3.52pm: It's a thin day on the markets, Wall Street is closed for a holiday, so time for a reality check on how shares work:
3.16pm: With no direction from the US and a summery day, markets are experiencing a fairly thin time in terms of volume, so perhaps it is not surprising the early enthusiasm has pretty much evaporated.
The FTSE 100 is now down 2.5 points at 5349.03 - having touched 5413 - while Germany and France are virtually flat. Precious metals have edged lower too, viz:
2.47pm: Thin trading on European stock exchanges makes it difficult to discern the underlying mood on trading floors, though we can all make an educated guess. And that is gloomy.
This morning there was a rosy glow as a series of polls in Greece put the pro-austerity parties back on track for a small majority, and the Greek stock market is still higher this afternoon than its Friday close, on the renewed optimism among investors of a yes vote.
But elsewhere the difficulties in Spain have brought traders back to earth with a bump. Spain's Ibex was down another 2% by 13.30 GMT. The FTSEurofirst 300 lost its early gains and had dropped 9 points from 993 to 984. The FTSE 100 struggled to a 10 point rise at 5362 by 13.50 GMT.
2.27pm: Over at
the Daily Telegraph, frustration at the situation in Spain is growing. Ambrose Evans-Pritchard believes Spain has run out of money:
Where is the €23.5bn for the Bankia rescue going to come from? The state's Fund for Orderly Bank Restructuring is down to €5.3bn, and there are many other candidates for that soup kitchen... I fail to see how Spain gains anything durable from an EFSF loan package.
The underlying crisis will grind on. Yes, the current account deficit has dropped from 10pc to 3.5pc of GDP, but chiefly by crushing internal demand and pushing the jobless toll to 5.6m.
The "unemployment adjusted current account equilibrium" — to coin a concept – is frankly frightening. Spain is quite simply in the wrong currency. That is the root of the crisis. Loan packages merely drag out the agony.
2.12pm: Reuters is running a story about electrical retailer Dixons and its efforts to prevent a Grexit wrecking its local business. Apparently it has spent the last few weeks "stockpiling security shutters to protect its nearly 100 stores across Greece in case of a riot".
The planning, says Dixons chief Sebastian James, may look "alarmist" but it's good to be prepared.
The article documents how Dixons and other major operators in Greece are taking their cash out and adopting a low profile. Diageo has slashed its marketing spend and withdrawn stocks, while BMW has already cut deliveries.
Photograph: Paul Hackett / Reuters/Reuters
2.06pm: The word on Barclays acquisition of 23,500 flats in Germany is that they stem from the collapse of a landlord that owed the bank lots of money. Barclays repossessed the homes last year and has been looking to offload them ever since. So now you know.
1.57pm: Sorry, that is a 24-hour media strike in Greece and not a 48-hour stoppage as mention earlier, which explain why there is no TV news today and no newspapers tomorrow.
1.32pm: As Bankia looks to sell its stakes in corporates such as British Airways/IAG while it wrestles with €32bn of toxic loans, Barclays is quietly offloading some of its assets.
The UK listed bank has agreed to sell its huge portfolio of apartments in north and eastern Germany to a local real estate firm. Who knew its property empire was so extensive?
Well there are around 23,500 flats and the provisional value is €1.2bn, making them worth a bargain €51,000 each, roughly.
If that seems low, it must be taken into account that Germany has a surplus of homes and a declining and ageing population, especially in the eastern half of the country. Though that begs the question, what was Barclays doing with them on its books in the first place. Maybe someone at the bank will tell us before the day is over.
1.23pm: And of course we should mention the strike by journalists in Greece that means there will be no newspapers tomorrow. TV news blackouts are already in operation. We've been here before. There was a four-day strike last month against redundancies. This time its wage cuts that have angered staff and the strike is to last two days.
1.09pm: Asked about the need to modify eurozone bailout mechanisms to allow direct bank recapitalisations , Spanish prime minister Rajoy agreed, presumably because his real intention at some stage is a backdoor re-financing by the ECB.
Some commentators cannot understand why he has refused to send Bankia directly to the ECB in search of the capital it needs.
Control is one issue. The Irish have devised clever schemes with their banks such that they delay indefinitely the interest on small parcels of debt held with its own central bank, sanctioned by the ECB. Maybe the Spanish want to concoct something similar.
12.39pm: More from Spanish prime minister Rajoy.
He says that when Bankia - which needs an injection of some €19bn - is recapitalised it will be sold, and the state's investment recovered. But the sale will only happen when the bank is cleaned up.
There are talks about the best way to inject public funds into the banks, but no discussions with the ECB about rescue funding for Bankia. But he has reportedly suggested the EU bailout fund should help recapitalise the banks (we await the German response to this).
As for Catalonia - which on Friday asked for government help - he said the region was not bankrupt but there was a liquidity problem.
12.28pm: It seems the UK chancellor George Osborne will also attend the Number 10 meeting between the Prime Minister, Bank of England and Financial Services Authority ...
12.25pm: Spanish prime minister Mariano Rajoy is calling on Europe to make structural reforms, including labour mobility to help combat the current crisis.
In an unscheduled press conference (webcast in Spanish
here) he says
Europe must move towards further monetary and fiscal integration.
He also said Spain runs the risk of not being able to finance itself if it does not cut its deficit. As for the banks, he said
the total figure for bank rescues would have to wait until the results of the independent audit being conducted. But he said there would
not be any external rescue of Spanish banks (does this include
the ECB bond suggestion?)
He calls for a "decision and clear move" to dissipate doubts over the euro.
12.09pm: Financial markets were holding onto their early gains as clocks across the City struck noon, with most major European markets up almost 1% (the
FTSE 100 is 46 points higher at 5397).
Spain's IBEX is the only market to lose ground, down 57 points at 6485, following the increase in its bond yields this morning. With Wall Street closed, and parts of Europe celebrating Whitson, there's a feeling of calm in the City.
David Jones, chief market strategist at
IG Index, said traders were focusing on yesterday's polling data suggesting New Democracy is currently the most popular Greek party (
see 8.22am). He added:
The reaction to poll results may be seen as a little fickle and we have got used to any positive news quickly getting swamped by the next tranche of disappointment, but it has lifted the London index back to its best levels for nearly a week.
With the US closed for its Memorial Day holiday it is probably going to be a quiet afternoon and the weather could mean that lunch breaks end up a little longer than usual.
Which sounds like a good time for a lunchtime round-up of the main developments, after a fairly calm morning:
11.46am: Goldman Sachs sent its clients a research note this morning which outlines three scenarios for the Greek crisis.
Here's the top-line summary :
Scenario #1: Muddling through
In the most likely scenario, the new Greek government emerging from the June 17 election neither chooses to exit the euro nor agrees unconditionally to implement the existing EU/IMF programme. This will lead to a cessation of troika payments, but would not of itself constitute Greek exclusion from the Euro area, provided Greek banks continue to enjoy access to ECB facilities. Such a scenario is consistent with our forecast for European macro variables and asset prices.
At the same time, there will also be (slow) progress toward deeper policy integration (financial market and banking regulations, fiscal coordination, and ex ante risk-sharing), in order to build the firewall necessary to make the Euro area resilient to a possible future Greek exit. In this scenario, the very large insurance premium priced into US Treasuries and German Bunds should gradually dissipate. Equities would likely rise, but initially only modestly given the continued weak growth picture.
Scenario #2: Fast exit; Greece walks away
Were Greece to unilaterally exit and introduce its own currency, the ECB would presumably halt the flow of Euro liquidity to Greece. Greece would be cut off from capital markets, forcing the government to a primary cash balance. The knock-on dislocations to the real economy could lower Euro area GDP by up to 2 percentage points, even assuming that robust counter measures are taken by the policy authorities. Our expectation would be that the policy response would be substantial. The hit to earnings expectations would likely push the SXXP down to 225, although uncertainty could push the ERP even higher (from 8.7% currently), pushing the SXXP back to at least the 215 low of last September or more and 10-yr rates to as low as 1.5% and 1.0% in the US and Germany respectively.
Scenario #3: Slow exit; Greece is excluded
There is no legal mechanism to force Greece out, but in practice it would be possible de facto by denying Greek banks access to ECB facilities. We see this as less likely than #1 but more likely than #2; it is more market friendly than #2 being a more "managed" exercise. Most likely, peripheral countries' would have received assurance that the ECB will intervene in bond markets to limit contagion preventing a sharp widening in spreads. The likely hit to GDP of up to 1% is already discounted in equities although uncertainty may result in an initial overshoot. If the policy response was powerful, we could see a strong rally from any lower levels.
11.38am: David Cameron is to meet with
Sir Mervyn King, the governor of the Bank of England, and
Lord Adair Turner, chairman of the Financial Services Authority, this afternoon to discuss the eurozone crisis.
We understand that the meeting is taking place at Number 10 Downing Street.
Senior representatives from the Treasury, the third part of Britain's Tripartite system of financial regulation, will also be attending.
Sources close to the situation are indicating that the talks are not a major event, but it's an interesting development. Cameron himself argued last week that Europe needs to draw up plans to survive a Greek exit, while King has said openly in the past that Britain has done its own contingency work. One to watch this afternoon....
Sky News reckons the talks will focus on the efforts to strengthen the British banking sector:
11.17am: The idea that Spain's government would recapitalise Bankia with Spanish government bonds, which would then be deposited with the European Central Bank in exchange for fresh capital, is causing some alarm in the City today.
The plan, which is not yet official, is seen as another short-term fix that actually increases the overall dangers.
One Spanish official told Reuters this morning that the ECB appeared to support the idea. From the terminal:
"The ECB has been closely consulted on this. The solution has been used by Germany and Ireland in the past. It is perfectly valid... My understanding is that (the ECB) did not object to it," the source said.
But experts are concerned....Mike van Dulken of Accendo Markets described it at a kind of financial "jiggery pokery" that has the potential to be copied elsewhere:
Michael Hewson of CMC Markets compared Spain and Bankia to "two drunks" trying to hold each other up:
10.52am: Nicholas Spiro of Spiro Sovereign Strategy is concerned by the results of this morning's Italian bond auction (see
see 10.21am)
Spiro argues that this morning's auction should have benefitted from the lack of other auctions this week, its small size, and the fact that Italy is less of a worry than Spain. Instead, though, the Italian Treasury had to pay much costs to get the sale away.
Italy, he warns, faces "a confluence of growing domestic and external risks." (a shrinking domestic economy, growing nervousness over the eurozone among investors, and the ever-present threat of Greece crashing out of the euro).
The big risk, though is political uncertainty, Spiro argues:
Mario Monti's position is becoming increasingly precarious because of the growing uncertainty surrounding his parliamentary support base. Italian politics is currently in a state of extreme flux. While this is background noise for the markets right now, how all this plays out in the coming months will have important implications for Italy's creditworthiness.
10.21am: Bond market news: Italy's borrowing costs have risen at an auction of government debt.
The Italian treasury found buyers for €3.5bn of two-year bonds. But the yield (effectively the interest rate on the bond) rose to 4.037%, sharply higher than 3.355% at a smiar auction last month. Demand for the bonds was also a little lower (the bid-to-cover ratio came in at 1.66, down from 1.8%).
It suggests investors are demanding higher rate of return in exchange for holding Italian debt.
With Spanish yields rising in the secondary bond market today, the message is that the two large, peripheral eurozone members are under a little more pressure today....
UPDATE: Reuters reckons this is the highest yield set on an auction of Italian bonds since December 2011.
9.59am: Looking beyond Greece, and Spain, the latest economic data from Italy shows that the economic deterioration there is continuing.
Busiss morale in Italy has now fallen to its lowest level in almost three years, due to a drop in orders. Business leaders also said they were more pessimistic about the outlook. It's understandable, given predictions of a harsh recession through 2012 – and the impact of Mario Monti's austerity programme.
Bloomberg has the full details.
9.36am: The Athens stock market has opened strongly this morning, with the main index jumping by 3% in early trading.
That mirrors the early rally in other stock markets on the back of polling data putting
New Democracy in the lead ahead of the June 17 election (
see 8.22am). Not much relief for Greek investors, though, after the Athens market hit its lowest point in over two decades last Friday.
9.25am: Spain is being buffetted in the bond market this morning, as concern grows over the cost of recapitalising its banks.
The yield on the benchmark 10-year Spanish bond jumped to 6.5% this morning, from 6.34% on Friday night. That's a big enough move to suggest that bond traders are getting jittery -- Spanish yields are heading back towards the record level seen during last November.
Along side that, the cost of insuring Spanish debt against default has jumped this morning. This has pushed the spread between the cost of a Spanish credit default swap and a German one to 505 basis points (5.05 percentage points). That's the biggest spread since the euro was created.
Greece's former prime minister Lucas Papademos. Photograph: Kostas Tsironis/AP
9.08am: The moderate rally across Europe's stock markets this morning (
see 8.22am) is somewhat surprising, as it comes after it emerged that Greece's former prime minister has warned that the country's public finances could collapse in June.
Greek newspaper To Vima revealed on Sunday that Lucas Papademos has warned that Greece's financial position was deteriorating rapidly, with tax revenues falling, spending cuts sliding and the withdrawal of bank deposits continuing.
A document sent by Papademos to Greece's president during the failed negotiations earlier this month suggested that, without a new government in place soon, salaries and pensions might go unpaid. As Papademos put it:
The state will face considerable difficulty covering its expenses in June.
8.55am: Apologies for the late opening of comments below (
a minor technical error). Many thanks to
Kizbot for flagging it up.
Thought you were a little quiet
Political leaders from across the spectrum have criticised Lagarde, with Pasok leader Evangelos Venizelos saying "Nobody has the right to humiliate the Greek people during the crisis .
As I have said many times before, I am very sympathetic to the Greek people and the challenges they are facing. That's why the IMF is supporting Greece in its endeavor to overcome the current crisis and return to the path of economic growth, jobs and stability. An important part of this effort is that everyone should carry their fair share of the burden, especially the most privileged and especially in terms of paying their taxes. That is the point I was emphasizing when I spoke to the Guardian newspaper as part of a broader interview some time ago.
But this has been rejected by Syriza's Alexis Tsipras, who said Greeks didn't need her sympathy as they laboured under "unbearable" taxes.
The issue of Greek 'tax evasion' has become such a
crisis cliché that it's hard to say exactly what the clear position is. Back in March, the head of the EC's Task Force said
Athens was making great progress in collecting back taxes, but claimed around €8bn of collectible revenue was still being missed. The IMF has also made improved tax collection a priority.
Marc Ostwald of Monument Securities has expressed some support for Lagarde's position:
Greece, as Mme Lagarde correctly observed, will never extricate itself from its problems if the culture of tax avoidance and non-payment persists, and the deficiency of the Greek debt restructuring with respect to bringing its current debt to GDP ratio well below 80% with immediate effect - the election outcome will do nothing to change these facts, and are thus they are primarily a pointer on whether Greece exits the Euro immediately after, or whether it continues to limp towards the exit.
8.27am: Shares in Bankia have slumped by 27% this morning, as trading in the company resumed on the Madrid stock market.
Bankia shares shed €0.42 to €1.15, as traders responded to the news that Spain's largest lender now needs needs €19bn in new capital. It's not yet clear how that deal will be financed. It emerged last night that the Madrid government hopes to involve the European Central Bank -through a complicated scheme where Spanish government bonds would be used to pay for Bnak's recapitalisation; with Banka then using bonds as collateral with the ECB as a way of raising new capital.
This would allow Spain to get around the ECB's refusal to recapitalise banks directly, but could also fall foul of opposition at its Frankfurt HQ, and in Berlin.
As Giles Tremlett reports:
By avoiding the markets altogether, the government would indirectly "push the financing of Bankia's bailout on to the ECB", according to El País newspaper.
But the debt scheme raises questions about how the ECB, Merkel and the financial markets might react to Europe's central bank helping rescue a nationalised Spanish bank laden with toxic real estate.
"You will have to ask the ECB that," said one official in Madrid.
Antonis Samaras , the leader of the Greek conservative New Democracy party, which is leading the latest opinion polls. Photograph: Louisa Gouliamaki/AFP/Getty Images
8.22am: European stock markets jumped in early trading, following opinion polling which showed that the New Democracy (ND) party was now on track to win the most votes in the June 17 election.
Several different opinion polls were published on Sunday by various Greek media outlets. Although the precise results varied, the broad message was that ND had achieved a lead over Syriza - of between 0.5 to 5.7%.
Two of the polls, conducted by Pulse and MARC, also indicated that ND and Pasok (which also supports the broad thrust of Greece's current bailout programme), would win enough seats to secure a majority.
Although political analysts insist that the race is too close to call (and has a long way to run), the news was enough to send shares up in early trading. Here's a round-up:
FTSE 100: up 50 points at 5401, + 0.9%
German DAX: up 74 points at 6414, + 1.17%
French CAC: up 33 points at 3081, + 1.1%
Chris Weston of IG Index commented that the stock markets have now become "a derivative of the Greek polls", rising or falling depending who is leading the race.
Michael Hewson of CMC Markets pointed out that ND's lead remains slender, and could quickly disappea, adding:
Expect markets to continue to react to the ebb and flow of sentiment with respect to each poll, right up to polling day.
A New Democracy-Pasok coalition would mean less chance of an immediate escalation of the crisis after the June 17 elections, as both parties broadly support the current terms of the Greek 'Memorandum'. But it would not ease the country''s financial gloom, or the wider problems in the eurozone...
..as one financial analyst who blogs as
Makro_trader pointed out:
8.15am: Good morning, and welcome to our rolling coverage of the eurozone debt crisis.
Coming up ... we'll be watching the twists and turns in the Greek election campaign.
Polling released over the weekend indicated that New Democracy (which supports Greece's bailout programme), has now inched ahead ahead of Syriza (which does not).
The prospect of a New Democracy-led government has been welcomed by City traders, as it would make an early Greek exit from the eurozone less likely. But with nearly three weeks to go until Greece heads to the ballot box again, the situation remains very fluid.
The other key issue is Spain's banking crisis. The suspension of trading in Bankia shares will be lifted this morning, after being suspended late last week ahead of its request for €19bn recapitalisation on Friday night. Rumours of an EU bank rescue deal, in which weaker banks could be taken over by Brussels rather than failing,
were circulating over the weekend.
In other news ... Christine Lagarde's claim (
reported in Saturday's Guardian) that Greeks must take responsibilty for their financial plight and "pay their taxes" has prompted a backlash against the International Monetary Fund's managing director. After heavy criticism on social networks.
Lagarde took to Facebook to explain that:
I am very sympathetic to the Greek people and the challenges they are facing.
.
We should see today if that's enough to calm the row ...
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