Debt crisis: as it happened April 13, 2012 European leaders, however, appealed for calm. Spanish Budget Minister Cristobal Montoro said Madrid was "taking measures every day" to reassure international traders and other countries that the nation is reforming its finances, as the government approved a crackdown on tax fraud. 19.17 Reuters has compiled a handy set of interactive graphics on Spain that illustrate everything from bad bank loans to the country's GDP growth over the past decade. 18.56 Jeremy Warner has posted a blog on the eurozone crisis argues that it's only a matter of time before the ECB is forced into massive quantitative easing: Since fiscal expansionism is out of the question, the only possible hope for salvation - within the euro that is - lies with the ECB. It may require the whole of the eurozone to move seriously into recession before the ECB acts, but eventually it will surely have to follow the US Federal Reserve and the Bank of England into full scale quantitative easing. Naturally, that would mean the heaviest purchases would have to take place in Germany. To the Bundesbank, it would be anathema Despairing of action by the ECB to choke off inflationary pressures, the Bundesbank has hinted at nationally imposed credit controls to dampen things down. Yet if there is ever to be any way out of this mess for the eurozone as a whole, other than break-up, a German boom is just the ticket. If there is relatively high inflation in Germany, it reduces the size of the deflation needed in the periphery to return to competitiveness. For the good of the whole, it's right that the ECB should be inducing a boom in Germany. 18.17 The Chancellor has also given himself a pat on the back, following S&P's affirmation of Britain's AAA credit rating. Mr Osborne said in a statement: This is a reminder that Britain is weathering the international debt storms because of the policies we have adopted and stuck to in tough times The budget showed we are ready to go on making the difficult decisions that are keeping our country safe. Once again we are reminded that those who want to spend and borrow even more would lead our country into an economic catastrophe. 18.05 Ambrose Evans-Pritchard endorsed George Osborne's austerity strategy in a blog post today - even though Britain could already be in recession: I continue to think that the Osborne strategy is correct, given the calamitous mess left by Gordon Brown's drunken budgets (5pc of GDP too loose, when adjusted for the cycle). The Chancellor's plan for net fiscal tightening of 1pc per year is the right pace. Greece is doing 6pc, Italy 3.5pc, and Spain 2.5pc this year. Fiscal austerity offset by monetary stimulus (QE) and currency weakness is exactly what the doctor ordered. Be that as it may, the Tories will be crucified if the ONS soon confirms the dreaded R word. It will colour the perceptions of bond markets and global investors. It will change public opinion. Grit your teeth. Keep buggering on. 17.48 Austerity is also the right way forward, according to S&P, which said that it could lower Britain's credit rating in the future if it felt the UK was not cutting far and fast enough: We could lower the ratings if we came to the conclusion that the pace and extent of fiscal consolidation was slowing beyond what we currently expect. This could stem from a reappraisal of our view of the government's ability to implement its ambitious fiscal strategy. Downward pressure on the ratings could also come from materially weaker economic growth than we currently anticipate over the medium term. The household sector, which accounts for nearly two-thirds of GDP, remains vulnerable to an unexpected increase in interest rates as well as further falls in house prices. Finally, if--contrary to our current expectations--the U.K. banking sector were to require additional capital support, pressure on the sovereign ratings could build. S&P currently rates Britain's outlook as "stable." 17.40 Standard & Poor's has affirmed the UK's AAA credit rating. In a statement, the ratings agency said its decision reflected Britain's "wealthy and diversified economy, fiscal and monetary policy flexibility, and adaptable product and labour markets." S&P added: In our view, the U.K. government's efforts over the next few years to engineer a steep correction in the fiscal accounts will likely drag on economic growth. At the same time, we expect that household spending in the short term will likely be dampened by sluggish nominal wage growth, a fragile labor and housing market, and a high, albeit falling, private sector debt burden--despite recent measures introduced to support private consumption. Nevertheless, we believe the U.K. economy's capacity to absorb shocks has improved. The household sector has developed a savings buffer and large corporations have accumulated substantial cash positions. Safe for now: S&P reaffirmed Britain's AAA credit rating (Photo: EPA) 17.24 After hitting highs of 6pc today, Spanish 10-year borrowing costs have eased (slightly) to 5.942pc at the close. 17.06 It's been a rollercoaster ride for Italian banks this week. Following heavy falls on Tuesday, banking stocks bounced back on Wednesday, only to fall again today. Nine of the top ten fallers in the FTSE Mib today are linked to the banking sector. Unicredit and Intesa Sanpaolo fell 6pc and 5pc respectively, while Banco Popolare shed 7pc. 17.00 Speaking ahead of the close, Angus Campbell at Capital Spreads, said: The risk aversion that's been building in the last few weeks means that the FTSE is about to record it fourth weekly decline on the trot, racking up over 5% of losses and investors are running scared. If China really is heading for a hard landing then we're all in trouble due to our reliance on them buying all the products that we make. The hope for the bulls though is that China will remain vigilant in respect of their economic growth and add more stimulus if needs be in order to avoid a hard landing. If this proves to be the case then this recent bout of weakness could prove short lived and hopefully we won't see a sixth week of declines. 16.40 Europe's stock markets have closed. Prices are still settling, but the FTSE 100 in London finished down 1pc at around 5652, while Spain's IBEX 35 index fell 3.6pc, and the FTSE Mib in Milan fell 3.4pc. 16.14 Spanish borrowing costs have hit 6pc, according to Bloomberg data. 15.51 The sell-off has taken hold. Spain's benchmark index has now fallen by almost 4pc, while Italy is down by 3.5pc. Just over half an hour of trading left. 15.41 ...and the cost of insuring the country against default has hit 500 basis points for the first time. This means it now costs £500,000 a year to insure £10m of Spanish debt over five years. This compares with £433,000 for Italian debt, and around £70,000 for German debt. 15.36 Spain's borrowing costs are also threatening to breach 6pc. Benchmark 10-year bond yields are currently at 5.978pc - and rising. 15.31 Mr Coeure's comments were enough to cause a market rally on Wednesday when he said: Will the ECB intervene? We have an instrument for intervention, the SMP, which has not been used recently but which exists. But stock markets today are not happy. Spain's benchmark index has now fallen by 3.1pc, while the FTSE Mib in Milan is down by 2.6pc. US markets also opened lower. The Dow Jones industrial average is down by 0.71pc at 12,894.85, while the broader S&P 500 has fallen 0.81pc. The FTSE 100 in London is currently down 0.8pc. 15.26 Mr Knot said that the impact of the ECB's €1 trillion blast of cheap liquidity into Europe's banks was still filtering through the system. Although he did not expect a repeat of the LTROs, he echoed comments made by ECB colleague Benoît Cœuré earlier this week: The instrument has not been used a long time but it still exists. I am glad it hasn't been used. I hope we will never have to use it again. 15.25 Mr Knot, who also sits on the ECB's board, told students at an event that he felt that markets had overreacted to the situation in Spain. I don't think we're heading towards the edge of a cliff. I think markets have overreacted a bit. 15.11 Klaas Knot, the president of the Dutch central bank has said that a loss of the country's AAA credit rating could push up its borrowing costs by 1pc, which, according to Bloomberg, translates to €4bn of extra interest costs. The Netherlands is among just four countries in the eurozone that enjoy a prized AAA credit rating, along with Germany, Luxembourg and Finland. Yields on 10-year government bonds are currently at 2.227pc. 14.40 The Economist's former point has been highlighted today, with workers turning out in their thousands in Rome to protest against labour and pension reforms recently approved by Mario Monti and his interim government. Workers march in front of the Colosseum in Rome during a protest in Italy on Friday (Photo: AP) 14.36 Should Spain and the rest of the periphery take a leaf out of Germany's book? After all, a decade ago, the country was Europe's basket-case, struggling with the costs of unification. A leader in this week's Economist newspaper highlights the lessons the rest of the world should - and should not - take from Germany: So what should Europe's weaker countries be trying to copy? The relaxation of labour-market rules, certainly. That is beginning to happen, though as Italy has been discovering, liberalising labour markets is harder in tough economic times. Germany freed up its job market when demand was strong in the rest of Europe. There is also much to be said for emphasising vocational training instead of producing more and more graduates with often useless university degrees. But many of the things that work well in Germany - its corporatism, its business clusters, its manufacturing prowess - are part of a traditional culture that would be hard, if not impossible, to transplant from one country to another. 14.25 More analysis from Michel Martinez at Societe Generale on this morning's news that Spain and Italy together borrowed more than half of the total debt issued by the ECB last month (see 09.15). After the second LTRO in February, the amount of Open Market Operation (OMO or banks' borrowing with ECB) by the ECB reached EUR1142bn. Spanish and Italian banks took 57% here. The Bank of Spain also released banks' borrowing with the ECB for March. Spanish OMOs increased from EUR170bn to EUR316bn in March. Italian banks" OMO rose from EUR147bn to EUR270 in March. Meanwhile, French banks increased their borrowing from ECB from EUR123bn to EUR144bn. It is difficult to interpret such a development. As such, these amounts are probably not indicative of banks" funding stress as they were clearly encouraged to use the LTRO facility by the ECB. But the fear is that most of those extra loans taken by Spanish and Italian banks were invested in domestic sovereign bonds, thus reinforcing the consanguinity between the sovereign and banks stresses. 13.48 Joseph Trevisani, chief market strategist at Worldwide Markets said the "danger for the economy" remained the "problem of inflation outstripping wage gains": The as-expected inflation numbers will not push the markets in any particular direction. The underlying problem of inflation outstripping wage gains remains. That is the danger for the economy in the long run. 13.45 Commenting on the figures, Lindsey Piegza, economist at FTN Financial, said: What we see is energy prices are seeping into the economy as producers try to pass on their costs. This is putting pressure on consumers. Consumers are increasingly sensitive to price increases given the sluggish rise in income. What this means going forward is a decline to retail sales. That's the biggest concern. This along with yesterday's report on the PPI put the Fed on the defensive for further policy accommodation. You have slowing job growth and rising prices. This would put them further on hold. There is no momentum one way or the other for them to ease more. 13.39 The cost of living in the US has edged up in March, as rising petrol prices put a greater strain on American wallets. Consumer prices edged up 0.3pc last month, compared with a 0.4pc rise in February. On an annual basis, inflation stands at 2.7pc. This is in line with economists' expectations. Rising petrol prices contributed to a slight increase in the cost of living in March (Photo: PA) 13.17 Mr Lewis also explains why the IMF might try to persuade "considerably poorer" economies to help to prop up the eurozone: The breakdown of that system might well impose costs not only on Europe but on the rest of the world also. That seems to be how euro zone leaders see matters. It lies at the root of their otherwise surprising assumption that G20 countries outside the euro zone, even some which are considerably poorer in terms of GDP per capita, should make a contribution to a firewall to stop contagion within the single currency area from tearing the euro apart. 13.11 G20 ministers will meet next Friday, ahead of the IMF and World Bank's Spring Meetings on April 20 - 22. However, Christine Lagarde said a decision on the size of the IMF's firewall is likely to take some time. Stephen Lewis at Monument Securities comments on other challenges facing the IMF: Mme Lagarde earlier this week reiterated her call for the USA and Japan to fashion credible plans for reducing government debt over the medium term. [She] has been taking a different line with hard-pressed sovereign debtors in the euro zone. Though economic demand in these countries has typically been weaker than in the USA or Japan, the IMF has backed EU authorities in insisting on immediate action to effect swingeing cuts in government deficits. Mme Lagarde is far from willing her prescription as a universal rule, however, probably because she is well aware that if all countries with large government deficits and rising public debt were to act as the peripheral euro zone nations have been coerced into doing, the global economy, or at least the advanced sector of it, would be locked in a prolonged downturn. Clearly, then, the IMF's priority in enforcing fiscal restraint on euro zone member-states is the preservation of the euro arrangements. Though we may suspect that political motivations lurk behind the position the IMF has adopted, that need not be the case. It could be that the IMF genuinely sees significant benefits for the world economy from keeping the present euro currency system alive in Europe. Christine Lagarde, managing director of the IMF (Photo: Getty) 12.55 The world's 20 most powerful economies are prepared to boost the IMF's firepower by between $400bn (£251bn) and $500bn to help fight the eurozone's debt crisis. China and Japan might together provide another $100bn, one G20 official told Reuters. Another said: Japan and China appear to be relatively happy with what Europe has achieved. The $500bn quoted is less than the $600bn initially sought by the IMF in January. A third official told the newswire: It has always been clear that the $500 to $600 billion was too much, not realistic We would be happy if we get as much from other countries as the Europeans are willing to provide. Eurozone countries have already pledged another €150bn to the IMF, while other EU countries have pledged $50bn. George Osborne has said that the UK would not pledge additional funds to the IMF unless Europe showed that it was doing enough to "stand behind" its currency. 12.21 The Portuguese parliament has rubber-stamped the EU's fiscal pact by a majority of nearly 90pc. The pact, which enshrines a golden rule in national law to keep budget deficits below 3pc of GDP from 2013, was approved by 204 votes to 24. In 2011, Portugal's budget deficit was 4.2pc of GDP, less than half of the 9.8pc shortfall reported for 2010, according to its National Statistics Institute. However, Portugal had to raid €5.6bn of pension fund assets last year in a controversial scramble to meet the 5.9pc deficit target set by the terms of its €78bn bailout. The government now expects the shortfall to reach 4.5pc of GDP this year, and 3pc in 2013. 12.08 It's not just the eurozone where tensions are running high. Hungarian PM Viktor Orban has criticised the EU for "blackmailing" the country into amending its constitution in return for a EU/IMF bailout. He told MR1 Radio: Creating political conditions - for example over the justice system - would amount to blackmail, which is unacceptable within the European Union. The EU and IMF have locked horns with Mr Orban over a change to the country's constitution which allowed the government to appoint more deputy governors to its central bank. Hungary, which is in the EU but not the eurozone, went to Brussels last November with its begging bowl after the country's credit rating was cut to junk. The ECB said this week that it still had "serious concerns" about the independence of the Magyar Nemzeti Bank, even after amendments were made to its constitution. 11.42 Christian Noyer, governor of the Bank of France, has said there is no reason why the country should become the next target for the markets after the election. He added that he would fight speculation on French debt in a determined way French presidential frontrunner François Hollande has said that he would renegotiate the eurozone's fiscal pact if he is elected. Christian Noyer (Photo: Bloomberg) 11.21 ...while the cost of insuring Spanish government debt against default has climbed to a record high. Spanish CDS spreads widened 16 basis points to 492bps. This means that insuring £10m of Spanish debt over five years now costs £492,000 per year. 10.30 The continued concerns over the eurozone has seen another flight to safety that has benefited Germany and Britain. Yields on German Bunds and British gilts rose on Friday. The yield on 10-year Bunds has slipped to 1.744pc, while that on 10-year gilts is eased to 2.050pc. 10.00 Spanish and Italian stock markets are leading European markets lower. Worries over Spanish banks' finances and the outlook for Italy after dissapointing industrial output data has seen the Ibex and the FTSE MIB drop 2.5pc and 1.9pc respectively. The FTSE 100 is trading down 0.6pc, Germany's DAX has slipped 1pc and France CAC has lost 1.1pc. Yields on 10-year Spanish and Italian government bonds have also widened this morning - 5.880pc and 5.445pc respectively. Spanish borrowing costs widen after Bank of Spain data shows borrowing by the country's bank from the ECB near doubled in March. 09.40 Commenting on the producer prices, Peter Dixon, of Commerzbank, said: The fact that input prices were up by 1.9pc on the month tells you that the oil prices had a big impact last month, and I wouldn't be at all surprised if we see a little bit more pressure from that side over the course of the next few months. While David Page of Lloyds, looking forward to next week's inflation figures, said: Next week's consumer price index is not likely to fall. 09.35 British factory gate inflation eased to a two-year low in March, but were higher than economists' forecasts. The ONS said producer output inflation eased to 3.6pc, the lowest annual rate since January 2010, down from 4.1pc in February. Economist had expected it to fall to 3.4pc. Input prices were 5.8pc higher on the year, compared with forecasts for an annual increase of 4.6pc, but are at their lowest level since November 2009. Oil prices rose by around 14pc in dollar terms in February and have since held at levels of about $125. However, the annual rate of crude oil input price inflation fell to 13.5pc, its lowest since October 2009. 09.25 Some good news for Spain on the jobs front where youth unemployment exceeds 50pc. Giant French retailer Carrefour says it will hire 3,000 staff in the country with the opening of news shops, according to a report on Cinco Dias. Let's hope its not just wishful thinking, given Carrefour's exposure to the eurozone crisis and country's financial woes. 09.15 Spanish banks borrowed a record €316.3bn from the European Central Bank in March, as financial institutions, virtually blocked out of wholesale credit markets, leant heavily on ECB liquidity lines. This was nearly double the €169.8bn borrowed in February, according to Bank of Spain figures. Total net borrowing was €227.6bn - a 49pc increase on the €152.4bn borrowed the previous month. MarketWatch tweets: 09.12 Italian industrial output was weaker than expected in February, falling 0.7pc after a revised 2.6pc fall the month before. Year-on-year it was down 6.8pc. Scott Barber of Reuters has pushed out this chart comparing Italian industrial production with GDP. It doesn't bode well and the FTSE MIB is now down 1.5pc. The data followed a 1.3pc monthly slump in industrial output in Germany, the euro zone's largest economy, while French output edged up 0.3pc. Germany, France and Italy make up at least two thirds of the euro zone's economic output. 09.10 Asmussen seems to be telling the market not to expect a further €1 trillion of cheap money. ForexLive tweets: 08.40 The European Central Bank will act when needed, ECB policymaker Joerg Asmussen said on Friday, adding that he saw signs of stabilisation in sovereign debt markets in a shaky environment. He told a conference in Berlin: We see signs of stabilisation in sovereign debt markets though in a still fragile environment. We all see what happened to Spain in the last days, However, he stressed that the ECB's non-standard measures are temporary and exceptional by nature. After fellow policymaker Benoit Coeure hinted that the central bank could step in to calm nerves over Spain and Italy, it seems the bond-buying programme could be back on. Looks like it will become a self-fulfilling prophecy. 08.20 Mining and commodity stocks on the FTSE 100 seem to have shrugged off the weaker growth in China and are the main risers. Xstrata, Shell, Glencore, Evraz, BHP Billiton and Rio Tinto are all up between 1.3pc and 0.3pc. Among the main fallers are RBS (-1.5pc), Glaxo (-1pc), Imperial Tobacco (-1pc), United Utilities (-1pc) and Vodafone (-1pc). The blue chip index remains slightly down. On the Continent, Germany's DAX is flat after consumer price inflation for March was confirmed at a rate of 0.3pc month-on-month and 2.1pc year-on-year. France's CAC was also down 0.4pc. But nerves over the finances of Spain and Italy remain. The Ibex dropped 1.5pc, and is now down 4.3pc so far this week, while FTSE MIB, down 3.9pc this week, slid 1pc.