel 4 News a similar line, in an interview being broadcast tonight.

Update:
As I blogged earlier, we’d long assumed that Europe was making some contingency plans for a Grexit (Mervyn King, Bank of England governor, has been clear that the UK authorities have been planning for such scenarios for a while). So, while there may not a full-blown contingency plan signed off and in place in Brussels, it would be more worrying (deeply irresponsible, really) if Rehn, Barroso, et al hadn’t put some work into the issue — given the proximity of the June 17 election in Greece.

1.45pm BST: The Irish economy continues to take a hit from its own debt laden, crisis stricken banking sector.

Bank of Ireland – one of the banks rescued in the international bail out – has announced today it is axing 1,000 jobs – 250 more posts than they had projected earlier this year.

From Dublin, Henry McDonald reports:

Chief executive Richie Boucher said that as the bank restructures “the overall number of people which we need to employ will regrettably reduce”.

However, the Irish Banking Officials Association – the trade union for bank workers in the Republic – welcomed the fact that all the job losses will voluntary redundancies.

While jobs continue to be lost in the banking sector there have been further glimmers of hope in the export-drive hi-tech sector in Ireland, with computer giant IBM revealed today that it hopes to create up to 300 new jobs at its Irish headquarters in west Dublin.

Speaking of Ireland, Henry flags up latest polling shows that the Labour party, the junior coalition partner, has fallen behind Sinn Fein in the latest opinion poll on the state of Ireland’s parties in today’s Irish Independent. Sinn Fein has 17 per cent support while Irish Labour are down to 15 per cent. The poll comes 24 hours after an opinion survey on Irish attitudes towards the EU fiscal treaty. Significantly up to 35% of the Irish electorate remains undecided on how to vote at the end of this month.

The results of the referendum will be known in a fortnight; a no vote could add to further de-stabilisation of the eurozone.

1.24pm BST: Anticapitalist campaigners have been demonstrating in Frankfurt today, as part of a protest called ‘Blockupy’.

According to local reports, police have begun removing people from outside a skyscraper that houses Goldman Sachs’ German operation. Some roads have been closed, and Reuters says 40 people have been detained.

The police presence appears quite high, given the small number of peaceful protesters, as these photos from The Wall Street Journal’s Laura Stevens show (there are more pics on her Twitter feed.:

Demonstrators have been protesting against Europe’s austerity programmes, and against the way the financial system operates. German banks have said their operations have not been affected by Blockupy.

1.13pm BST: Here’s some market commentary from David Jones of IG Index, confirming the grim mood in the City today:

With around 250 points gone on the FTSE 100 since last week, the 2012 uptrend that held for so long finally appears to have broken. The ugly prospect of bank runs appears to be spreading over Europe, rumours having hit Spanish banks yesterday to complement those heard about Greece earlier in the week.

As with so many things, it doesn’t matter if it’s actually true, since markets have worried about this for so long that the merest hint of capital flight raises investors’ hackles. Bond yields are on the march, and shares in London are
taking heavy losses once again.

12.47pm BST: Here’s more details of the European Commission’s official denial that it’s working on contingency plans for a Greek exit (via Market News)

The European Commission is not working on any contingency plans should Greece leave the Eurozone, a spokesperson for the Commission said on Friday.

“We completely deny that we are working on any such emergency plans” the spokesperson told MNI.

“We are concentrating all our efforts on supporting Greece and keeping it in the Eurozone. That is the scenario we are working on,” the spokesperson said.

Have been trying to speak to the Commission on this myself….

As reported at 10.15am EU trade commissioner Karel De Gucht appeared to tell Belgian newspaper De Standaard that contingency plans were well underway. Unfortunately, the online version of this article only includes part of the interview, so it’s tricky to know exactly what was said….

Open Europe, the think tank, says De Gucht has previous form on letting ‘the cat out of the bag’ on such issues….

12.27pm BST: In a volatile session, European stock markets have clawed their way back, amid ongoing chatter in the markets that a short-selling ban might be reintroduced. The FTSE 100 is still in the red (down 30 points at 5309), but other markets are a little higher.

Short-selling bans are usually brought in during times of crisis. They do tend to provide some short-term support for share prices, but don’t fix underlying problems….

12.04pm BST: The European Commission has now denied that is has been working on an exit plan for Greece, after trade commissioner Karel De Gucht told a Dutch newspaper that contingency plans had been drawn up (see 10.15am).

European Commission spokesman Olivier Bailly has said that the EC “denies firmly” that any such exit scenario is being worked on, and that the Commission still wants Greece in the eurozone. There is no secret Grexit plan, Bailly insisted.

11.07am BST: While European stock markets have suffered again, there has been another surge of money into AAA-rated government bonds.

With investors desperate to find a safe home for their money, German bonds hit their highest levels ever. This pushed the yield (the measure of interest rate) on 10-year bunds down to a new alltime low of just 1.396% in early trading (Tradeweb date, via the Reuters terminal). UK 10-year gilts also strengthened, pushing down the yield to 1.81%.

Such record low yields suggest both countries will be able to borrow at very low rates at the present time. Economists, though, see record low yields as a sign of stagnation. Dr Gerard Lyons of Standard Chartered pointed out that a similar pattern was seen in Japan during its financial crisis 20 years ago.

Lyons was on sharp form on the BBC this morning too, describing the tension between Greece and the rest of Europe as a poker game, in which “instead of both sides playing Aces at the last minute they will produce Jokers”.

10.55am: German chancellor Angela Merkel made a telephone call to the Greek president Karolos Papoulias this morning, to discuss the crisis.

A German government spokesman has just confirmed the call, explaining that Merkel “expressed the German government’s wish for a functioning government in Greece”. According to Greek TV, Papoulias will now brief caretaker PM Pikramenos on the discussion, so more details might come out later…

Seperately, a spokeswoman for the finance ministry has been quizzed about this morning’s report (see 10.15am) that the ECB has been working on contingency plans in case Greece leaves the eurozone. No details emerged, but she did say that:

Our citizens expect us to be prepared for every eventuality.

10.15am: EU trade commissioner Karel De Gucht has confirmed that the European Commission and the European Central Bank are working on an emergency scenario in case Greece should leave the euro zone.

While we’d rather assumed that contingency work was underway, I’m not aware of an official stating it before (shout out if you know better).

De Gucht made the comments in an interview with Belgian newspaper De Standaard, arguing that a ‘domino effect’ from a Greek exit could be contained:

Both within the European Central Bank and the European Commission, services that are working on emergency scenarios in case Greece doesn’t make it.

De Gucht declined to give details, and added that he still expects Greece to remain in the euro (quotes via Reuters’ Brussels office).

9.49am: In the financial markets, the FTSE 100 remains sharply lower, down 53 points at 5285, at its lowest point since 30 November.

This moves the UK blue-chip index deeper into ‘corrrection’ territory, from its recent high of 5965 in mid-March.

The German DAX and French CAC markets are also still in the red, both down around 0.6%.

But surprisingly, the Spanish stock market is actually up. Led by Bankia, whose shares have surged by 28% this morning. Quite a turnaround, following yesterday’s rumours of a bank run. Other financial stocks are also now up, despite Moody’s volley of downgrades last night.

That follows a report that Goldman Sachs has been hired to value Bankia – which could prelude a break-up.

UPDATE: A couple of City types have also mentioned a rumour that Spain might impose a ban on short selling (selling stocks which you don’t actually own). Nothing official though.

9.35am: The crisis in the Spanish banking sector comes nearly four years after Santander was playing a ‘white knight’ role during the UK’s own banking crisis.

Our banking expert Jill Treanor comments:

Interesting times for Santander UK. This was the bank that the Labour government turned to during the 2008 crisis to take on Bradford & Bingley savers. It also bought Alliance and Leicester just before the crash.

Now, unrelated to last nigh’s downgrade, its attempts at a stock market flotation – earmarked for two years ago – are now pushed back until at least next year. Even so, it still has a strong rating and has not been downgraded as much as the overall group.

9.13am: The proportion of bad debts sitting on the books of Spanish banks has risen to its highest level since August 1994.

Bank of Spain data showed that the bad loans rate across the Spanish banking sector rose to 8.37% in March. The number of loans falling into arrears increased by €1.6bn to €148bn.

That underlines the thinking behind Moodys’ downgrades last night – Spain’s banking sector is stuffed full of loans that turned sour once the property market crashed.

Those bad debts could grow significantly if the Spanish economy deteriorates, making it even harder for the Madrid government to recapitalise its banks and put them on a sound footing. As Nicholas Spiro of Spiro Sovereign Strategy points out:

Spanish bank restructuring is a moving target: the deeper the downturn, the bigger the scope for a further deterioration in asset quality.

8.55am: France’s new prime minister had stern words for European leaders this morning for their failure to help Greece through the financial crisis.

Jean-Marc Ayrault, a former German teacher, added his voice to the chorus calling for a new growth agenda. Ayrault urged Brussels to put spare structural funds to work to help the Greek economy return to growth:

We waited too long before helping Greece. This has been going on for two years now and only gets worse….

Tough talk, but not exactly unfair.

8.36am: German finance minister Wolfgang Schäuble said on Friday that the market turmoil surrounding the euro zone crisis could last another two years.

Speaking on France’s Europe 1 radio after Asian markets had tumbled, Schäuble said:

Regarding the crisis of confidence in the euro … in 12 to 24 months we will see a calming of the financial markets

And that, it seems, is Schäuble being optimistic. He also appeared to warn Greek voters not to trust parties who promise to renegotiate Greece’s financial progamme.

It’s up to Greek politicians to explain the reality to their people and not make false promises.
We want Greece to stay in the euro but meet its commitments and that’s a decision that’s up to the Greeks.

8.27am: Santander UK, which was downgraded one notch by Moody’s last, is stressing this morning that the downgrade won’t affect its business.

A spokesman said:

The change to Moody’s credit rating of Santander UK plc has no impact on our businesses in the UK or our plans for future growth. Santander UK plc is an autonomous subsidiary of the Santander Group, with more than 90% of its total assets held in the UK and a Eurozone sovereign exposure of less than 1% of assets.

Santander UK is a key player in the British financial sector, having acquired Alliance & Leicester, Abbey National and Bradford and
Bingley. It now has a higher credit rating than its parent company, following Banco Santander’s three-notch drubbing.

8.10am: European stock markets have fallen at the start of trading, with Spain’s IBEX showing the steepest losses.

The IBEX shed 128 points, or 2%, at the start of trading, hitting a new nine-year low of 6409 points. That follows Moody’s downgrading much of the Spanish banking sector last night (see 7.49am)

In London, the FTSE 100 is down 50 points at 5289, a new low for the year. Just four shares have risen, while mining companies and banks are leading the fallers. Rio Tinto, Xstrata, Lloyds Banking Group and Barclays are all down at least 2.5%.

It’s a similar tale across Europe, with the Italian FTSE MIB down 1.5% and the French and German markets dropping around 1%.

There’s a really downbeat mood in the City this morning. As Clive Duckitt, director at Fyshe Horton Finney, commented:

There seems little respite from the gloomy news that has engulfed equity markets in recent weeks.

7.56am: Risk aversion has driven the US dollar up this morning, as traders look to put their money somewhere safe.

This has pushed the euro down to a new four-month low of $1.2649 against the US dollar.

It has also pushed the oil price to its lowest level of the year, with a barrel of Brent crude dropping $1 to $106.40. That might actually bring some relief to the global economy, as high fuel and energy prices have been blamed for pushing up inflation.

7.49am: Moody’s decision to downgrade much of Spain’s banking sector last night has put country’s financial problems under even more scrutiny.

Some downgrades had been anticipated, but the scale of the move is still quite dramatic – with 16 banks downgraded in total and some, including the giant Santander, by three notches.

Moody’s blamed the weak Spanish economy (currently in recession), and the Madrid government’s reduced ability to support troubled lenders, given its own problems.

Amidst the ongoing euro area debt crisis, the Spanish government’s rising budget deficit and the renewed recession, sovereign creditworthiness has declined.

Spain’s banking sector was also reeling from reports, officially denied, that worried customers were pulling deposits out of Bankia.

As analysts at Investec comment, “It’s not going to go down in history as a great day for Spanish banks.”

7.38am: Asian markets were hit hard overnight by fears over the health of the Spanish banking sector, and the looming threat of a eurozone break-up.

In Tokyo, the Nikkei fell by 2.99% at 8611.31, its lowest level since January. The index has now fallen for seven weeks in a row — its worst performance since 2001. Hong Kong’s Hang Seng index is down -2.69%.

Ben Kwong, Hong Kong-based chief operating officer at KGI Asia, called it straight:

It’s really bad….

Fears of a Greek exit from the euro zone and the negative consequences from that are prevailing.

Australian stocks were also hit overnight, particulaly banks and miners (with National Australia Bank falling 4.23%, and Rio Tinto down 5%). Warnings that China’s economic growth might be lower than expected this year also hit sentiment.

Chris Weston, institutional trader at IG, was also in bleak mood, predicting a “dark and tiresome open” in European markets.

The world is bereft of good news

7.35am: Good morning, and welcome to our rolling coverage of the eurozone financial crisis.

Not that there’s much ‘good’ about this morning. The escalating crisis having sparked heavy losses in Asian stock markets overnight, and another sell-off expected in Europe today.

There are two factors behind the sell-off: Fitch downgrading Greece yesterday evening on concerns that it might soon leave the eurozone and default, and Moody’s decision to downgrade 16 Spanish banks.

Those two developments capture the essence of the crisis today – Greece pushed to the brink of euro exit by austerity, a long recession and an huge debt mountain, and Spain battling to avoid the same fate. We’ll be watching both countries today.

World leaders are gathering in the US for the G8 summit, facing the growing threat of a global downturn. Barack Obama is expected to demand that Europe bows to pressure at home and abroad with new policies to boost growth.

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