11.36 More from JP Morgan:
We expect no long-term positive impact on peripheral spreads from a resumption of SMP. This reflects several factors.
? First, we expect ECB implementation to remain half-hearted and reactive.
? Second, the impact on peripheral sovereign yields will likely be smaller this time due to the issue of private sector subordination, a point which was hammered home by the preferential treatment given to the ECB during Greek PSI.
? Third, Spain needs to significantly ramp up its issuance pace in order to cover its funding needs for the rest of the year. We estimate that Spain needs to nearly double its issuance pace going forward. These figures do not include potential funding needs due to support facilities announced for the Spanish regions.
? Fourth, secondary market selling pressure from non-domestic holders of Spanish debt will continue, as investors sell into the SMP bid due to lack of market demand elsewhere. Net, we expect these factors to outweigh the positive impact from ECB bond-buying over the long-term, especially if Spain gets downgraded to sub-investment grade later in the year, which is our base case.
11.31 Analysts at JP Morgan have also examined how much impact the ECB's bond buying programme would have if it was re-activated. Its conclusion? Not much:
Since 2010, the ECB has accumulated a total portfolio of peripheral sovereign debt of around ?225bn, dominated by Italy, Greece and Spain (Exhibit 4). However, previous ECB attempts have been mainly reactive. That is, the ECB wants to defuse a crisis but also wants the fiscal authorities to ultimately bear the load. Thus, prior bouts of SMP buying have started out with a bang but tapered off significantly after 3-6 weeks. In late 2011 the ECB had to pick up the pace again when Italian and Spanish yields approached new highs; this also led to the introduction of 3Y LTROs in December.
11.08 The German government has "full confidence" in the ECB and sees no reason for legal action against the central bank.
Spokeswoman Georg Streiter was responding to comments made by German MP Joerg-Uwe Hahn this morning (see 09.21) that the government should sue the central bank over its purchases of peripheral debt.
Mr Streiter also said that the government's position on eurobonds remained unchanged, and shared debt liability was not in the country's interest.
10.49 Meanwhile, confidence across the eurozone slipped again in July, according to a monthly survey by the European Commission.
A fall in confidence across "all sectors" saw the EC's Economic Sentiment Indicator (ESI) for the eurozone fall to 87.9 in July (from 89.9), while the EU reading fell to 89.0 (from 90.4). This compares with a long run average of 100.
A "loss of confidence in the services sector" was the main driver of the fall in the EU, the EC said, while the euro area saw the biggest declines in industry and among consumers.
10.33 Commenting on the Italian auction, Annalisa Piazza at Newedge Strategy, said:
Lower yields are good news for the Italian Tesoro and rising borrowing costs is one of the major threat for the Italian fiscal consolidation at the current juncture. However, the relatively low bid/cover ratios remain a sign that dealers are extremely suspicious on the recent tightening of EMU periphery's spreads. ECB policymakers sounded convinced that the re-activation of the SMP was needed in the near term as spiking spreads are a clear obstacle to the smooth transmission mechanism of the ECB monetary policy. However, the ECB meeting is a few days away and market participants are still reluctant on the possible outcome of the meeting and they seem to be concerned about a possible disappointment.
10.21 Italy has managed to sell medium and long term debt this morning at lower rates than at a previous auction in June.
The Treasury sold ?2.5bn of 10 year debt at average yields of 5.96pc, compared with 6.19pc at the last auction, ?2.24bn of five year debt at average rates of 5.29pc (vs. 5.84pc), and ?750m of three year debt at average yields of 4.49pc.
Demand remained steady, with around 1.3 bidders per bond on offer at the ten-year auction.
09.58 It's a week of meetings this week. Today, US Treasury Secretary Timothy Geithner meets German counterpart Wolfgang Schaeuble and ECB president Mario Draghi.
On Thursday, Italian PM Mario Monti will meet his Spanish counterpart Mariano Rajoy in Madrid.
In between all that, we'll get interest rate decisions on both sides of the Atlantic.
The Bank of England, ECB and Federal Reserve in America are all expected to keep interest rates on hold this week, despite calls from some economists to ease monetary policy further.
09.52 The Bank of England also said that mortgage approvals and lending slumped to its lowest level since December 2010 last month, reflecting broader economic weakness due to extra public holidays and wet weather.
09.47 The amount of money swirling around the financial system has collapsed to new lows.
The Bank of England figures showed that the UK's broad money supply, M4, shrank by 5.2pc on an annual basis in June to its lowest level since records began in 1983.
Commenting on the figures, Samuel Tombs at Capital Economics, said:
Given our view that the euro-zone crisis is likely to intensify, thereby weakening UK banks, we continue to expect weak money and credit growth to undermine the pace of the economic recovery for some time to come.
09.29 Analysts at Societe Generale argue in a note this morning that even if the ECB was to restart its Securities Markets Programme (SMP), it would not lower peripheral borrowing costs over the long term:
Restarting the SMP purchases is another matter. The Bundesbank was never keen on the idea, yet this didn?t stop the ECB from relaunching the programme last August. Graph 1 shows that it was first launched in May 2010, then petering out, only to be restarted in August 2011 before petering out again. The bullish impetus only lasted a few days last August.
A repeat of August 2011 is possible, even if the Bundesbank drags its feet. Little does it matter to the investor who the official buyer is (EFSF or Eurosystem). Investors will just want to sell their holdings at prices perceived to be above market clearing levels compared to longer term prospects. So a buy programme will just result in a transfer of ownership. It will not have a durable impact on lower yields
But for now the threat of intervention can buy governments a little time, and contain spreads, or even push them tighter. Buying will at best be a palliative, not a game changer, though can still have a large near-term impact on markets, as August 2011 saw.
09.21 Not everyone is happy with the idea of the ECB going on a bond buying spree, and one member of Angela Merkel's junior coalition party has called on the German government to sue the central bank for hoovering up peripheral debt on the secondary market. Joerg-Uwe Hahn told Die Welt:
The European treaties allow member states to sue the ECB [...] It's time to open the toolbox of the (EU's) Lisbon Treaty and see how one can ensure that the ECB is brought into line to focus on its original task: monetary stability.
08.52 Today's leader column in the Financial Times argues that the International Monetary Fund (IMF) should ask EU leaders for a refund on its loans to the indebted country and "confine its own role to giving open and honest assessments of the ensuing rescue attempt." More from the FT:
...the longer the IMF participates in a rescue it does not itself believe in, the greater the cost will be to its reputation and support outside the eurozone. Should any writedown on its lending even be proposed, it would enrage other shareholders, including the US and the big emerging economies. Its implementation would be a disaster, raising costs for other borrowers and in effect crippling the institution.
On balance, the fund was right to take the risk of getting involved in Greece. It has offered unrivalled technical competence and has tried to inject a sense of reality into the proceedings. But the risks to its reputation have now begun to outweigh the limited good it has been doing. The eurozone has money. It needs an impartial and outspoken adviser, not a co-opted fellow creditor. The IMF should look at how to extricate itself from further bankrolling the Greek rescue.
08.34 Reports that the ECB could take losses on Greek debt have gained traction over the weekend.
Intensive discussions are now reportedly under way among EU policy-makers that could see the European Central Bank and a number of central banks take a significant write-down on their Greek bonds as the price for avoiding a eurozone break-up and losing its weakest link.
08.24 Spanish and Italian borrowing costs have also continued to fall.
Yields on Spanish and Italian 10-year debt are currently at 6.66pc and 5.88pc respectively.
The FTSE 100 is up 0.3pc, at 5,643.09, while the CAC 40 in Paris is up 0.5pc at 3,296.64 and Frankfurt's DAX is up 0.7pc at 6,734.40. The IBEX 35 in Madrid is flat, at 6,619.10.
08.12 The eurozone has "no time to lose" (sound familiar?), and leaders "must make extremely clear with all available means that we are determined to ensure the financial stability of the currency union," Jean-Claude Juncker has said.
Mr Juncker, who leads the Eurogroup of finance ministers in the 17-nation bloc, told German daily S?ddeutsche Zeitung (translation by AP):
I don't want to raise expectations, but I must say that we have arrived at a decisive point [...] the euro countries have arrived a point where we must make extremely clear with all available means that we are determined to ensure the financial stability of the currency union.
I have no doubt that we will implement the decisions of the last summit [...] It still has to be decided what exactly we will do when. That depends on the developments of the coming days and how fast we have to react [...] and we will, as Draghi says, see results.
08.03 We wake to news this morning that the Spanish economy contracted by 0.4pc in the second quarter. This follows a 0.3pc contraction in the previous quarter. On an annual basis, the economy contracted by 1pc.
The figures affirm the Bank of Spain's forecasts earlier this month.
08.00 Good morning and welcome back to our live coverage of the European debt crisis.
Debt crisis live: archive
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