Eurozone crisis live: European Central Bank under pressure to act

The ECB will decide today whether to cut interest rates, as Spain struggles to maintain the confidence of the markets

8.18am: Spanish industrial output fell sharply in April, data just released has shown, in further proof that the country’s economy is deteriorating.

Output dropped by 8.3% in April on a seasonally adjusted basis. Production of
consumer durable goods slumped by 16%, while output of capital goods (such as heavy machinery) tumbled by 14.9%.

8.12am: European stock markets have opened higher, with traders pushing share prices up in London as the City gets back to work after the Diamond Jubilee.

FTSE 100: up 43 points at 5304, + 0.87%
German DAX:
French CAC:
Spanish IBEX: up 31 points at 6297, + 0.5%
Italian FTSE MIB: up 69 points at 13043, + 0.5%

Andrew Taylor, strategist at GFT Markets, said there was a ‘groundswell’ of optimism that eurozone leaders could be jolted into taking new steps.

Most of it centres on calls to actions from most notably the Spanish treasury and G7 financial chiefs. Their demand for immediate response to Spain’s escalating funding issue and the EU debt crisis as a whole seems to have pricked the ears of traders globally.

However, like the numerous times before, it is really a matter of when will they stop talking about what is needed and instead action what is needed.

8.06am: City analysts are divided over whether the European Central Bank will cut interest rates today, although a clear majority expect No Change.

Out of 60 economists surveyed, 48 forecast that interest rates will remain at 1%, while 11 predicted a cut to 0.75%. One bold forecaster plumped for a 50 basis point cut, to 0.5%. Unlikely.

The ECB’s position in recent months has been that national governments need to use the ‘window of opportunity’ created by initiatives such as the €1trn of cheap loans recently handed to banks through its Long Term Refinancing Operations. So Mario Draghi is more likely to signal that rate cuts may be close.

7.54am: Another interesting developmoent overnight – Australia’s economy posted surprisingly strong economic growth in the first quarter of 2012, defying predictions that the eurozone crisis would dent demand.

Australian GDP rose by 1.3% in Q1 2012, more than twice the 0.6% pencilled in by economists. As Michael Blythe, chief economist at Commonwealth Bank of Australia, put it:

Rumours of the economy’s death have been totally exaggerated….It does tell you we had a decent amount of momentum in the run-up to the latest round of the European woes, and it’s not a bad place to be in.

7.50am: Overnight, Moody’s cut its rating on six German and three Austrian banks, blaming the impact of the eurozone crisis.

The downgrades follow Moody’s ongoing review of Europe’s banking sector, and are generally less severe than its recent downgrades of Spain’s banks (with most of the banks only being cut by one notch).

Moody’s warned that German lenders could see their assets shrink in value if the euro zone crisis deepens, saying:

Today’s rating actions are driven by the increased risk of further shocks emanating from the euro area debt crisis.

We have more details here.

7.45am: Good morning, and welcome to our rolling coverage of the eurozone financial crisis.

Fears over Spain continue to dominate the eurocrisis, after its prime minister yesterday pleaded for help to recapitalise its banks and warned that Spain is in a situation of “extreme difficulty”.

With Germany refusing to allow Spain’s banks to be bailed out without a formal request from the Spanish government, and Madrid opposed to such a move, there is still deadlock at the heart of the eurozone crisis.

The main event today is the monthly meeting of the European Central Bank. The ECB is unlikely to cut interest rates (although you never know …), but it could announce some other ways to stimulate the eurozone economy. Either way, Mario Draghi’s press conference this afternoon will be closely watched.

There’s plenty of economic news this morning too, including a second estimate of eurozone GDP for the first quarter of 2012 (the first reading came in at 0% change), and data from the UK construction sector.

In the City, traders return to work after the Diamond Jubilee weekend. Shares are expected to rise, on hopes that world leaders may make progress in solving the crisis when they gather for the G20 Summit in Mexico later this month.

Here’s today’s agenda:

Spanish industrial production: 8am BST / 9am CEST
UK construction PMI: 9.30am BST
First revision of eurozone GDP: 10am BST / 11am CEST
German industrial production: 11am BST / noon CEST
European Central Bank decision on monetary policy: 12.45pm BST / 1.45pm CEST
European Central Bank press conference: 1.30pm BST / 2.30pm CEST


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