Debt crisis: as it happened May 18, 2012 Clearly the Greeks have to make their minds up, they have to make their decision. 19.31 The plot thickens. A spokesman for Angela Merkel has denied that she floated the idea that Greece should hold a referendum on the euro. "This is false and we completely dismiss this," he told Reuters. 18.49 German Chancellor Angela Merkel has mooted the idea that Greece should hold a referendum on the euro alongside its second round of elections next month. Mrs Merkel's proposal came up in a jaw-jaw with the country's president Karolos Papoulias earlier today, according to a spokesman for the Greek government. In a statement, Dimitris Tsiodras said the proposal was "obviously" outside the scope of a Greek caretaker government. Channel 4's economics editor Faisal Islam comments on the irony of it all: Merkel suggests Greek vote should include referendum on euro: Athens 17.53 More than 400 people have been arrested today while participating in an anti-capitalist protest outside the European Central Bank offices in Frankfurt, Germany. "Blockupy Frankfurt" protesters have been in the city since Wednesday, and have called for four days of protest against austerity measures in Europe. A protestor is held by German riot police during an unauthorized blockade of the road by activists in Frankfurt on Friday (Photo: Getty). 17.36 Robert Chote, the head of the Office for Budget Responsibility, has warned that a Greek euro exit could throw UK into a "long-term recession." Speaking in an interview with the Guardian, he said: The concern is that you end up with an outcome in the eurozone that creates the same sort of structural difficulties in the financial system and in the economy that we saw in the past recession, and that that has consequences both for hitting economic activity in the economy, but also its underlying potential And it's the latter which has particular difficulties for the fiscal position, because it means not just that the economy weakens and then strengthens again - ie, it goes into a hole and comes out - but that you go down and you never quite get back up to where you started. 17.20 Following Fitch's downgrade of Greece yesterday, the rating agency has also downgraded five Greek banks, including the central bank, to mirror its sovereign rating of "CCC." In the event that the new general elections scheduled for 17 June fail to produce a government with a mandate to continue with the EU-IMF programme of fiscal austerity and structural reform, an exit of Greece from EMU would be probable and/or this could be followed by a withdrawal of international support to Greek banks. A Greek exit would likely result in widespread default on private sector as well as sovereign euro-denominated obligations. A woman begs outside the Bank of Greece in Athens (Photo: AFP) 17.07 More than £18bn has been wiped off the value of Britain's top companies today. The benchmark FTSE 100 index in London fell by 1.33pc to close at a new six month low of 5,267.62. Elsewhere in Europe, the CAC 40 in Paris closed flat, at 3,008.00, while Frankfurt's DAX fell 0.6pc to close at 6,271.22. Following heavy falls earlier in the week, the IBEX 35 in Madrid ticked up 0.44pc to 6,566.70. 17.04 While the G8 meet in Camp David, G20 labour and employment ministers have gathered in Mexico, where they have been discussing Europe's "austerity trap," and how this has affected EU youth unemployment. Speaking in Guadalajara, László Andor, European commissioner for employment, social affairs and inclusion, said: ...we immediately need an alternative approach: a new jobs-centred approach with investment, which is based on coordinated macroeconomic, employment and social protection policies. Unemployment among young people in the EU is twice the general rate. On average, over 22% of those under 25 who are available to work cannot find a job. The percentage is over 50% in our worst-affected Member States. One in every eight young persons in the EU is not in employment, education or training. So like most countries at this table we face a big challenge. The risk is seeing a generation go to waste. Unemployment, coupled with frustration at a lack of future prospects, is an explosive mix. It fuels unrest and political extremism - and carries a huge economic and social cost. One in eight people under 25 in the EU are classed as NEET - i.e. not in education, employment, or training. An unemployment office in Spain (Photo: AFP/Getty) 16.15 Mr Posen has long been labelled the Bank's arch-dove, and called for money printing last year at a time when the rest of the MPC decided to stand pat and not resume its asset purchases. However, Mr Posen ruffled markets when he decided last month to keep QE unchanged at £325bn. David Miles, former chief economist at Morgan Stanley, was the only member to vote for an extra £25bn of money printing in April. The Bank of England minutes for its May meeting will be published next Wednesday. 16.07 Commenting on Mr Posen's decision, Chancellor George Osborne said: I would like to wish Adam congratulations on his new position, I am sorry that he will be leaving the MPC but understand his reasons for doing so. Adam has made a significant contribution to monetary policy making and analysis during his three years on the Committee. 16.00 Adam Posen, who sits on the Bank of England's Monetary Policy Committee, has announced that he will leave the Bank at the end of August. Mr Posen will join the Peterson Institute for International Economics next January, where he will serve as president: In a statement, Mr Posen said: I am deeply grateful to the superb staff of the Bank of England, to the Governor and all of my colleagues on the MPC, and to Her Majesty's Treasury for enabling me to make a contribution to British monetary policy during this difficult and challenging period. I am proud of the work we have done trying to understand and stabilize UK economic performance in the aftermath of the global crisis. I also am sincerely grateful to the many people from all areas of the United Kingdom who engaged with me openly and frankly during my travels for the MPC. 15.15 Wall Street is now open and trading slightly higher - even without any help from Facebook, who's IPO is today (in case you've ben living in a cupboard this week and missed it...). Facebook shares will not start trading until around 4pm London time. The Dow Jones is flat at 12,447 points, while the S&P 500 rose 0.1pc to 1,306.72. The Nasdaq, where Facebook will trade, is off just 0.1pc. 14.34 In case you missed Osborne's speech at the EBRD, here it is in full: Untitled 14.31 Spain's government have approved a new freedom of information law aimed at giving taxpayers a better look at how their money is spent, while punishing officials who miss budget targets. Deputy Prime Minister Soraya Saenz de Santamaria said the bill will go to Parliament for debate after the summer and - if approved - take effect in a year or so, once government internet portals for information-sharing are set up. 14.29 Osborne finishes. Spoke for just 10 minutes. 14.26 "Huge challenges that EBRD can help with. Can support region (south and eastern Mediterranean) to help with youth unemployment. We have not yet mobilised most of our resources. All of us have to up or game. What would our predecessors say? 14.20 Osborne recapping history of EBRD, why it was set up. Eastern European countries have grown twice as fast as Western nations. Still parts of Eastern Europe that need significant support. More now so than a couple of years ago due to European debt crisis. Stormclouds of eurozone crisis are gathering again. Eastern region's growth prospects, like that of UK, are closely tied to eurozone. 14.18 George Osborne steps up to speak. EBRD returned to record profitability and increased lending my 18pc. President Thomas Mirow, international community owes you a huge debt of gratitude. 14.13 Meanwhile, ECB refuses to speculate on Greek euro exit after European Commissioner for Trade admits to emergency plan. 14.05 Maria Fekter, chair of the board of governors at the ECB, introduces UK Chancellor as "Dear George." 13.54 Chancellor George Osborne is about to begin his speech to the European Bank for Reconstruction and Development. Here's a live feed: 13.46 Spanish stocks up 0.7pc at the moment. Rumours of a ban on short-selling, which Spanish banks have asked for. 13.45 EU Commission vice-president Olli Rehn has told Channel 4 there will be "no renegotiation of austerity for the Greeks." He adds: "We are not working on the basis of a scenario of Greek exit." 13.35 Remember that phonecall earlier between Angela Merkel and the Greek president (see 10.02)? She told him that "we hope the country will get a functioning government right after the [June] elections." 13.15 The European Bank for Reconstruction and Development (EBRD) has said that the eurozone debt crisis would slash growth this year across its current and future "transition" countries of operation. The EBRD - which since 1991 has helped ex-communist countries switch to a market economy - forecast growth of 3.1pc this year across a region of operation that comprises 33 countries, including Hungary, Jordan and Russia. Growth in the transition region is expected to substantially slow from 4.6pc in 2011 to 3.1pc in 2012 before modestly picking up to 3.7pc in 2013, as the eurozone debt crisis hurts the region. A further worsening of the eurozone crisis or an oil supply shock are both possible and pose significant downside risks for the region as a whole. In addition, domestic risks have risen in some countries. Chancellor George Osborne will give a speech to the EBRD at 2pm. 13.10 The Telegraph's head of business, Damian Reece, believes the G8 is extremely limited in what it can do to solve the current economic problems. 13.03 Alexis Tsipras, the Greek leftist leader who is tipped to win next month's elections, has said that the country's crisis is a European one, not national. Only because Greece's debts are so large. 12.58 Spain's Deputy PM Saenz de Santamaria says the country is to hold a one-month stress test for its banking system. There will then be a deeper analysis of assets. 12.53 Chancellor George Osborne speaking at 2pm to the European Bank for Reconstruction and Development on "Change in the Face of Economic Turbulence." We'll have the latest here. 12.38 Spanish official trade deficit cut by 29.4% in March to €3.2bn. Exports climbed by 1.2pc and imports fell by 4.6pc. 12.31 Mike Riddell at M&G believes there is no end in sight for the European debt crisis: The disintegration of the euro looks to me to be the most likely outcome... we may get some temporary respite from the panic if Greece manages to form a government, but this will surely just prove temporary as further austerity leads to continued recession, civil discontent and greater support for extremist political parties [which is already scary - 1-in-14 Greeks just voted for a neo-Nazi party]. "The ECB very probably has more tricks up its sleeve, which may be LTRO 3 or perhaps some form of Quantitative Easing [e.g. purchasing a GDP weighted portion of member states" government bonds]. But these measures will again fail to address the underlying imbalances at the heart of the eurozone. 12.27 The Telegraph's Economics Editor Philip Aldrick has tweeted on the euro crisis: 12.12 Quick update on the markets: 11.57 Strange but true fact. Hairdressers in Greece can retire at 50 with a full pension because they are deemed to have a dangerous job - on a par with coal miners and bomb disposal experts. 11.52 Thomas Wieser, a top EU official who heads the panel that prepares meetings of euro-region finance ministers, has said growth in the crisis hit area won't be driven by fiscal policy: We're in the middle of this debate about growth versus austerity. Growth will not come out of the muzzle of a fiscal gun. On balance and in aggregate, we will probably make matters worse if we stop fiscal consolidation... We need to break out of the conundrums of these policy-design failures. We need to break the link between the banks and the sovereigns. 11.47 Paul Krugman, Nobel laureate in economics, believes Greece is undergoing a "bank jog" - like a bank run but slower. 11.45 Citibank fears contagion a lot more than a Greek exit from the eurozone: We believe that Grexit, in isolation, would be manageable for European banks. Grexit, with 50pc to 75pc probability, could impact exposures to Greece of up to around €410bn. However, we estimate most of these exposures (up to around €360bn or 87pc) belong to the official sector. We calculate the remainder is attributable to the private sector: up to €15bn for CASA, SocGen, Bank of Cyprus and Cyprus Popular which have subsidiary or branch exposures to Greece; up to c.€5bn for Greek banks; up to around €20bn to other European banks; and up to €15bn to other investors. Contagion Risks Are Trickier - In the run-up to potential Grexit, all eyes would likely be focused on the contagion risks to Ireland, Italy, Spain and Portugal (IIPS). With sufficient fiscal resources and an accommodating ECB, contagion to Italy and Spain should be manageable. We estimate the ECB would need to deploy up to an additional €800bn in liquidity to support potential deposit outflows and debt refinancing for the IIPS banks - the equivalent of a one LTRO and a half. ECB's assets could rise to around 41pc of EA GDP versus 33pc today. 11.38 De La Rue has drawn up contingency plans to print drachma banknotes should Greece exit the euro and approach the British money printer, an industry source has told Reuters. 11.37 More from Bruno Waterfield in Brussels on the Greek crisis plans drawn up by the EU: How much will it cost... I do not know, but it will cost money. What I am assured of is that there will be no contagion: a Greek exit does not mean the end of the euro," Karel De Gucht said. Painting a grim picture the commissioner said that if Greece left the euro it was "finished" and that, while the euro would survive it would have to fight off a "cataclysm." It [Greek exit] means that after a while you can no longer pay your officials who can no longer pay your pensions," he said. 11.09 We've put together a schedule for today's G8 summit. Should be an interesting event, with the eurozone debt crisis sure to dominate the agenda. Canada has said it expects the G8 to "contemplate" Greek exit from eurozone. 11.05 German police have begun removing anti-capitalist protesters from outside a Frankfurt skyscraper that is Goldman Sachs' home in the German financial capital. The demonstration was part of a four-day-long "Blockupy" protest, due to run until Saturday, against capitalism and austerity measures implemented to tackle the eurozone crisis. 11.01 The Telegraph's Bruno Waterfield is in Brussels with the latest on the new that the EU is working on emergency plan for a Greek euro exit: EU officials are horrified that one of their number has let the cat out of the bag. Until today, European Commission and European Central Bank officials peddled the line that there was no such plan. And that "Grexit" was simply unthinkable. Karel De Gucht, a former Belgian foreign minister before he became EU trade commissioner, would be one in the know as he holds a key economic portfolio. His remarks that the EU is ready to handle the "cataclysm" of Greek exit without a "domino effect" will seem highly complacent given the financial turmoil engulfing Spain. "Totally off message," was the verdict of one EU diplomat. As G8 leaders gather, it is yet another sign that eurozone and European leaders are in disarray with France insisting that Greece must be helped and Germany, with key EU officials onside, planning to leave the Greeks to their fate. 10.57 The German finance ministry has said it has a responsibility to be prepared for any eventuality in the eurozone. It added that it believes Spain can deal with its bank problems. The language from politicians during this Greek crisis has been a lot more negative than the last time. Have they concluded that Greece can't stay in the euro? 10.46 Ilya Spivak, currency strategist at DailyFX, believes market traders could be taking profits ahead of the weekend: European shares down in early Friday trade with risk appetite still under pressure as yesterday's disappointing set of US economic data dents hopes that an accelerating US recovery will help offset slowing performance in Europe and Asia. Mounting Eurozone crisis woes are compounding the dour mood after Moody's downgraded 16 Spanish banks overnight, stoking fears that lenders in the currency bloc's fourth-largest economy [and possibly elsewhere] may buckle as Greek-born jitters metastasize region-wide. However, three consecutive weeks of aggressive selling across the spectrum of risky assets may force a period of profit-taking, with traders unlikely to be willing to carry significant directional exposure into the weekend given the degree of unprecedented uncertainty surrounding the satiation in the Eurozone. S&P 500 stock index futures have erased overnight losses and now trade flat, hinting that a correction may be brewing. 10.37 We are hearing rumours that Spanish nationalised lender Bankia could ask for €10bn in state aid to strengthen its balance sheet. 10.23 The bond markets are holding up well, however. Spanish 10-year yields still over 6pc but they have eased this morning, as have Italian. UK yield now at 1.829pc. 10.15 Quick update on the markets: 10.11 Brent crude oiil may fall to $80 a barrel if Greece leaves the euro, says Bank of America. It's currently trading at $107. Any chance the price of petrol would fall with it? 10.08 Herman Van Rompuy, president of the European Council, is off to the G8 summit: Here's what the event will focus on: eu 10.02 Greek President Karolos Papoulias has held talks with German Chancellor Angela Merkel. No information on what was said, but we're trying to find out. 09.58 German finance minister Wolfgang Schaeuble appears to have a crystal ball. After saying this morning that "in 12 to 24 months we will see a calming of the financial markets" (see 7.25), he now believes that "concerning the euro's crisis of confidence, that won't take so long. I think it'll move much more quickly. Handy, those crystal balls. 09.50 Karel De Gucht, European Commissioner for Trade, has said te ECB and EU Commission are working on emergency scenarios for a Greek euro exit. He told Belgium's Dutch-language newspaper De Standaard: A year and a half ago there may have been the danger of a domino effect. But today there are, both within the European Central Bank and the European Commission, services that are working on emergency scenarios in case Greece doesn't make it. 09.41 However, the Spanish central bank has said the country's bad loans have hit their highest level since 1994 (see 08.58). They hit €147.968bn. Strangely, Spanish banking shares are up significantly today - Bankia has risen 31.1pc. 09.40 Inigo Fernadez de Mesa, a junior minister at the Spanish treasury, has told Radio 4's Today programme that there is "no liquidity problem" in his country: 09.34 Barclays: "The costs [and the risks] for Greece and Europe greatly exceed the benefits. If the size of the firewalls increase and the process of EU integration accelerates, a Greek exit would become less costly for Europe.