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Eurozone crisis live: Spanish borrowing costs hit 7% after double downgrade Eurozone crisis live: Spanish borrowing costs hit 7% after double downgrade
(about 1 hour later)
1.06pm: More on Spain. There is talk of an emergency cabinet meeting to discuss the crisis, which is not really surprising given the Moody's downgrade and the rise in the country's bond yields.
But it all adds to the sense of stumbling from one crisis to the next without a clear plan....
Spanish website 20minutos.es is reporting that Spanish PM Mariano Rajoy is holding a crisis cabinet meeting to (cont) tl.gd/hra56g
— Steve Collins (@TradeDesk_Steve) June 14, 2012
11.39am: Only €60bn to €70bn will be needed to clean up and strengthen Spain's banks, according to an audit of the country's financial sector, Reuters reported, citing two sources. That's almost double the amount the International Monetary Fund estimated last Friday (€40bn), but less than the €100bn maximum requested by the Spanish government last weekend.11.39am: Only €60bn to €70bn will be needed to clean up and strengthen Spain's banks, according to an audit of the country's financial sector, Reuters reported, citing two sources. That's almost double the amount the International Monetary Fund estimated last Friday (€40bn), but less than the €100bn maximum requested by the Spanish government last weekend.
The audit from consulting firms Oliver Wyman and Roland Berger was due to be completed by next Thursday, but will be brought forward because Spanish prime minister Mariano Rajoy wants to take the results to the G20 summit in Los Cabos in Mexico, which starts on Monday.The audit from consulting firms Oliver Wyman and Roland Berger was due to be completed by next Thursday, but will be brought forward because Spanish prime minister Mariano Rajoy wants to take the results to the G20 summit in Los Cabos in Mexico, which starts on Monday.
11.30am: Holger Schmieding, chief economist at Berenberg Bank, Germany's oldest private bank, has looked at various Greek election scenarios.11.30am: Holger Schmieding, chief economist at Berenberg Bank, Germany's oldest private bank, has looked at various Greek election scenarios.
Let's start with a 'positive' call: two years after a chaotic Greek euro exit, Greece could well be the fastest-growing economy in Europe. Why? If GDP collapsed by 30% in a Grexit, it would take nine years of 4% annual GDP rebound just to get back to today's starting point. Whether or not Greece avoids such a fate will depend on the result of the Sunday elections.Let's start with a 'positive' call: two years after a chaotic Greek euro exit, Greece could well be the fastest-growing economy in Europe. Why? If GDP collapsed by 30% in a Grexit, it would take nine years of 4% annual GDP rebound just to get back to today's starting point. Whether or not Greece avoids such a fate will depend on the result of the Sunday elections.
Europe seems ready to reward a responsible Greek government, giving it more time to meet fiscal targets and offering some extra infrastructure financing while insisting more strongly on deregulation and other structural reforms. Europe may not formally renegotiate the "troika" memorandum but use a clause that allows fiscal slippage if an unexpectedly deep recession worsens the fiscal situation. But, if Greece does not get a responsible government, Europe would likely take a hard line and not offer such concessions. The election is too close to call. The major scenarios:Europe seems ready to reward a responsible Greek government, giving it more time to meet fiscal targets and offering some extra infrastructure financing while insisting more strongly on deregulation and other structural reforms. Europe may not formally renegotiate the "troika" memorandum but use a clause that allows fiscal slippage if an unexpectedly deep recession worsens the fiscal situation. But, if Greece does not get a responsible government, Europe would likely take a hard line and not offer such concessions. The election is too close to call. The major scenarios:
Scenario I: Samaras winsScenario I: Samaras wins
Nea Dimokratia, the biggest party, gets the 50-seat bonus and has a majority for coalition with a Pasok. In the upcoming compromises between Merkel and Hollande, Germany puts aside its grave doubts about Greece and agrees to let Europe continue, adjust and possibly augment the support for Greece, giving the austerity and reform programme a chance to actually work. Probability of Greece still being in the euro by end-2012: 75%.Nea Dimokratia, the biggest party, gets the 50-seat bonus and has a majority for coalition with a Pasok. In the upcoming compromises between Merkel and Hollande, Germany puts aside its grave doubts about Greece and agrees to let Europe continue, adjust and possibly augment the support for Greece, giving the austerity and reform programme a chance to actually work. Probability of Greece still being in the euro by end-2012: 75%.
Scenario II: Tsipras winsScenario II: Tsipras wins
Ultra-left Syriza is the biggest party, pockets the 50-seat bonus and forms an anti-bailout coalition with some smaller leftist groups. Europe would probably offer no serious concession but demand that Tsipras either scraps his campaign promises and signs up to the Troika memorandum by the 28-29 June EU summit or be cut off from EU and central bank support. With Greece lacking the money to import oil and other essentials, and amid a bank run, the threat of utter chaos could elicit four different responses.Ultra-left Syriza is the biggest party, pockets the 50-seat bonus and forms an anti-bailout coalition with some smaller leftist groups. Europe would probably offer no serious concession but demand that Tsipras either scraps his campaign promises and signs up to the Troika memorandum by the 28-29 June EU summit or be cut off from EU and central bank support. With Greece lacking the money to import oil and other essentials, and amid a bank run, the threat of utter chaos could elicit four different responses.
First, Tsipras relents and signs up to the troika memorandum, turning his Syriza into a new Pasok (responsible centre-left).First, Tsipras relents and signs up to the troika memorandum, turning his Syriza into a new Pasok (responsible centre-left).
Second, Tsipras does not ditch his policies. Chaotic Grexit.Second, Tsipras does not ditch his policies. Chaotic Grexit.
Third, Tsipras accepts an offer from Europe to negotiate a semi-orderly Euro exit. In exchange for some temporary adjustment help to make the transition to a new currency less chaotic, Greece would have to acknowledge its debts to Europe (including the Target2 balances) as the basis for an orderly work-out later. But an unreformed Greek economy would face a very dismal long-term outlook.Third, Tsipras accepts an offer from Europe to negotiate a semi-orderly Euro exit. In exchange for some temporary adjustment help to make the transition to a new currency less chaotic, Greece would have to acknowledge its debts to Europe (including the Target2 balances) as the basis for an orderly work-out later. But an unreformed Greek economy would face a very dismal long-term outlook.
Fourth, as Greece realises that the Syriza election victory was based on an illusion (Greece can avoid austerity and reforms and still get Europe to pay for its salaries, pensions and imports), the Tsipras coalition falters after a few days or weeks, giving way to a new pro-euro government, either with or without new elections. It would be chaotic. But if a new responsible government were to emerge, Europe might still let Greece stay in the euro?Fourth, as Greece realises that the Syriza election victory was based on an illusion (Greece can avoid austerity and reforms and still get Europe to pay for its salaries, pensions and imports), the Tsipras coalition falters after a few days or weeks, giving way to a new pro-euro government, either with or without new elections. It would be chaotic. But if a new responsible government were to emerge, Europe might still let Greece stay in the euro?
Overall probability of Greece still being in the euro by end-2012: 30%.

Scenario III: inconclusive outcome, as on 6 May		Overall probability of Greece still being in the euro by end-2012: 30%.

Scenario III: inconclusive outcome, as on 6 May
Neither ND nor Syriza can form a normal coalition. The threat of chaos finally forces some smaller parties (Dimar, Anel?) to join ND and Pasok in a unity government, with or without Syriza. Another repeat election is a possible alternative, but less likely. A grander coalition like this would try to stay in the euro, but would find it much more difficult than a plain ND-Pasok government to accept and implement European demands. The threat of Grexit would continue to loom very large. Probability of Greece staying in the euro: 50% or less.Neither ND nor Syriza can form a normal coalition. The threat of chaos finally forces some smaller parties (Dimar, Anel?) to join ND and Pasok in a unity government, with or without Syriza. Another repeat election is a possible alternative, but less likely. A grander coalition like this would try to stay in the euro, but would find it much more difficult than a plain ND-Pasok government to accept and implement European demands. The threat of Grexit would continue to loom very large. Probability of Greece staying in the euro: 50% or less.
11.19am: Greek banking stocks have jumped more than 20% amid talk that secret opinion polls show pro-bailout parties are likely to win the Sunday election - confounding most people's expectations. Greek law bans the publication of opinion polls in the two weeks leading up to an election.11.19am: Greek banking stocks have jumped more than 20% amid talk that secret opinion polls show pro-bailout parties are likely to win the Sunday election - confounding most people's expectations. Greek law bans the publication of opinion polls in the two weeks leading up to an election.
Panagiotis Kladis, analyst at NBG Securities, told Reuters:Panagiotis Kladis, analyst at NBG Securities, told Reuters:
The market sees that a pro-European government which will push ahead with reforms will be formed on Sunday.The market sees that a pro-European government which will push ahead with reforms will be formed on Sunday.
Our Athens correspondent Helena Smith reported yesterday that anger had given way to fear in Greece. Also on our Greek blog, Jon Henley reports on Greek farmers renting patches of land to citydwellers.Our Athens correspondent Helena Smith reported yesterday that anger had given way to fear in Greece. Also on our Greek blog, Jon Henley reports on Greek farmers renting patches of land to citydwellers.
11.13am: Reuters has just flashed this headline:11.13am: Reuters has just flashed this headline:
Greek bank stocks up almost 19%, on market talk that pro-bailout parties likely to win 17 June electionGreek bank stocks up almost 19%, on market talk that pro-bailout parties likely to win 17 June election
11.03am: The economy goes from bad to worse in Greece, where the unemployment rate has hit a new record of 22.6% in the first quarter, from 20.7% in the previous quarter. It was the highest quarterly jobless rate since this data series started in 1998.11.03am: The economy goes from bad to worse in Greece, where the unemployment rate has hit a new record of 22.6% in the first quarter, from 20.7% in the previous quarter. It was the highest quarterly jobless rate since this data series started in 1998.
10.58am: Interestingly, Deutsche Bank's finance chief Stefan Krause has downplayed the likelihood of Greece exiting the euro, describing it as "very very low" and "unlikely".10.58am: Interestingly, Deutsche Bank's finance chief Stefan Krause has downplayed the likelihood of Greece exiting the euro, describing it as "very very low" and "unlikely".
10.53am: And more comments on the Italian bond auction and its wider implications, from Ranvir Singh, chief executive of market analysts RANsquawk:10.53am: And more comments on the Italian bond auction and its wider implications, from Ranvir Singh, chief executive of market analysts RANsquawk:
After a week of rising sovereign borrowing costs and a falling stock market, this expensive bond auction is compelling proof that Italy's financial travails are far more than a storm in a cappucino cup.After a week of rising sovereign borrowing costs and a falling stock market, this expensive bond auction is compelling proof that Italy's financial travails are far more than a storm in a cappucino cup.
Although the Italian government raised the full €4.5bn it was seeking in today's auctions, its cost of borrowing is creeping ever upwards as investors ponder whether Italy could be the next eurozone member to seek financial assistance.Although the Italian government raised the full €4.5bn it was seeking in today's auctions, its cost of borrowing is creeping ever upwards as investors ponder whether Italy could be the next eurozone member to seek financial assistance.
Mario Monti's government was today forced to offer the highest yield in 7 months on the benchmark three-year bond. Italy's main stock index is down more than 6% on the week, with bank shares particularly volatile.Mario Monti's government was today forced to offer the highest yield in 7 months on the benchmark three-year bond. Italy's main stock index is down more than 6% on the week, with bank shares particularly volatile.
The technocrat prime minister insists that Italy has not asked for, and does not need, a bailout, but the aggressiveness of the rise in yields at this week's auctions reflect a sense of grim inevitability that Italy will be forced into seeking some sort of bailout.The technocrat prime minister insists that Italy has not asked for, and does not need, a bailout, but the aggressiveness of the rise in yields at this week's auctions reflect a sense of grim inevitability that Italy will be forced into seeking some sort of bailout.
Latest polls suggest that popular support for Mr Monti is waning, and there is broad acceptance that any European assistance for Italy would come with tough conditions attached.Latest polls suggest that popular support for Mr Monti is waning, and there is broad acceptance that any European assistance for Italy would come with tough conditions attached.
Should Italy's government be forced to seek help from Europe's paymasters, there is every chance that it will have do so without the Italian people's blessing.Should Italy's government be forced to seek help from Europe's paymasters, there is every chance that it will have do so without the Italian people's blessing.
With Spanish 10-year bond yields now a whisker off the feared 7% level, Mariano Rajoy's self-congratulation at the bailout of Spanish banks now looks rather premature. Mario Monti could soon find himself facing some the same very difficult decisions as the embattled Spanish leader.With Spanish 10-year bond yields now a whisker off the feared 7% level, Mariano Rajoy's self-congratulation at the bailout of Spanish banks now looks rather premature. Mario Monti could soon find himself facing some the same very difficult decisions as the embattled Spanish leader.
10.47am: The Guardian's economics editor Larry Elliott has taken a look at the spike in Spanish borrowing costs. More here.10.47am: The Guardian's economics editor Larry Elliott has taken a look at the spike in Spanish borrowing costs. More here.
If ever there was a time for Europe to try a bit of muddling through, the moment when the interest rate on Spain's 10-year bonds hits 7% is surely it. Policy makers will sit tight for a couple of days in the hope that the Greek elections at the weekend will result in victory for the pro-austerity parties and that the pressure on Spain will abate.If ever there was a time for Europe to try a bit of muddling through, the moment when the interest rate on Spain's 10-year bonds hits 7% is surely it. Policy makers will sit tight for a couple of days in the hope that the Greek elections at the weekend will result in victory for the pro-austerity parties and that the pressure on Spain will abate.
This seems forlorn. For a start, there is no guarantee that the Greek election will see a stronger showing by the centre-right and centre-left parties. Secondly, all the recent evidence is that any respite in the financial markets for "good news" can be measured not in weeks, or even days, but in hours. Most importantly of all, the action in the bond markets reflects concerns about the Spanish banking system and the Spanish economy that are rooted in hard fact.This seems forlorn. For a start, there is no guarantee that the Greek election will see a stronger showing by the centre-right and centre-left parties. Secondly, all the recent evidence is that any respite in the financial markets for "good news" can be measured not in weeks, or even days, but in hours. Most importantly of all, the action in the bond markets reflects concerns about the Spanish banking system and the Spanish economy that are rooted in hard fact.
The position is this. Spain has had a spectacular boom-bust in its housing market financed by its commercial banks. Like Britain and Ireland, Spain borrowed growth from the future and is now gripped by a brutal recession that has sent youth unemployment soaring above 50%. There is no end in sight.The position is this. Spain has had a spectacular boom-bust in its housing market financed by its commercial banks. Like Britain and Ireland, Spain borrowed growth from the future and is now gripped by a brutal recession that has sent youth unemployment soaring above 50%. There is no end in sight.
The banks that lent so imprudently are now in a zombie-like state. The are only kept alive courtesy of the European Central Bank, which lent them the thick end of €320bn in May alone. The Spanish banks have been buying up Spanish government debt which is going down in value day by day. This, clearly, is a recipe for crisis and, because Spain is the eurozone's fourth biggest economy, a crisis of a different order of magnitude to that seen in Greece, Portugal or Ireland.The banks that lent so imprudently are now in a zombie-like state. The are only kept alive courtesy of the European Central Bank, which lent them the thick end of €320bn in May alone. The Spanish banks have been buying up Spanish government debt which is going down in value day by day. This, clearly, is a recipe for crisis and, because Spain is the eurozone's fourth biggest economy, a crisis of a different order of magnitude to that seen in Greece, Portugal or Ireland.
What is needed in these desperate circumstances is not more muddling through but a good solid dose of shock and awe.What is needed in these desperate circumstances is not more muddling through but a good solid dose of shock and awe.
10.42am: And here is what ING economist Martin van Vliet made of the record levels of ECB borrowing by Spanish banks in May.10.42am: And here is what ING economist Martin van Vliet made of the record levels of ECB borrowing by Spanish banks in May.
The increase in Spanish banks' ECB borrowing in May conveys the severity of the predicament some banks found themselves in ahead of last weekend's bailout announcement. Data released by the Bank of Spain show that the average gross amount borrowed by banks increased from €316.9bn in April to €324.6bn in May. The net figure, which subtracts the average amount parked at the ECB's overnight deposit facility (€36.8bn), rose more sharply to €287.8bn from €263.5bn. Moreover, the gross amount borrowed by Spain's banks at the end of May (i.e. €342.9bn), as revealed by the monthly statistical bulletin released earlier this month, also points to a more significant increase.The increase in Spanish banks' ECB borrowing in May conveys the severity of the predicament some banks found themselves in ahead of last weekend's bailout announcement. Data released by the Bank of Spain show that the average gross amount borrowed by banks increased from €316.9bn in April to €324.6bn in May. The net figure, which subtracts the average amount parked at the ECB's overnight deposit facility (€36.8bn), rose more sharply to €287.8bn from €263.5bn. Moreover, the gross amount borrowed by Spain's banks at the end of May (i.e. €342.9bn), as revealed by the monthly statistical bulletin released earlier this month, also points to a more significant increase.
Banks in Spain are now by far the most dominant users of ECB funding, accounting for about 30% of outstanding ECB liquidity. In relevant terms, however, banks in other "bailout countries" are more reliant on the ECB. Indeed, Portuguese banks in aggregate currently take down 10.1% of their banking assets in ECB liquidity versus 9.3% for Spain's banks, and Greece's and Ireland's banks fund well over 10% of their assets with ECB cash (and this excludes the Emergency Liquidity Assistance (ELA) provided by the national central banks). The equivalent figure for the Italian banking system is 6.5%.Banks in Spain are now by far the most dominant users of ECB funding, accounting for about 30% of outstanding ECB liquidity. In relevant terms, however, banks in other "bailout countries" are more reliant on the ECB. Indeed, Portuguese banks in aggregate currently take down 10.1% of their banking assets in ECB liquidity versus 9.3% for Spain's banks, and Greece's and Ireland's banks fund well over 10% of their assets with ECB cash (and this excludes the Emergency Liquidity Assistance (ELA) provided by the national central banks). The equivalent figure for the Italian banking system is 6.5%.
Now that concerns about the solvency of Spain's banks will be addressed, financing difficulties should gradually start to ease. But we would expect the Spanish banking system to remain heavily dependent on central bank funding for quite some time to come.Now that concerns about the solvency of Spain's banks will be addressed, financing difficulties should gradually start to ease. But we would expect the Spanish banking system to remain heavily dependent on central bank funding for quite some time to come.
10.35am: More reaction to the Italian bond sale, courtesy of Reuters.10.35am: More reaction to the Italian bond sale, courtesy of Reuters.
Nick Stamenkovic, strategist at Edinburgh-based RIA Capital Markets:Nick Stamenkovic, strategist at Edinburgh-based RIA Capital Markets:
Italy manages to reach the €4.5bn target for its latest bond auction with reasonable demand but yields significantly higher than the previous month.Italy manages to reach the €4.5bn target for its latest bond auction with reasonable demand but yields significantly higher than the previous month.
Clearly investors are demanding ever higher premiums to buy Italian sovereign paper. With overseas investors shifting out of BTPs domestic investors are stepping up to the plate but for how long?Clearly investors are demanding ever higher premiums to buy Italian sovereign paper. With overseas investors shifting out of BTPs domestic investors are stepping up to the plate but for how long?
Achilleas Georgolopoulos, strategist at Lloyds Bank in London:Achilleas Georgolopoulos, strategist at Lloyds Bank in London:
The auction was a bit better than the market feared it would be. I don't think lots of people called for a bad auction but there was some fear after the downgrade for Spain.The auction was a bit better than the market feared it would be. I don't think lots of people called for a bad auction but there was some fear after the downgrade for Spain.
Overall good demand, they raised the money. Yields are higher, of course, but they sold the bonds at a premium to the 10 o'clock cutoff.Overall good demand, they raised the money. Yields are higher, of course, but they sold the bonds at a premium to the 10 o'clock cutoff.
But we didn't expect the Italians to mess this up. The message cares only about the higher yields but in terms of the lasting message it is clear Italy can still fund from the market - a high levels, but it can still fund.But we didn't expect the Italians to mess this up. The message cares only about the higher yields but in terms of the lasting message it is clear Italy can still fund from the market - a high levels, but it can still fund.
10.34am: Nicholas Spiro, of Spiro Sovereign Strategy, has sent over his thoughts on the Italian bond auction:10.34am: Nicholas Spiro, of Spiro Sovereign Strategy, has sent over his thoughts on the Italian bond auction:
1. Italian auctions are now as nerve-wracking as Spanish ones. While the Treasury tried to mitigate the dramatic deterioration in sentiment by limiting supply at today's sale, the scale of the concessions show how vulnerable Italy's debt market has become. Demand is holding up, just about, but only because of unprecedented domestic financial repression. Unless the ECB steps in very soon to restore confidence, Italy and Spain will no longer have market access.1. Italian auctions are now as nerve-wracking as Spanish ones. While the Treasury tried to mitigate the dramatic deterioration in sentiment by limiting supply at today's sale, the scale of the concessions show how vulnerable Italy's debt market has become. Demand is holding up, just about, but only because of unprecedented domestic financial repression. Unless the ECB steps in very soon to restore confidence, Italy and Spain will no longer have market access.
2. Market perception-wise, this is the most dangerous moment for Italy's debt market since the eurozone crisis erupted. The Spanish "bail-out" was a game-changer. It's putting Italy under extreme pressure because of the lack of differentiation in the markets. There's a sense among investors that Italy is the next domino to fall in the absence of bold and decisive eurozone-wide measures to stem the panic.2. Market perception-wise, this is the most dangerous moment for Italy's debt market since the eurozone crisis erupted. The Spanish "bail-out" was a game-changer. It's putting Italy under extreme pressure because of the lack of differentiation in the markets. There's a sense among investors that Italy is the next domino to fall in the absence of bold and decisive eurozone-wide measures to stem the panic.
3. The timing of the latest bout of risk aversion couldn't be worse for Italy. The markets are becoming more sensitive to Mr Monti's woes. Politics has long been the Achilles heel of the Italian credit story. The more the markets fret about Mr Monti's position, the more vulnerable Italy becomes. What are largely external risks are being amplified by domestic political weaknesses.3. The timing of the latest bout of risk aversion couldn't be worse for Italy. The markets are becoming more sensitive to Mr Monti's woes. Politics has long been the Achilles heel of the Italian credit story. The more the markets fret about Mr Monti's position, the more vulnerable Italy becomes. What are largely external risks are being amplified by domestic political weaknesses.
10.29am: Traders say the Italian bond sale was "reasonable" with Italy selling the maximum amount of €4.5bn, but at a high price. The yield on the three-year bond sold for €3bn rose 1.4 percentage points, to 5.3%, from the last auction a month ago, hitting the highest level since December. The sale was covered 1.6 times, slightly up from mid-May.10.29am: Traders say the Italian bond sale was "reasonable" with Italy selling the maximum amount of €4.5bn, but at a high price. The yield on the three-year bond sold for €3bn rose 1.4 percentage points, to 5.3%, from the last auction a month ago, hitting the highest level since December. The sale was covered 1.6 times, slightly up from mid-May.
Analysts had expected the auction to benefit from its smaller-than-average size and the fact this this was probably the last chance to snap up March 2015 bonds before Italy launches a new three-year benchmark.Analysts had expected the auction to benefit from its smaller-than-average size and the fact this this was probably the last chance to snap up March 2015 bonds before Italy launches a new three-year benchmark.
Italy also sold two issues of bonds maturing in 2019 and 2020 which are no longer issued on a regular basis. Demand for the two "off the run" bonds totalled 1.8 times the amount sold.Italy also sold two issues of bonds maturing in 2019 and 2020 which are no longer issued on a regular basis. Demand for the two "off the run" bonds totalled 1.8 times the amount sold.
10.18am: The yield at Italy's three-year bond auction has spiked to 5.3%, versus 3.91% at the mid-May sale - and the highest since December.10.18am: The yield at Italy's three-year bond auction has spiked to 5.3%, versus 3.91% at the mid-May sale - and the highest since December.
However, Italy managed to get it all away - they sold the targeted €4.5bn of bonds.However, Italy managed to get it all away - they sold the targeted €4.5bn of bonds.
10.06am: Italy is starting to auction its bonds. Markets not in the best of moods today. We'll keep you posted.10.06am: Italy is starting to auction its bonds. Markets not in the best of moods today. We'll keep you posted.
9.56am: The Italian bond auction is upon us.... just four minutes to go.9.56am: The Italian bond auction is upon us.... just four minutes to go.
9.53am: Spanish ten-year yields have gone through 7% - the level that is considered unsustainable.9.53am: Spanish ten-year yields have gone through 7% - the level that is considered unsustainable.
9.33am: Stock markets have wobbled across Europe in the wake of Spain's double downgrade last night - Moody's cut the country's rating to one notch above junk - while Spanish government bond yields have surged to new record highs, tracked by Italian yields.9.33am: Stock markets have wobbled across Europe in the wake of Spain's double downgrade last night - Moody's cut the country's rating to one notch above junk - while Spanish government bond yields have surged to new record highs, tracked by Italian yields.
The FTSE is now down 46 points at 5437, a 0.9% fall. Germany's Dax has lost 0.4%, Spain's Ibex and France's CAC have both tumbled 0.6% and Italy's FTSE MiB is down even more, by 1.1%.The FTSE is now down 46 points at 5437, a 0.9% fall. Germany's Dax has lost 0.4%, Spain's Ibex and France's CAC have both tumbled 0.6% and Italy's FTSE MiB is down even more, by 1.1%.
Collective gasp in the office here as Spanish ten-year yields hit 6.982% - closer to the key 7% level - and up 20 basis points on the day. The Italian equivalent has climbed 7 bps at 6.294%, while German Bund yields are largely flat at 1.5%.Collective gasp in the office here as Spanish ten-year yields hit 6.982% - closer to the key 7% level - and up 20 basis points on the day. The Italian equivalent has climbed 7 bps at 6.294%, while German Bund yields are largely flat at 1.5%.
9.29am: German chancellor Angela Merkel said this morning that Europe must press ahead with closer political integration even though is a "Herculean task".9.29am: German chancellor Angela Merkel said this morning that Europe must press ahead with closer political integration even though is a "Herculean task".
She said in a speech to parliament in Berlin:She said in a speech to parliament in Berlin:
It is our task today to make up for what was not done [when the euro was created] and to end the vicious circle of ever new debt, of not sticking to rules.It is our task today to make up for what was not done [when the euro was created] and to end the vicious circle of ever new debt, of not sticking to rules.
I know that it's arduous, that it's painful, that it's drawn out. It's a Herculean task but it is unavoidable.I know that it's arduous, that it's painful, that it's drawn out. It's a Herculean task but it is unavoidable.
She said Spain was taking the right steps with its reforms, and was right to seek aid for its banks.She said Spain was taking the right steps with its reforms, and was right to seek aid for its banks.
9.28am: Credit rating agency Standard & Poor's says in a new report on European banks that the "eurozone has entered a crucial phase".9.28am: Credit rating agency Standard & Poor's says in a new report on European banks that the "eurozone has entered a crucial phase".
Events in the coming weeks, such as the forthcoming Greek election, EU meetings, and the Group of 20 summit, will play a significant role in defining its future direction.Events in the coming weeks, such as the forthcoming Greek election, EU meetings, and the Group of 20 summit, will play a significant role in defining its future direction.
Of the 50 largest rated European banks, 27 currently have negative outlooks or negative CreditWatch placements, reflecting our view of the difficult economic and market environment across the region. For some banks, the negative outlooks are at least partly due to their domestic sovereigns also having negative outlooks. The other 23 institutions have stable outlooks and are primarily located in France, Germany, Sweden, and the UK.Of the 50 largest rated European banks, 27 currently have negative outlooks or negative CreditWatch placements, reflecting our view of the difficult economic and market environment across the region. For some banks, the negative outlooks are at least partly due to their domestic sovereigns also having negative outlooks. The other 23 institutions have stable outlooks and are primarily located in France, Germany, Sweden, and the UK.
9.19am: Spanish banks borrowed a record €324.6bn from the European Central Bank in May, up from €319.9bn in April, according to Bank of Spain figures. The data cast doubt over the proposed €100bn banking bailout for Spain - will it be enough?9.19am: Spanish banks borrowed a record €324.6bn from the European Central Bank in May, up from €319.9bn in April, according to Bank of Spain figures. The data cast doubt over the proposed €100bn banking bailout for Spain - will it be enough?
Borrowing from Portuguese banks also hit a new record high peak of €58.7bn last month. This shows that banks continue to shy away from lending to each other - trust is the main issue - as the eurozone debt crisis lurches to new lows.Borrowing from Portuguese banks also hit a new record high peak of €58.7bn last month. This shows that banks continue to shy away from lending to each other - trust is the main issue - as the eurozone debt crisis lurches to new lows.
9.12am: Carphone Warehouse is counting the cost of weak European markets, my colleague Dan Milmo reports. It forecast a decline in new sales this morning due to weak demand for pay-as-you-go handsets. Spain is the mobile phone retailer's second-largest market and it also has stores in France, Germany, Sweden, Ireland and the Netherlands - making it something of a bellwether for the European consumer.9.12am: Carphone Warehouse is counting the cost of weak European markets, my colleague Dan Milmo reports. It forecast a decline in new sales this morning due to weak demand for pay-as-you-go handsets. Spain is the mobile phone retailer's second-largest market and it also has stores in France, Germany, Sweden, Ireland and the Netherlands - making it something of a bellwether for the European consumer.
8.32am: France's Crédit Agricole, the owner of Greece's largest foreign-held bank Emporiki, is drawing up plans to abandon the lender if Greece leaves the eurozone, the Wall Street Journal reports.8.32am: France's Crédit Agricole, the owner of Greece's largest foreign-held bank Emporiki, is drawing up plans to abandon the lender if Greece leaves the eurozone, the Wall Street Journal reports.
Sunday's second Greek election, after the 6 May poll failed to produce a conclusive result, is seen as effectively a referendum on whether the country wants to stay in the euro. The vote pits the radical leftist Syriza party, which vehemently opposes the austerity measures tied to the Greek bailouts, against their conservative rival, New Democracy, which largely supports the bailout programme.Sunday's second Greek election, after the 6 May poll failed to produce a conclusive result, is seen as effectively a referendum on whether the country wants to stay in the euro. The vote pits the radical leftist Syriza party, which vehemently opposes the austerity measures tied to the Greek bailouts, against their conservative rival, New Democracy, which largely supports the bailout programme.
The Journal writes:The Journal writes:
A host of international companies have said they are preparing contingency plans, with many voicing concerns about how to retrieve cash in the country if Greece exits the euro zone. But none have disclosed potentially walking away from their assets in Greece.A host of international companies have said they are preparing contingency plans, with many voicing concerns about how to retrieve cash in the country if Greece exits the euro zone. But none have disclosed potentially walking away from their assets in Greece.
Crédit Agricole's contingency plans for Emporiki Bank of Greece, Greece's sixth-largest bank, add to the bleak landscape, even after two multibillion euro bailouts extended by European Union countries and the International Monetary Fund. The banking sector is reeling from rising bad loans as the economy—now in its fifth year of recession—nose dives and fears over an eventual exit from the euro zone shatter consumer confidence.Crédit Agricole's contingency plans for Emporiki Bank of Greece, Greece's sixth-largest bank, add to the bleak landscape, even after two multibillion euro bailouts extended by European Union countries and the International Monetary Fund. The banking sector is reeling from rising bad loans as the economy—now in its fifth year of recession—nose dives and fears over an eventual exit from the euro zone shatter consumer confidence.
8.21am: This just in from Markus Huber at ETX Capital, ahead of the Italian bond auction at 10am:8.21am: This just in from Markus Huber at ETX Capital, ahead of the Italian bond auction at 10am:
European equity markets are trading little changed today with Italian bond auctions expected to take centre stage in midmorning. With crucial elections in Greece being less than three days away and periphery yields having spiked substantially to the upside since Spain agreed to outside help for their troubled banking sector last weekend, many would consider the current environment anything than ideal to stage bond auctions.European equity markets are trading little changed today with Italian bond auctions expected to take centre stage in midmorning. With crucial elections in Greece being less than three days away and periphery yields having spiked substantially to the upside since Spain agreed to outside help for their troubled banking sector last weekend, many would consider the current environment anything than ideal to stage bond auctions.
The auctions are manageable but investors in return for their trust will certainly be demanding an extra premium in form of higher yields once more. General activity is expected to be moderate at best with many preferring to stay on the sidelines until the situation in Greece and their 'indirect referendum' on remaining in the euro has been decided or at least become somewhat clearer.The auctions are manageable but investors in return for their trust will certainly be demanding an extra premium in form of higher yields once more. General activity is expected to be moderate at best with many preferring to stay on the sidelines until the situation in Greece and their 'indirect referendum' on remaining in the euro has been decided or at least become somewhat clearer.
8.15am: Spanish ten-year yields at 6.912% now, and it's only 8.15am. Chris Adams, financial markets editor at the Financial Times, tweets:8.15am: Spanish ten-year yields at 6.912% now, and it's only 8.15am. Chris Adams, financial markets editor at the Financial Times, tweets:
The Spanish 10 year bond needs its own Twitter accountThe Spanish 10 year bond needs its own Twitter account
— Chris Adams (@chrisadamsmkts) June 14, 2012— Chris Adams (@chrisadamsmkts) June 14, 2012
8.08am: Thought it was worth mentioning German finance minister Wolfgang Schäuble's sniping at Greek yachtowners yesterday.8.08am: Thought it was worth mentioning German finance minister Wolfgang Schäuble's sniping at Greek yachtowners yesterday.
"In a crisis... the little man suffers and the rich feather their own nests," Schäuble told German magazine Stern."In a crisis... the little man suffers and the rich feather their own nests," Schäuble told German magazine Stern.
It is not easy to cut the minimum wage in Greece, when you think of the many people who own a yacht.It is not easy to cut the minimum wage in Greece, when you think of the many people who own a yacht.

But, he stressed, if Greece wanted to regain competitiveness, the minimum wage "must fall".
But, he stressed, if Greece wanted to regain competitiveness, the minimum wage "must fall".
An election result will not change anything about the real situation of the country, which is in a painful crisis due to decades of economic mismanagement.An election result will not change anything about the real situation of the country, which is in a painful crisis due to decades of economic mismanagement.
8.04am: Spanish and Italian bond yields are surging, and European stock markets have opened lower. The FTSE 100 index in London has edged down 3 points to 5480. Spain's Ibex is down 0.5%, Italy's FTSE MiB 0.1%, Germany's Dax has fallen 0.3% and France's CAC has slipped 0.2%.8.04am: Spanish and Italian bond yields are surging, and European stock markets have opened lower. The FTSE 100 index in London has edged down 3 points to 5480. Spain's Ibex is down 0.5%, Italy's FTSE MiB 0.1%, Germany's Dax has fallen 0.3% and France's CAC has slipped 0.2%.
8.00am: Spanish ten-year yields have just broken through 6.9%, up 13 basis points this morning. Italian yields are tracking them, rising 8 bps to 6.3%.8.00am: Spanish ten-year yields have just broken through 6.9%, up 13 basis points this morning. Italian yields are tracking them, rising 8 bps to 6.3%.
7.54am: Here is today's agenda:7.54am: Here is today's agenda:
• 9am ECB publishes June monthly report
• 10am Italy sells 2015/2019/2020 BTPs for up to €4.5bln
• 10am Eurozone consumer price inflation for May (final) (previous: annual rate 2.4%)
• Italian prime minister Monti meets French president Hollande in Rome
• 1.30pm US consumer price inflation for May - monthly figure expected to show a drop of 0.2% while annual rate forecast to drop from 2.3% to 1.9%
• 1.30pm US Weekly jobless claims are expected to remain around the 375,000 mark
• 7pm UK chancellor and Bank of England governor speak at the annual Mansion House Dinner		• 9am ECB publishes June monthly report
• 10am Italy sells 2015/2019/2020 BTPs for up to €4.5bln
• 10am Eurozone consumer price inflation for May (final) (previous: annual rate 2.4%)
• Italian prime minister Monti meets French president Hollande in Rome
• 1.30pm US consumer price inflation for May - monthly figure expected to show a drop of 0.2% while annual rate forecast to drop from 2.3% to 1.9%
• 1.30pm US Weekly jobless claims are expected to remain around the 375,000 mark
• 7pm UK chancellor and Bank of England governor speak at the annual Mansion House Dinner
7.37am: Equity market calls from Michael Hewson, senior market analyst at CMC Markets UK:7.37am: Equity market calls from Michael Hewson, senior market analyst at CMC Markets UK:
• FTSE100 is expected to open 10 points lower at 5,474
• DAX is expected to open 2 points lower at 6,150
• CAC40 is expected to open 2 points lower at 3,028
• FTSEMib is expected to open 17 points lower at 12,882		• FTSE100 is expected to open 10 points lower at 5,474
• DAX is expected to open 2 points lower at 6,150
• CAC40 is expected to open 2 points lower at 3,028
• FTSEMib is expected to open 17 points lower at 12,882
7.30am: We are fast approaching the point where both Spain and Italy may have to be removed from the market, writes Gary Jenkins of Swordfish Research.7.30am: We are fast approaching the point where both Spain and Italy may have to be removed from the market, writes Gary Jenkins of Swordfish Research.
Unless there is a move towards a fiscal union or at least temporary common euro bonds the most likely way of doing this is for the ECB to buy in the secondary market and for the ESM to buy in the primary market. But that might not be enough firepower unless the EU increases the size of the firewalls.Unless there is a move towards a fiscal union or at least temporary common euro bonds the most likely way of doing this is for the ECB to buy in the secondary market and for the ESM to buy in the primary market. But that might not be enough firepower unless the EU increases the size of the firewalls.
In his morning musings, he also writes:In his morning musings, he also writes:

We might just be heading towards the endgame where German politicians have to make the most difficult decision of their careers; do they put Germany's credit on the line to try and save the Eurozone or do they walk away? We have been slowly approaching this point for years but events seem to be picking up pace after the debacle of the attempted bailout of Spain.
We might just be heading towards the endgame where German politicians have to make the most difficult decision of their careers; do they put Germany's credit on the line to try and save the Eurozone or do they walk away? We have been slowly approaching this point for years but events seem to be picking up pace after the debacle of the attempted bailout of Spain.
There are ever more desperate cries for help coming from Spain and Italy ("ECB is the only institution able to restore stability" – PM Rajoy) and according to the FT France is pushing again for the ESM to be given a banking licence, be able to recapitalise banks directly and be leveraged. According to the Telegraph Ms Merkel is prepared to consider a "European Redemption Pact" which was first mooted last year in Germany.There are ever more desperate cries for help coming from Spain and Italy ("ECB is the only institution able to restore stability" – PM Rajoy) and according to the FT France is pushing again for the ESM to be given a banking licence, be able to recapitalise banks directly and be leveraged. According to the Telegraph Ms Merkel is prepared to consider a "European Redemption Pact" which was first mooted last year in Germany.
7.25am: Good morning and welcome back to our rolling coverage of the eurozone debt crisis.7.25am: Good morning and welcome back to our rolling coverage of the eurozone debt crisis.
Spanish borrowing costs have just hit a new high. The interest rate on ten-year government bonds has climbed 8 basis points this morning to 6.864%, levels last seen in the 1990s before the euro was introduced. Italian yields have risen by 6 points to 6.289%, ahead of an eagerly awaited auction of three-year bonds later this morning. Yesterday's auction was not considered a success, when Italy sold €6.5bn of one year paper at 3.97% - well above the 2.34% at the previous auction.Spanish borrowing costs have just hit a new high. The interest rate on ten-year government bonds has climbed 8 basis points this morning to 6.864%, levels last seen in the 1990s before the euro was introduced. Italian yields have risen by 6 points to 6.289%, ahead of an eagerly awaited auction of three-year bonds later this morning. Yesterday's auction was not considered a success, when Italy sold €6.5bn of one year paper at 3.97% - well above the 2.34% at the previous auction.
Spain was rocked by a double downgrade last night: ratings agency minnow Egan Jones downgraded the country to CCC+ with a negative outlook. Moody's followed, cutting Spain by three notches to Baa3 - leaving it just one notch above junk - and kept its rating on review for a further downgrade in the next three months. It cited the Spanish government seeking up to €100bn of external funding from the EFSF or ESM to bail out its banks, which will increase the country's debt burden.Spain was rocked by a double downgrade last night: ratings agency minnow Egan Jones downgraded the country to CCC+ with a negative outlook. Moody's followed, cutting Spain by three notches to Baa3 - leaving it just one notch above junk - and kept its rating on review for a further downgrade in the next three months. It cited the Spanish government seeking up to €100bn of external funding from the EFSF or ESM to bail out its banks, which will increase the country's debt burden.
Over in Greece, the run on the banks has intensified. Daily cash withdrawals have increased from €100m-€500m to between €600m and €900m a day ahead of this Sunday's elections, which many fear could herald the country's exit from the euro.Over in Greece, the run on the banks has intensified. Daily cash withdrawals have increased from €100m-€500m to between €600m and €900m a day ahead of this Sunday's elections, which many fear could herald the country's exit from the euro.