Debt crisis: as it happened, October 3, 2012 18.08 ...while a third official told Reuters that Greece and the troika were arguing over how much the economy will contract next year. The debt inspectors expect Greece's economy to shrink by 5pc, more than the government's 3.8pc forecast. 17.43 Another Greek official told AFP that the country hopes to reach accord with international creditors by Monday. More meetings will be held...we will know where we are on Monday [when eurozone finance ministers are to meet in Luxembourg]. 17.15 Greece's talks with European debt inspectors are progressing well, but there is still "a large gap" between the two parties, according to the country's finance minister. Yannis Stournaras told reporters: Discussions with the troika are on a good track. There is still a large gap, we are trying to reach a compromise to seal a deal. A Greek municipal worker shouts slogans during a protest in front of the Greek Parliament in central Athens on Wednesday (Photo: EPA). 17.05 Commenting on today's market movers, the team at Capital Spreads, said: Up a bit, down a bit, up a bit, down a bit. The markets continue directionless as investors grapple with better than expected economic data from across the pond on one hand and a continued reluctance from Spain to go down the route of a bailout on the other. The encouraging thing is that even if the Europeans can't get their houses in order, the world's biggest economy is in good shape, creating jobs and growing which is good for the globally exposed stocks of the FTSE 100 and a disappointing services survey earlier in the morning was long buried and forgotten once the US numbers came out. This bodes well for this Friday's non-farm payroll which remains a major market mover across all asset classes. Whilst the gains are hardly explosive, at least the sellers are being kept at bay and in the UK there were some bright spots on the earnings front with Sainsbury and Easyjet surpassing estimates. 17.00 European stock markets have closed. The FTSE 100 in London finished up 0.3pc at 5,825.81, while the CAC 40 in Paris fell 0.2pc to 3,406.02 and Frankfurt's DAX rose 0.2pc to 7,322.08. The IBEX 35 in Madrid fell 0.5pc to 7,826.70. 15.35 It also plans to introduce a financial transactions tax next year. The government is still working on further spending cuts, says Mr Gaspar. 15.32 The government will also introduce a "4pc income tax surcharge" in 2013. A new capital tax and luxury property tax will also kick in this year. 15.29 The country will reduce the number of income tax brackets to boost revenues. This will effectively take the average rate of income tax to 11.8pc, from the current level of 9.8pc. Portugal currently has eight income tax brackets. 15.23 Now for the meaty bit. The government reiterates its forecast that the economy will contract by 1pc in 2013, and grow by 1.2pc the following year. Unemployment will rise to 16.4pc next year, he adds. Mr Gaspar says that additional measures worth 3pc of GDP are needed next year so the country can meet its targets. A woman walks by a graffiti reading "General Strike! Passos Out!" in Lisbon on Wednesday (Photo: AFP). 15.15 Mr Gaspar says that the country is now considering issuing medium-term debt. 15.11 The crisis was caused by too much debt, says Mr Gaspar, but today's successful bond swap (see 12.07) shows that the country is making good progress. He compares Portugal's progress to that of austerity poster child, Ireland. 15.08 Portugal's finance minister Vitor Gaspar has started his press conference on the country's bail-out and new austerity measures. He starts by saying that there has been "intensive" public debate over the country's adjustment programme (aka lots of protests), but reform is at risk if there is no consensus. Portugal's Finance Minister Vitor Gaspar shuffles his papers during a news conference to announce new austerity measures on Wednesday (Photo: AP) 15.01 European Commission president Jose Manuel Barroso has attempted to address the confusion over EU plans to recapitalise struggling banks. Mr Barroso, who held talks with Irish Taoiseach Enda Kenny in Brussels today, said: We had an exchange of views on the Commission's proposals for a banking union, in particular the single supervisory mechanism. We are both determined to see the single supervisor in place as soon as possible, not least because it is an essential condition for the ESM to directly recapitalize banks. I will make clear at the next European Council in October that we must stick to the commitments we made in June European Council. It is a question of credibility for the EU and for all the member states that are our Union. However, this still doesn't address the issue of "legacy debt" - which Germany, Finland and the Netherlands said last month could not be taken on by the European Stability Fund (ESM). European Commission President Jose Manuel Barroso (R) and Irish Taoiseach Enda Kenny (L) give a press conference following their working session on Wednesday at the EU Headquarters in Brussels (Photo: AFP). 14.42 A post-lunchtime blog by Ambrose Evans-Pritchard this afternoon. The title? Multiplying Europe's fiscal suicide (technical). I'll leave him to explain... The entire EU austerity plan is based on a false premise. This disastrous error is now clear beyond any reasonable doubt. The Teuto-Calvinists believe - or profess to believe, since much of their dogma is national self-interest dressed up as theory - that the fiscal multiplier is around 0.5. That is to say, fiscal retrenchment worth 1pc of GDP will cut output by half as much, or around 0.5pc over two years. There is pain, but at least there is gain. This is based on the IMF's analysis of fiscal crises over the decades. Well, it has not worked out like that. Ireland has contracted at nearly seven times the speed, Spain four times, and Greece three times. Here is a table put together by Jean-Michel Six from S&P using IMF data: Apologies for the size of the table, you can see a larger version here. As you can see, the multiplier is around 1.0 for the big countries, which is why France can expect a devastating year in 2013 as it tightens pointless by 2pc to comply with EU rules. And why the world faces a full-blown shock if the US goes over the fiscal cliff and tightens by 4pc next year. 13.59 A full-scale Spanish bail-out is "inevitable," according to the president of Catalonia. Artur Mas said that Madrid should ask for help without delay: External aid will be inevitable, so it would be better to face it without a lot of delays Spain has the potential to emerge from this situation ... but it needs help for a period. Mr Mas also said there was no need to dramatise the situation. He said that the European Union had previously supported Spain's economic development: Spain is already used to being helped. 13.41 Portugal may still have a funding gap of €9bn by the end of next year, despite today's debt exchange, according to economists at BNP Paribas. Portugal exchanged €3.76bn today of a €9.7bn bond maturing in September 2013 (see 12.07). However, in a note today, Ricardo Santos said that Portugal's revised budget deficit targets (to 5pc from 4.5pc in 2012, and 4.5pc in 2013 from 3pc) meant that its funding needs could increase by €800m this year and €2.5bn in 2013. Based on these calculations, Portugal will still have a funding gap close to €9bn that will need to be covered via market financing or additional aid, BNP said. 13.05 Cyprus is playing hardball with the IMF over the terms of a potential bail-out President Demetris Christofias told Greek state broadcaster NET that he would not sign any deal which called for the sale of profitable state-owned assets, or the abolition of inflation-linked salary increases. However, Mr Christofias added: We aren't just saying 'no' to them. We are giving them counterproposals. Cyprus is currently talking to Russia, which has already lent Cyprus €2.5bn, about another bail-out loan. Russia's finance minister Anton Siluanov said last week that it would only grant a bailout loan to Cyprus as part of a co-ordinated rescue with the European Union. Demetris Christofias is a Soviet-educated, Russian-speaking leader who describes himself as a longtime friend of Moscow (Photo: AFP). 12.35 More details about Spain's "bad bank" are emerging. Economy minister Luis de Guindos has said that the bank will buy assets at conservative prices and that its creation will "dynamise" the country's battered housing market The bank will only accept loans above €200,000 and property assets above €100,000, he added. Spanish economy minister Luis de Guindos arrives at parliament's lower house on Wednesday (Photo: EPA). 12.07 Portugal dipped its toe back into the bond market this morning, successfully exchanging short for longer-term bonds in its first debt swap since it agreed a €78bn international bail-out last year. Portugal's debt agency sold €3.76bn of three year debt at a coupon of 3.35pc, exchanging the bonds for debt maturing in September 2013 (5.45pc). Commenting on the debt sale, Sergio Calpadi at Intesa SanPaolo told Reuters: This is a very positive development for Portugal. We've seen Portuguese bonds performing well like Ireland and so not everything in Europe is going to rot. 11.48 This morning, Luis Morais Sarmento, the budget secretary, told parliament that Portugal's 5pc of GDP budget deficit target was achieveable. Mr Sarmento said that while the deficit goal for this year was currently off by about 1.6 percentage points, the sale of airport operator ANA-Aeroportos de Portugal would help it to narrow the gap. 11.30 Portugal is preparing to present a fresh package of austerity measures to parliament, after backtracking on previous cuts following mass protests. The new measures, which are expected to include several tax hikes, were given provisional approval yesterday by the European Commission. Protests forced the government to shelve a proposal on increasing workers' social security payments, which would have cut wages by about 7pc. Unemployment has become a rising problem in Portugal. The jobless rate has jumped by one percentage point to 15pc since the start of 2012. 10.55 The global economy will take at least a decade to recover from the 2008 financial crisis, according to the IMF's chief economist. In an interview published today, Olivier Blanchard told Hungarian website Portfolio.hu: It's not yet a lost decade... But it will surely take at least a decade from the beginning of the crisis for the world economy to get back to decent shape. He also said that Germany would have to get over its fear of inflation if it is to help weaker eurozone countries recover. A somewhat higher inflation rate in Germany should simply be seen as a necessary and desirable, relative price adjustment (desirable even from the narrow point of view of Germany, as this real appreciation increases the real income of the German people). Given overall demand conditions and the ECB's strong mandate to ensure price stability, this is not the beginning of hyperinflation... 10.32 One of Spain's biggest housebuilders has collapsed (hat tip to reader poitierslimoges for this). Rivero y Soler - controlled by the Joaquín Rivero family and ally Bautista Soler, has presented one of the largest bankruptcy proceedings in Spanish corporate history, according to El Pais, with liabilities of €1.6bn. Among the major creditors is state-owned RBS, for €212m, or 13pc of Rivero y Soler's total liabilities. RBS is the housebuilder's fifth largest creditor (Photo: Getty). 10.18 A report yesterday by the Financial Times has caused a bit of a stir this morning.