Debt crisis: as it happened June 6, 2012 Secondly, President Draghi was very explicit in mentioning some of the assembedded in the new Eurosystem staff projections. The projections have already been challenged to the downside by some of the most recently available survey data for May, especiallthose pinning down conditions of foreign demand, which the ECB still expects to be "buoyant." In fact following the cut-off date for the Eurosystem projection assumptions (May 24th), survey data suggest the global business cycle might be weakening, especially as far as the manufacturing sector is concerned. 17.31 The investigation will focus on the formation of Bankia from seven Spanish savings banks, or cajas in 2010, according to the Spanish newswire Efe, which cited an interview with Spain's chief prosecutor, Eduardo Torres-Dulce. Complaints from consumer groups representing small Bankia shareholders have grown louder in recent weeks, and many have threatened legal action over the sudden collapse in the bank's share price. According to Reuters, thousands of ordinary Spaniards invested an average of €6,000 each when the bank floated last year at €3.75. The shares closed at €1.04 today. 17.13 Spain's public prosecutor's office has opened an investigation into bailed-out bank Bankia, Last month, Bankia requested €19bn in state aid on top of the €4.5bn it has already received from the government. The investigation will be conducted by the anti-corruption unit, a spokesman told Reuters. 16.59 Charles Dallara, the man who represented banks in Greek debt write-off talks, will step down as head of the Institute of International Finance (IIF) at the end of the year. An IIF spokeswoman told AFP that Mr Dallara's departure was not linked to the stressful debt negotiations, adding that he would stay on at the IIF until the end of the year to ensure an "orderly transition." 16.54 Ben Critchley, sales trader at IG Index, comments on today's market movers: There was a brief wobble for markets during the early afternoon after Mr Draghi said no to any rate cut for the eurozone. However, indices rapidly stabilised after they remembered the more important rumour, that QE3 might finally be on its way in the US. The ECB didn't hint at any liquidity boosts so all eyes now turn to Washington. Both the Fed's vice-chairman and chairman will make speeches over the next 24 hours, and, so the theory goes, the spate of weaker US data means that intervention must be on its way. Markets might of course be setting themselves up for a fall in the coming days if we don't get any supportive words, but for now the optimists are in full control. 16.43 European markets have drawn to a close for the day, climbing on hopes European authorities are moving closer to more effective measures against the debt crisis. The FTSE 100 has ended 2.29pc up, the DAX rose 2.15pc and the CAC gained 2.61pc. The FTSE MIB soared by 3.42pc. 16.02 We've got a slideshow this afternoon of European banknotes which could be making a comeback soon if the eurozone debt crisis isn't solved. 15.35 A banker who was involved in the Greek debt haircut negotiations that ultimately saw investors lose the majority of the value of their bonds has pleaded for other countries to avoid similar tactics. Jean Lemierre of French bank BNP Paribas told a conference in Copenhagen hosted by the Institute of International Finance: Don't do it again, please, in the official sector. Once is enough. Stick to your word, stick you commitments, and pay back the creditors. I'm very grateful to the heads of state in Europe (for having) promoted a negotiated solution. We are not happy about the haircut at the end of the day, of course, but negotiation has great value. It is very crucial when you have a process to understand what is going to happen, otherwise you have a systemic crisis. I hope in the future we shall stick to that principle of negotiation. This is key. 15.27 The Crisis in the eurozone is hitting small companies" confidence and cash flow, writes James Hurley, with European suppliers demanding cash up front for orders while exporters are being caught by customers delaying payment. Data from Western Union show that businesses are increasingly shifting payments to the end of the month as they hoard cash and wait for better exchange rates. 15.12 Wall Street is now up and running, with sentiment buoyed by the ECB's decision to leave interest rates at a historic low and keep cash flowing to banks - until the end of the year, anyway. Oil is also back above $100 a barrel this afternoon. The Dow Jones has already gained 1.24pc, the S&P 500 is up 1.3pc and the Nasdaq has risen 1.47pc In Europe the markets are also climbing once again. The FTSE 100 is back to just over 2pc, the DAX is 1.64pc higher and the CAC has floated 2.05pc. 14.45 Glenn Uniacke, senior dealer at Moneycorp, comments on the ECB press conference: With its direct reference to increased downside risk, heightened uncertainty, flat GDP and a lack of momentum, Mario Draghi's press conference will have left many onlookers scratching their heads as to why rates were left on hold. While Draghi has a point in that monetary policy cannot make up for a lack of action elsewhere in the banking and political apparatus of Europe, watching and waiting could be a woefully flawed strategy. Knee-jerk policy reactions are less effective than a determined and committed policy stance. Caution and procrastination could be the catalyst of the eurozone's collapse. 14.38 The ECB has passed the buck to eurozone governments, warning that the single currency is under increasing threat. Mario Draghi talked down the chance of more cheap LTRO funding once the current batch runs out, saying it was wrong for monetary policy to fill a policy vacuum created by others: The issue now is whether these LTROs would actually be effective. Some of these problems in the euro area have nothing to do with monetary policy... and I don't think it would be right for monetary policy to fill other institutions' lack of action. The economic outlook for the euro area is subject to increased downside risks relating in particular to a further increase in the tensions in several euro area financial markets and their potential spillover to the euro area real economy. 14.28 The Wall Street Journal asks Mario Draghi what he would say to people outside of Europe who believe their unemployment levels have been raised by the crisis in the eurozone. He replies: The capacity of the European crisis to affect the rest of the world, one one hand I think it has to be right. We are the second richest economy in the world, so if this weakens we're certainly going to have some impact on the rest of the world. But Draghi also warned about taking this reasoning too far: Europe may have some responsibility but these countries also have their own responsibilities. It's not balanced to say that only Europe has a responsibility. And this is maybe going to be the main message of the G20 summit, that all countries have to work together. First and foremost they have to address their own problems, and then they should worry about the spillover of their own policies - or lack of policies - on the rest of the world. 14.09 Markets have slipped back slightly since Mario Draghi started his press conference. The FTSE 100 has come off to rest 0.9pc up on the day, the DAX is just 0.63pc higher and the CAC has pared gains to 0.99pc. For those of you unfamiliar with equine pharmaceuticals, Dormosedan is a sedative... 13.56 Mario Draghi has been asked if Spanish banks will be able to receive help without having to go through the Greek government as a middle-man. He says: I don't view it as the ECB's task to push governments into doing something. It's their own decision whether they want to access the EFSF or not. He says the IMF assessment of the country's banking sector will come "very soon" and then the independent one soon after, and that any decision will need to be made on "realistic assessments of the needs to recapitalise the banks and the money that's available to the government." 13.45 We're on to questions and answers now. Draghi has been asked how functional the bond markets currently are: We still have very low nominal rates and negative real rates. We also have dysfunctional markets - the inter-bank market is really very dysfunctional, it's not working. 13.42 The ECB's governing council considers economic and monetary union to be a "highly important step" in restoring stability in the eurozone. It predicts growth during 2013 of between stagnation (0pc) and 2pc - that's the same lower limit, but a slightly lower upper limit than the last estimate of 2.2pc. 13.41 Credit demand is likely to remain subdued, and banks need to do more to ensure their resilience. On interest rates, he said the decision was by "consensus" and wasn't unanimous. 13.37 Indirect taxes and rising energy prices will keep eurozone inflation above 2pc for the rest of the year, says Draghi. It's likely to fall below the threshold in early 2013 he claims. 13.34 Mario Draghi, president of the ECB, is now giving a press conference. Within minutes he's down to the key points: three-month LTRO lending will continue to the end of 2012. 13.05 We've heard from the basics from the ECB - although Draghi will be holding a press conference soon - but the MPC decision won't be made public until tomorrow afternoon. David Kern, chief economist at the British Chambers of Commerce, looks ahead at what to expect: Most analysts expect the MPC to maintain its current policy at the June meeting, with interest rates staying at 0.5pc and the quantitative easing programme at £325bn. However, demands for more QE have started to rise due to the worsening crisis in the eurozone and signs that the US and Asian economies are slowing. More QE will have only marginal effects in boosting growth. But if the pressure facing Spanish banks puts the UK financial system at risk, an increase in QE may be necessary. In the meantime though, the MPC should focus on boosting the flow of credit to businesses. David Kern 12.45 The European Central Bank held its key interest rates steady at an historic low of 1pc. All eyes are now on what Mario Draghi will say at his press conference. The bets are that he will indicate a cut in interest rates and keep pressure on eurozone leaders to act to stem the debt crisis. Rabobank economist Elwin de Groot said: The key question for the market now is whether the ECB will cut rates next month and whether it is willing to also lower the deposit rate. 11.47 Part of the reason for that solid demand for German bunds could be down to slow bank runs (bank jogs?) in Europe. 11.31 Some mixed news from Germany now. Industrial production fell 2.2pc in April, wiping out gains in the previous month. Analysts had expected a 1pc contraction. Meanwhile, the country sold €3.98bn of five-year debt this morning, enjoying solid demand. The yield was 0.41pc, compared to the last similar auction which came in at an average of 0.56pc. Achilleas Georgolopoulos, strategist at Lloyds Bank, said: It was nothing spectacular in that the market expected a good result. The record low yield was expected, though the Bundesbank probably held a bit more than we thought. The market probably liked it a bit more than we expected - despite the very low yield there's still decent demand. 11.14 The EC has published its report on bank recapitalisation. Bruno Waterfield brings us the key points: 11.03 Markets are continuing to bob upwards as the ECB announcement nears. Investors are optimistic that the ECB could unveil more stimulus to fight the debt crisis. The FTSE 100 is now up 1.27pc, the DAX by 1.55pc and the CAC is 1.92pc higher. Spain's IBEX is now 2.86pc up on the day, it's third consecutive positive trading session. 10.37 First quarter eurozone GDP data out this morning shows that strong exports saved it from recession. The EU statistics office confirmed GDP was flat in January to March, quarter-on-quarter. Eurostat confirmed that the eurozone escaped technically moving into recession by the skin of its teeth as GDP was flat quarter-on-quarter in the first quarter of 2012 after contracting 0.3pc quarter-on-quarter in the fourth quarter of 2011. However, this does not mask the fact that the eurozone is exhibiting recessionary tendencies in most respects, Indeed, eurozone GDP was down 0.1pc year-on-year in the first quarter (revised down from flat). It is also notable that it took a strong net trade performance to prevent the eurozone contracting in the first quarter, and the eurozone cannot rely on this going forward given current heightening global growth concerns. 10.35 More on the Spanish bank bailout, or, more specifically, the lack of one. Economy Minister Luis de Guindos says there are no immediate plans to request a recapitalisation - it needs the results of a banking sector audit first: I have absolutely not discussed any intervention in Spain's banks today... in no more than 10, 15 days we will have the report from the independent auditors... which we are cerain will be very similar to that of the International Monetary Fund. Economy Minister Luis de Guindos 10.26 The ECB may cut interest rates to a record low later today. Officials are meeting in Frankfurt at the moment and an announcement is expected this afternoon. With governments struggling to fix the debt crisis that's engulfing Spain, pressure's mounting on the ECB to lower rates and introduce more liquidity support for banks. Bloomberg surveyed 44 economists: 32 predict rates will remain as they are, 11 predict a 0.25pc cut and one expects a 0.5pc cut. What do you predict? Time for a quick poll. Will the ECB cut interest rates? 10.13 Spain's in discussions with Germany and EU policymakers on how to recapitalise its troubled banks, but no decision can be made until the first phase of an independent banking audit is completed later this month, sources say. A series of reforms have failed to persuade investors that huge losses from 2008's property crash have been fully addressed. Treasury Minister Cristobal Montoro said yesterday that Spain was locked out of the credit markets. That could prove troublesome tomorrow, as the country hopes to raise €2bn in a bond auction. Reports this morning suggest that the EC will propose a new plan for boosting failing banks later today. But it won't kick-in until 2014, which means it will be of little help to Spain. 09.55 Spain isn't keen on a full bailout, as seen by Greece, Portugal and Ireland, instead calling for direct recapitalisation of its struggling banks by the eurozone bailout fund, the EFSF. In any case, it argues, it's too big to bailout directly. There's a strong editorial by Ignacio Camacho on Spain's ABC which shows exactly how the troika inspectors and austerity measures which come part and parcel with European bailouts are seen: They call it a rescue, but in reality it is a kidnapping; they take over the sovereignty of the nation concerned and wire it up to shock treatment, until the now-happy patient relaxes a little. They are the Men in Black, the flying emissaries from the dreaded EU troika, the commissioners that Merkel sends to impose her airtight budgetary discipline. It's a pitiless brigade whose presence always sparks panic in governments when things start to go the way they are going in Spain. Starting with pensions and unemployment benefits, they move on to taxes and civil service salaries and end up selling off all the assets that can be bought. When they finish, they leave the economy burned to the ground and politics mowed down to stubble, and depart arm-in-arm with the patient brushing the dust off their shoes. They may be able to clean up a nation that has sunk, but if there is any possibility of recovery they will leave it buried it under the rubble. 09.50 Oil is floating back towards $100 a barrel as data showed US stocks fell more than expected. Positive services data also gave investors a hint that demand would remain high. Brent crude rose more than $1.10 to $99.94 before easing back to $99.75 this morning. Ric Spooner, chief market analyst at CMC Markets, said: We probably need to see a more significant rally out of this level to be more confident we have a corrective rally going on. We have gone from pricing in a potential supply shortage because of the situation in Iran... to a market that is more than adequately supplied. 09.35 Growth in British house construction fell back to a three-month low in May as new orders dried up. The Markit/CIPS Construction PMI fell to 54.4 from 55.8 in April, staying in growth territory and beating expectations slightly. But, still, a three month low... The slip will undermine hopes of an early end to recession, especially given previous disappointing manufacturing data. Tim Moore, senior economist at Markit, said: While still in positive territory, the month-on-month fall in business confidence was the greatest since June 2010, which was when plans for the autumn government spending review were first announced. 09.24 As we've mentioned, Moody's downgraded six German banks, but it also took a swipe at Austria. The rating agency cut the long-term rating for Erste Group Bank by two notches to A3 from A1 while UniCredit Bank Austria AG was cut to A3 from A2. Both got a negative outlook into the bargain. The main concern for German banks was contagion, while for the Austrian banks Moody's noted vulnerabilities from operating conditions in Central and Eastern Europe. 09.14 Warren Buffett has been speaking on the eurozone crisis, calling for more fiscal union: They can't have a common currency, but not common fiscal policy or culture. Speaking at the 25th anniversary dinner of the Economic Club of Washington, the billionaire investor also said the odds of a renewed US recession were "very low." 09.04 There are two big meetings today: the Bank of England's Monetary Policy Committee, and the European Central Bank. As usual, we won't hear anything from the MPC until tomorrow at noon, but the ECB is expected to make an announcement this afternoon. The Bank of England. 08.52 Irish services PMI data is out this morning, showing its first contraction in four months. Slumping confidence is causing new orders to dry up and the backlog of work is running out. The index fell to 49.6 in May, from 52.7 in April. 08.49 There's an interesting article on CNBC warning that Greece could run out of cash next month, and have to stop paying salaries and pensions, along with imports of fuel, food and pharmaceuticals. It also has a fascinating insight into the endemic nature of tax evasion in the country: To understand the difficulty, just talk to Nikos Maitos, a longtime official in Greece's financial crimes investigation unit. When he and a team of inspectors recently prowled the recession-hit island of Naxos for tax evaders, a local radio station broadcast his license plate number to warn residents. "One repercussion of the crisis is that people are harder to find," Mr. Maitos, an imposing, burly man, said last week in his sweltering office on the edge of Athens. And when you do find them, they don't have money. Even tax collectors, who have had to take large pay cuts, find that budget reductions make it hard to pay for the gasoline needed to reach their targets. 08.41 The morning briefing from Benedict Brogan has just been sent out (sign up here), focusing today on "Eurogeddon." Parliament might be in recess and politics put aside for the Jubilee, but the eurozone crisis still rages across the continent, giving David Cameron something to be busy with. Yesterday he had a telephone call with Barack Obama about preparations for this month's G20 summit in Mexico. No wonder - things are getting hairy. Yesterday Spain admitted for the first time that it can no longer raise money on the global markets or roll over its sovereign bonds. And manufacturing and jobs data in the US and China came in weaker than expected. You can read more in Ambrose Evans-Pritchard's report. 08.34 Spain's industrial output slumped to its lowest level since 2009 in April. It took an 8.3pc tumble year-on-year, way below forecasts of 6.5pc. And this follows a 7.5pc drop the previous month, showing that contraction is serious and prolonged. 08.26 A quick update on markets across Europe now, which are all making gains ahead of the ECB meeting. The FTSE 100 has edged 0.8pc higher, the DAX is up 0.72pc and the CAC has risen 0.53pc. Asian markets also mostly rose overnight, following a positive lead from Wall Street. Tokyo closed up 1.81pc, while Seoul was closed for a public holiday.