Debt Crisis as its Happening

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Debt crisis: as it happened - June 26, 2012
New proposals for a “banking union” pose a threat to
London, proposals prepared for Friday's EU summit
show, while Angela Merkel says there won't be shared
debt in Europe "as long as I live".
19.05 That's where we leave our live coverage for today. We'll be back first thing in the
morning to pick up where we left off. Have a good night.

18.43 Our own Jeremy Warner has looked long and hard at the new EU Grand Plan and
decided: it won't work.

Ambitious plans to be put before this week's EU summit – yes indeed, yet another crisis
summit – to turn the eurozone into something much closer to a fiscal union make for easy
analysis. On almost any level you care to take, they won't work.

As for the immediate crisis, it does nothing to address that. Wriggle and squirm as
Europe might, it still remains hard to see how this crisis can end in anything other than
an almighty pile up.

18.11 A lawmaker from Germany's governing coalition says Angela Merkel told a party
meeting that there won't be a full shared debt liability in Europe "as long as I live". That
rules out Yanis Varoufakis's second point in the post below...

18.09 Greek economist Yanis Varoufakis has published an interesting interview in
which he says his country's economy is "finished":

They cannot fix the Greek economy. The Greek economy is finished. The Greek economy
is in a great, great depression. The growing social economy is in its long, long winter of
discontent. There is no power, no force within the Greek economy, with Greek society
that can avert – it’s like – imagine if we were in Ohio in 1931 and we were to ask: what
can Ohio politicians do to get Ohio out of the Great Depression? The answer is nothing.

He adds that there are three steps to saving the eurozone:

• Unify the banking system, to have it being funded directly, not through national

• Common European debt - eurobonds.

• An investment policy which runs throughout the single currency area.

17.53 Reuters reports that eurozone governments are discussing removing the preferred
creditor status from the ESM.

17.30 Ladbrokes has slashed the odds on a country announcing it will leave the euro at
this week's summit to 6/1 from 10/1.

It also has odds of 25/1 that Greek ministers will "set an example to the nation" and
decide to camp during the summit, which starts on Thursday, or stay at a low-cost hotel.

17.01 European markets are closed for the day. Spanish and Italian stock markets have
continued to fall.

The IBEX 35 in Madrid finished the day down 1.4pc, while the FTSE Mib in Milan
ended 1.1pc lower. The FTSE 100 in London finished flat, at 5,446.96.

16.50 Eurozone finance ministers will discuss formal requests for financial assistance
from Spain and Cyprus this afternoon in a hastily-arranged teleconference.

According to AFP, the Eurogroup will "rapidly examine the requests from Spain and

16.40 Some good news (finally)! The Dutch economy managed to crawl out of recession
in the first three months of the year, according to revised figures from the government's
statistics office.

Previous estimates showed the economy had contracted by 0.2pc in the first quarter. This
has been revised to show growth of 0.3pc. This was mainly due to revised consumer
spending figures, which were not as weak as previously thought.

16.29 Chris Beauchamp at IG Index comments on today's market movers ahead of the

Despite several valiant tries, markets remain stuck in a downbeat mode for a second
consecutive day. Weaker figures from the US, in the shape of consumer confidence and
the Richmond Fed index, combined with a lingering sense of nervousness ahead of this
week’s eurozone summit. This week’s summit is the nineteenth meeting of European
leaders, but it seems to be doomed to the same inglorious failure as all its predecessors.
Germany once again stuck to its familiar line on the pooling of debt, saying this would

require greater oversight from Brussels. After more than two years of crisis we are left
with the same problem, namely that Germany won’t take on everyone else’s liabilities,
while the other countries remain opposed to a reduction in their sovereignty. One
wonders how long the eurozone can carry on in this fashion.

15.41 Italy's prime minister, Mario Monti, says that Europe needs a mechanism to limit
bond spreads widening for countries that respect public finance rules. He's also said that
he'll send a letter to European leaders tomorrow explaining the progress that Italy has
made with reforms.

15.23 US consumers grew more pessimistic about the economy for the fourth consecutive
month in June. The Conference Board said its consumer confidence index fell to 62, its
weakest level since January. The research firm revised the May reading a half-point
lower to 64.4.

14.57 Away from bond auctions and eurozone grand plans, George Osborne is to halt the
fuel duty rise in August and freeze it for the rest of the year. The Telegraph's James
Kirkup tweets:

<noframe>Twitter: James Kirkup - Osborne: We will stop any rise in fuel duty this
August, and freeze it for the rest of the year.</noframe>

14.54 We reported earlier (13.42) that Italy's government said it will give struggling
Banca Monte dei Paschi di Siena, founded in 1472, financial aid of up to €2bn. In honour
of that, we've put together a picture gallery of the world's oldest banks.

14.44 Jeremy Warner, the Telegraph's assistant editor, has blogged on how this
morning's public finance figures threaten the Chancellor's fiscal mandate:

The run of decent economic news came to an abrupt end this morning with the
announcement of an exceptionally poor set of numbers on the public finances. So much
for austerity. Central government spending and the deficit are continuing to rise, both
year on year and year to date.

If this carries on, then there is a real danger of the Office for Budget Responsibility
finding the Government in breach of its fiscal mandate when it does its next update at the
time of the autumn statement.

The fiscal mandate requires both that the national debt is falling as a proportion of GDP
by the end of the parliament and that the structural deficit is eliminated within five years.
The first of these targets is fixed, the second is adjudicated on a rolling basis.

This makes the mandate pretty flexible, for it allows for use of the automatic stabilisers if
growth stalls, as it has, and therefore for the holy grail of balanced budgets to be moved
ever further into the future. But is it flexible enough to save George Osborne the
embarrassment of having to admit he may be in breach? Perhaps not.

14.26 The Financial Times is running a story this afternoon that Herman van Rompuy
scaled back his plan for the eurozone (see 10.47) with the document on fiscal union less
ambitious than previous drafts. The Telegraph's Bruno Waterfield tweets:

Twitter: Bruno Waterfield - gang of 4 EMU report as published heavily scaled back
compared to draft reported by @SpiegelPeter - the influence of France?

14.10 Some news from the other side of the Atlantic. In America, home prices have risen
for a third month on the trot, suggesting the recovery in the housing market is gaining

The S&P/Case Shiller composite index of 20 metropolitan areas gained 0.7pc on a
seasonally adjusted basis, topping economists' expectations of 0.4pc.

On a non-seasonally adjusted basis, prices fared even better, rising 1.3pc.

13.54 A brief survey of the markets shows that the FTSE 100 is just about keeping its
head above water, rising 8 points to 5459. But, Spain's IBEX is down 25 points to 6599
and Italy's MIB is down 32 points to 13081.

Spain's 10-year yield is up 10.4 basis points to 6.7pc while Italy's is up 5.5 basis points to

The euro is trading at €1.2468.

13.42 The world's oldest bank is in need of a pick-me-up. Italy's government said it will
give struggling Banca Monte dei Paschi di Siena, founded in 1472, financial aid of up
to €2bn.
On top of the aid, the government is to substitute a loan it gave the bank in 2009 with a
new loan, bringing the total amount of aid channelled into BMPS to a maximum of

13.30 We are learning a little more about the man in charge of Greece's finances. Yannis
Stournaras, the 55-year-old economist appointed today as Greece's new finance
minister, is known in Greece as "Mr Euro".

"Mr euro," aka Yannis Stournaras (Photo: AFP)

Reuters reports that he is seen as a liberal economist and an ardent supporter of structural
reforms to open up the economy and make it more competitive - ideas that are likely to
win him favour with Greece's exasperated foreign lenders.
He was chief economic adviser and aide to former Prime Minister Costas Simitis when
Greece was negotiating entry to the euro, which it joined in 2001.

It was unclear whether Stournaras would be ready to go to a European summit on
Thursday and Friday. Prime minister Antonis Samaras, who emerged from hospital on
Monday with a bandage over one eye following surgery, will miss the meeting.

13.05 Citigroup's Willem Buiter reckons that after Spain's bailout, it could soon be a
troika programme:

After Spain’s still-to-be-finalised euro area bank bail-out, we expect it to be in a troika
programme with sovereign conditionality, quite possibly soon.

After Spain’s bank bail-out, Cyprus or Italy will be the next euro area countries to apply
for a troika bail-out, in our view. We believe the need for a sovereign bail-out for Spain
and Italy will be driven by a lack of affordable access to market funding and a lack of
credibility of the respective sovereigns’ commitments to engage in sufficient fiscal and
structural reform.

These sovereign bail-outs are highly likely to involve fiscal and structural reform
conditionality for the sovereign. They are also likely to aim to retain partial market
access for Italy and Spain, relying on a mix of ECB-subsidised funding and financial
repression to ensure take-up of the residual government funding needs by domestic banks
and other financial institutions.

Spain or Italy may be able to access one of the precautionary EFSF/ESM programmes,
but those programmes would still likely come with sovereign conditionality. Primary or
secondary market purchases by EFSF/ESM could be part of either a precautionary or a

normal EFSF/ESM programme. Any programme would require a request from Spain or
Italy and unanimous non-objection by the Eurogroup.

12.41 Ian Dey, deputy business editor at The Sunday Times, gleans this lesson from

<noframe>Twitter: Iain Dey - New lesson from <a
href="" target="_blank">#Greece</a>...
finance ministers should be appointed on same basis as ageing footballers: subject to

12.35 It's official. Yannis Stournaras is Greece's new finance minister. The office of
Antonis Samaras, prime minister, said:

Prime Minister Antonis Samaras has decided to name Athens University economics
professor and Director of (economic think-tank) IOBE Yannis Stournaras as Finance

12.24 Spain's finance minister, Luis de Guindos, has been talking today about the rescue
package for the country's banks. Spain made a formal request for a package worth up to
€100bn on Monday.

Scuppering hopes for a quick rescue of the country's ailing lenders, Mr de Guindos said:
"This is a very complex package, the negotiation will take time."

He added that talks with EU authorities would focus on four areas: conditions of the
credit line; restructuring conditions for banks that receive aid; conditions for the whole
sector; and other measures such as setting up "bad banks" for parking and selling off
toxic real estate assets.

12.09 A midday round-up of developments so far today:

- Spain saw its short-term debt costs almost triple in an auction this morning as its request
for a €100bn rescue package for the country's banks failed to stem market fears.

- A report compiled by Barroso, Van Rompuy, Draghi and Juncker ahead of this week's
eurozone summit presents a plan for rescuing the eurozone including creating a closer
fiscal and banking union that would turn Brussels into a finance ministry for all eurozone
members. Under the plan, the European Union could be handed powers to change
countries' budgets if they breach debt and deficit rules.

- Finance chiefs of the eurozone's four biggest economies - France, Germany, Italy and
Spain - will hold last-minute talks in Paris on Tuesday evening to try to narrow
differences on the currency area's future

- Mervyn King has warned that the outlook for the UK economy has worsened during
recent weeks due to the eurozone turmoil; that came as public sector net borrowing rose
much more than expected

12.01 Some more chatter on who could get the post of Greek finance minister following
the resignation of Vassilis Rapanos on Monday due to ill health. According to Reuters,
four officials have suggested that Yannis Stournaras, a respected economist who was part
of the team that negotiated the country's entry into the euro, could get the job.

11.49 Mervyn King has warned that the outlook for the UK economy has worsened
over the past few weeks due to the turmoil in the eurozone:

In the last six weeks... I am very struck by how much has changed since we produced our
May Inflation Report. I am pessimistic [about the eurozone outlook]. I am particularly
concerned because over two years now we have seen the situation in the euro area get
worse and the problem being pushed down the road.

11.41 European Commission president, Jose Manuel Barroso, has also been speaking
this morning. Lorcan Roche Kelly, chief Europe strategist at Trend Macrolytics, tweets:

<noframe>Twitter: Lorcan Roche Kelly - Journalist at Barroso press conference asks
how easily negotiations will proceed with new Greek government "When they are out of

11.14 Italy and Spain are not the only ones to have been auctioning debt this morning -
the UK has also been selling index-linked bonds. Ed Conway, economics editor of Sky
News, tweets:

<noframe>Twitter: Ed Conway - Wow. Uk govt sells &#163;1.25bn of 17yr index-linked
(eg inflation proof) bonds at a NEGATIVE yield: -0.108%. And covered healthy 1.83

<noframe>Twitter: Ed Conway - Obviously that -0.108% on those uk govt bonds is a real
yield - eg after inflation. Nonetheless shows how deep into the twilight zone we

10.50 Following Spain's debt auction earlier, the results are now in from Italy's auction.
The country paid 4.7pc to sell two-year paper, a new high since December. That reflects
increasing investor doubts over whether the summit later this week will deliver a decisive
answer to the single currency's crisis.

Italy sold a total of €3.9bn in zero-coupon and inflation-linked bonds - near the top of its
planned range - ahead of a six-month bill sale on Wednesday and a more challenging
offer of five- and 10-year debt for up to €5.5bn on Thursday.

10.47 The European master plan that we embedded earlier (10.32) does not seem to be
displaying correctly for everyone, so here's a link to the report presented by Herman van
Rompuy, European Council president, in case you can't read it on our blog.

The Telegraph's Bruno Waterfield has also penned a dispatch on the plan:

It seems to be curtains for the London based European Banking Authority – the new euro
plan for "an integrated financial framework" does not even mention it.

The text says:

"An integrated financial framework should cover all EU Member States, whilst allowing
for specific differentiations between euro and non-euro area member states on certain
parts of the new framework that are preponderantly linked to the functioning of the
monetary union and the stability of the euro area rather than to the single market."

It goes on to stress the importance of "a single European banking supervision system"
without mentioning the EBA and highlighting a new role for the ECB.

There are also chilling words for the government with the strong emphasis of putting EU
supervisory structures above national bodies. Germany will take no prisoners on this
demand and is not inclined to give the City of London "safeguards" after repeated calls
by Britain for members of the single currency to backstop banks.

"The current architecture should evolve as soon as possible towards a single European
banking supervision system with a European and a national level. The European level
would have ultimate responsibility," the text says.

A senior eurozone official told me: "If we want to protect our currency we need tighter
structures, this view is shared by David Cameron because the UK also suffers when the
eurozone is weak. Why should we pay a price to make safeguards to do what others ask
us to do?"

Britain's only leverage, which could lead to a major summit row is a veto over the use of
the ECB as a banking regulator, which requires unanimity.

Germany and France support putting the European Central Bank in charge of eurozone
bank regulation. This means gutting the current London-based EBA, which would
become a glorified single market watchdog, and shifting power to Frankfurt.

"Such a system would ensure that the supervision of banks in all EU Member States is
equally effective in reducing the probability of bank failures and preventing the need for
intervention by joint deposit guarantees or resolution funds. To this end, the European
level would be given supervisory authority and pre-emptive intervention powers
applicable to all banks. Its direct involvement would vary depending on the size and
nature of banks. The possibilities foreseen under Article 127(6) TFEU regarding the
conferral upon the European Central Bank of powers of supervision over banks in the
euro area would be fully explored."

Many countries blame the EBA for failing to act on the Spanish banking crisis leading an
EU bailout that is expected to cost the eurozone €100 billion.

"A credible EU banking supervisor is the right demand, the EBA in its present form is not
credible,” said a EU official.

10.41 The Bank of England governor has also commented on the computer glitch at
RBS. He says that the problems were not related to liquidity at all, but are operational and
there is no risk to the general payment system. Jeremy Warner of the Telegraph also

<noframe>Twitter: jeremy warner - <a href=""
target="_blank">#BofE</a>'s King promises "very detailed" investigation of what went
wrong at RBS. Shows how banking should focus on basic services.</noframe>

10.38 A couple of highlights of what Merv has said so far:

Monetary policy still does work by injecting more money into the economy.

They've (British banks) all been pre-positioning large amounts of collateral under the
discount window facility and we welcome that.

10.35 Mervyn King is speaking this morning in front of the Treasury Select Committee.
Our economics editor, Philip Aldrick, is there and tweets that it's rather busy...

<noframe>Twitter: Philip Aldrick - Huge queues at Portcullis House. Even BoE's David
Miles turned way and told: 'Everyone's giving evidence today. Get in line.'</noframe>

10.32 In case you fancy reading the whole thing, here's a copy of that Euro master plan
that we mentioned earlier:

10.17 Some more comment on this morning's public finances data. Olan Kerrison, head
of product management at Moneycorp, described the Chancellor's Plan A as "kaput".

The spike in public sector borrowing, to £17.9bn in May, is a body blow to the
Chancellor and the coalition government's handling of the economy.

There is often a dip in tax revenues in May, following the end of the tax year, but this
doesn't hide the fact that borrowing is significantly higher than in May 2011 when it was
just £15.2bn.

The simple fact of the matter is that tax revenues are down — and borrowing up —
because the economy is weak. Unfortunately, there is every chance the economy will
weaken further in the months ahead as the Eurozone unravels.

10.03 Howard Archer, chief UK and European economist at IHS Global Insight,
says that the public finances in May make bleak reading for Chancellor George Osborne.

The May public finances make pretty bleak reading for the Chancellor. Only two months
into the fiscal year, it is evident that Mr. Osborne is facing a major battle to meat his
fiscal targets for 2012/13 and is in grave danger of losing it. The current weakness of the
economy is clearly taking a serious toll on tax receipts while spending is currently rising
at a well above target rate. And just to rub it in for the Chancellor, the Public Sector Net
Borrowing Requirement in 2011/12 was revised up to £127.6 billion from the previously
reported £124.4 billion.

He adds:

Of course it is early days in the fiscal year, and much can yet happen. But the Chancellor
desperately needs the economy to quickly return to growth, or else he faces suffering a
significant shortfall on his public finance targets. And a growing threat to the UK’s AAA
credit rating which is so prized by the government.

09.54 The scores on the doors from Spain's auction are in and they are not particularly
pretty, with Spain having to pay more to borrow. Spain has sold both 3-month and 6-
month treasury bills; the yield on the 3-month has leapt to 2.4pc from 0.8pc previously
while the yield on the 6-month has climbed to 3.2pc from 1.7pc. Demand has also
dropped off, with the bid-to-cover ratio on the 3-month dropping to 2.6 against 3.9 last
time and falling to 2.8 versus 4.3 last time on the 6-month.

09.43 Some more details and reaction on the borrowing figures. The Office for
National Statistics said that public sector debt as a percentage of GDP (excluding
financial interventions) was 65pc - a record for the month of May and the third-highest
on record.

Ross Walker, an economist at RBS, said: "Today's figures aren't so bad but it still looks
like a sizeable underlying deterioration."

09.37 Public sector net borrowing in the UK was higher than expected in May after
income tax receipts fell, while spending rose. Borrowing, excluding financial
interventions, came in at almost £18bn compared to a forecast of £14.8bn.

09.20 A quick scoot round the markets: the FTSE 100 is up 12 points to 5462; France's
CAC is up 7 points at 3028; Germany's DAX is 19 points higher at 6151. Spain's IBEX is
up 44 points to 6668 and Italy's MIB is up 48 points to 13163.

Italy's 10-year bond yield is hovering just below 6pc, rising 1.5 basis points to 5.998pc.
Spain's is up 3.6 basis points to 6.6pc.

Meanwhile, the euro is trading at $1.2520, having touched $1.2471 yesterday.

Clear Currency said that the euro is ignoring bad news, remaining "suprisingly resilient in
the face of an every deteriorating environment".

09.04 Reuters has now got hold of the document prepared for this week's eurozone
summit. The report was compiled by European Commission President Jose Manuel
Barroso, European Council President Herman Van Rompuy, European Central Bank
President Mario Draghi and President of the Eurogroup Jean-Claude Juncker (pictured
below with Draghi).

According to the newswire, it suggests the eurozone could create a treasury for the single
currency and issue eurobonds in the medium term as the final stage of a fiscal union.

Here are some other snatches from the report:

In a medium-term perspective, the issuance of common debt could be explored as an
element of such a fiscal union and subject to progress on fiscal integration

Steps towards the introduction of joint and several sovereign liabilities could be
considered, as long as a robust framework for budgetary discipline and competitiveness
is in place to avoid moral hazard and foster responsibility and compliance

The process towards the issuance of common debt should be criteria-based and phased,
whereby progress in the pooling of decisions on budgets would be accompanied with
commensurate steps towards the pooling of risks

Several options for partial common debt issuance have been proposed, such as the
pooling of some short-term funding instruments on a limited and conditional basis, or the
gradual roll-over into a redemption fund

08.49 Jim Reid at Deutsche Bank points out that the markets are not expecting much
from this week's summit: "After 3-4 days of lower markets it seems that expectations for
this week's EU summit have been scaled back. Simultaneously the market has moved on
to be worrying about global growth." He adds:

Ahead of this summit it doesn't seem from Mrs Merkel's comments yesterday that she is
softening her rhetoric. She said yesterday in Berlin that "I say quite openly: when I think
of the summit on Thursday I'm concerned that once again the discussion will be far too
much about all kinds of ideas for joint liability and far too little about improved oversight

and structural measures". She also added that "euro bonds, euro bills and European
deposit insurance with joint liability and much more" are "economically wrong and
counterproductive". So the summit is likely to be one where several ideas are put on the
table but that agreement on anything meaningful is likely to be low. It seems like the
crisis needs to take another turn for the worse to focus the minds on a more radical

08.38 Ian Traynor, the Guardian's Europe editor, has got his mitts on a copy of the
master plan for the future of Europe and the single currency. He's written a few tweets on
this grand plan:

<noframe>Twitter: Ian Traynor - <a href=""
target="_blank">#europe</a>'sgrandplan "a coherent complete architecture to be put in
place over next decade, possible changes to EU treaties at some point."</noframe>

<noframe>Twitter: Ian Traynor - <a href=""
target="_blank">#europe</a>'sgrandplan - warning to cameron. "integrated financial
framework (bank union) should cover all, whilst allowing differentiations"</noframe>

<noframe>Twitter: Ian Traynor - <a href=""
target="_blank">#europe</a>'sgrandplan "possibilities under treaty on conferral on ECB
of powers of supervision over banks in euro area to be fully explored."</noframe>

08.24 With Greece's new finance chief resigning yesterday, having spent the last few
days in hospital, thoughts are turning to who will take up the mantle. Greek newspaper,
Kathimerini, tweets:

<noframe>Twitter: Kathimerini English - Caretaker Development Minister Yiannis
Stournaras is being pegged as most likely finance chief <a

08.09 The FTSE 100 had made modest gains at the open, rising almost 17 points to 5467.

07.56 Another chinwag is in the offing. French finance minister, Pierre Moscovici, has
told France Info radio that he will meet with the finance ministers of Germany, Italy and
Spain in Paris this evening ahead of the EU summit at the end of the week.

"We want to work with Germany," Moscovici said, asked about the pressure on President
Francois Hollande and German Chancellor Angela Merkel to reach an agreement on
ways to curb the spiralling euro zone crisis. He added:

Tomorrow there is a meeting, which will be very important, between Francois Hollande
and Angela Merkel and this evening I will receive the finance ministers: Mr. Schaeuble
from Germany, Mr. Monti or Mr. Grilli of Italy and Mr. de Guindos of Spain along with
the European Commissioner. We are in an active phase of preparation of this summit.
07.40 There are a couple of auctions today which traders will be keeping a close eye on.
Spain is set to auction three-month and six-month bills, while Italy will sell up to
€3bn in debt. The auction comes Spain and Italy's bond yields pushed higher on Monday
amid fading hopes that this week's EU summit will come up with any decisive action to
tackle the festering crisis.

Michael Hewson of CMC Markets commented:

With bond yields rising in Spain, Italy’s yields have also been dragged higher as fears
remain as to whether Italian PM will be able to continue along with his current reform
program. Today’s Italian bond auction of up to €3bn is likely to be another key test of
demand with 10 year yields once again back above 6%, while Spain is also looking to sell
three and six-month T-bills, just a week after selling one year paper at over 5%.

07.30 Figures this morning show that consumer morale in Germany unexpectedly
edged up going into July, rising to 5.8 from 5.7 in June. Sentiment was boosted by
improving income expectations, although worries over the eurozone crisis risk hurting
consumption in the months ahead, a survey by GfK found.

07.27 Cyprus has become the fifth eurozone country to seek emergency funding from
Brussels and with the country not specifying how much money it actually needs,
speculation is rife in the Cypriot media as to what the amount will be.

Reuters writes that Cypriot newspapers reported that the Mediterranean island, whose
banking sector is heavily exposed to debt-crippled Greece, may need a bailout amount
worth up to half the size of its economy. Cyprus' €17.3bn econom y is the third-smallest
in the eurozone and there was speculation that its bailout could be worth up to €10bn.

Cyprus' finance minister, Vassos Shiarly, has told Reuters that Cyprus needs to plug a
€1.8bn - or 10pc of its GDP - regulatory capital shortfall in its second largest lender by
June 30 and that potential aid could be more comprehensive to cover fiscal requirements.

07.25 And in another tale from the Pink 'Un, the FT has a story that the European Union
could gain far-reaching powers to rewrite national budgets for eurozone countries that
breach debt and deficit rules under proposals likely to be discussed at this week's summit.

The proposals are part of an ambitious plan to turn the eurozone into a closer fiscal
union, giving Brussels more powers to serve like a finance ministry for all 17 members of
the currency union. They are contained in a report to be presented at the summit, which
will also outline plans for a banking union and political union.

07.20 US billionaire, George Soros, has penned a comment for the Financial Times
(£). He argues that Germany must change its "can't do" policy against immediately
forging a consolidated European fiscal and banking union, or risk becoming "the centre
of an empire" responsible for the eurozone's collapse.

The Hungarian-born US financier said there was a need to establish a European fiscal
authority that, in partnership with the European Central Bank, could establish a debt
reduction fund, that would acquire and hold a significant portion of the outstanding stock
of debt of Italy and Spain.

Here's a taster of what he had to say:

At a meeting in Rome last Thursday, the heads of state of Germany, France, Spain and
Italy agreed on steps towards a banking union and a modest stimulus package to
complement the fiscal compact. But Angela Merkel resisted all proposals to provide relief
to Spain and Italy from the excessive risk premiums prevailing in the market. This
threatens to turn the EU summit this week into a fiasco that may well prove fatal because
it will leave the rest of the eurozone without a strong enough firewall to protect it against
the possibility of a Greek exit.

07.17 What do you think? Vote in our poll:

Would Britain leaving the EU harm the economy? (Poll Closed)
Yes. Britain is stronger within the EU 30.07% (2,702 votes)

No. The positives would outstrip the negatives. 69.93% (6,285 votes)

Total Votes: 8,987

07.10 Would Britain be better off within the EU, or outside? One of Britain's top
bankers thinks there's safety in numbers, and has warned David Cameron of the City's
fears over a British exit. Robert Winnett and Louise Armitstead report:

Peter Sands, the chief executive of Standard Chartered, had a breakfast meeting with the
Prime Minister on Monday during which he is understood to have raised concerns over a
British breakaway.

The warning was sounded amid growing calls from Conservative MPs for Britain to have
an “in-out” referendum on the country’s ongoing membership of the European Union.

George Osborne, the Chancellor and Mr Cameron’s key election strategist, is understood
to be considering offering the pledge of a referendum as the centrepiece of the next
Conservative manifesto. Labour is also considering a similar pledge.

Peter Sands is pictured yesterday leaving Downing Street (Photo: Steve Back)

07.07 The downgrades came on a day when two countries got out their begging bowls to
ask for bail-outs.

Spain was first. It wants access to a €100bn pot for the country's ailing banking
sector. However, it did not specify either the required amount or any conditions.

Then came Cyprus. It wants cash to shore up its own fragile banking sector, which is
heavily exposed to Greece. It also wants a billion or two for other "fiscal requirements",
as the country's finance minister highlighted yesterday. Vassos Shiarly told Reuters:

The amount will be as much as it may be needed to cover the recapitalisation and fiscal
requirements [...]These will be established after careful review during the next few

07.00 Rating agency Moody's downgraded 28 Spanish lenders last night, including
Banco Santander, owner of the UK namesake. Louise Armitstead reports:

All of Spain’s major banks were hit with cuts of one to four notches – worse than
expected and sending several deeper into junk status.

The move followed Moody’s decision this month to slash the sovereign rating from A3 to
Baa3, but also reflected the mounting risk of real estate losses, the agency said.

Comparing Spain’s property crisis to Ireland’s, where values have fallen almost twice as
much, Moody’s said: “The banks’ exposures to commercial real estate will likely cause
higher losses, which might increase the likelihood that these banks will require external

Rival rating agency Standard & Poor's said this month that house prices in Spain could
fall another 25pc before the market levels out.

06.45 Good morning and welcome back to our live coverage of the European debt crisis.



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Description: European Sovereign Debt Crisis, as its Happening. New proposals for a “banking union” pose a threat to London, proposals prepared for Friday's EU summit show, while Angela Merkel says there won't be shared debt in Europe "as long as I live".