• Chancellor: Britain could be swayed by well-argued case.
• Merkel hints at bigger German contribution to bailout fund
• German bond auction goes well
• Germany shrinks 0.25% in fourth quarter
• Today's agenda
Greek government officials at the highest levels tonight confirmed to our correspondent Helena Smith in Greece that debt-reduction talks are going well and in terms of detail should be completed in "the next few weeks."
It will however take several more weeks for the bond swap to "be physically implemented."
Interim prime minister Lucas Papademos will, they confirm, be holding talks with Charles Dallara tomorrow (as Evangelos Venizelos also indicated this evening).
"Right now Papademos is looking towards elections being held sometime in April and probably towards the end of the month," a senior insider has just revealed.
Helena continues:
The revered macro-economist was installed in power in December at the helm of a three-party coalition whose mission is solely to push through the necessary reforms to finally win a second €130bn rescue package for the debt-stricken country.
And as another very well-placed government source has just told me: "unanticipated shocks are by definition anticipated. We are preparing for every scenario - whatever it may be and how we react to it."
A late snippet -- the EU summit scheduled for 30 January in Brussels has been shifted to the 29th, because of a general strike taking place in Belgium that day.
The power of the workers, eh?
News of the change, and its cause, was confirmed by Danish PM Helle Thorning-Schmidt this evening, telling reporters in Copenhagen that:
We have moved it a day earlier, and it really is because of the general strike.
Thorning-Schmidt was speaking at the ceremony to mark the start of Denmark's presidency of the European Union.
A something-or-nothing day for the financial markets has seen the Dow Jones index finish 13 points lower at 12499.
That's a fall of 0.1%, better than the 0.45% fall on the FTSE 100 today (it finished 25 points lower at 5670).
Wall Street traders took some heart from the latest 'Beige Book' report from the Federal Reserve. This regular US economic survey showed that conditions improved at the end of 2011. Nothing spectacular, but December's "modest to moderate pace" growth was better than November, when growth was "slow" in some districts.
Greek finance minister Evangelos Venizelos has called on the Arab world to help Greece through its financial crisis.
Venizelos gave the closing speech this evening at the 1st Economic Forum Greece-UAE 2012. In what reads like a rousing address, he said the support offered to Greece by the rest of the EU was not sufficient to get it through the crisis:
In this effort that requires very tough sacrifices of the Greek people, we need international allies. Undoubtedly, we have found such allies in the face of our partners in the Euro Area and the European Union. But they are not enough.
Our traditional and historic friends must come by our side too; and we will always be by their side. And those friends are in the Arab world.
Middle Eastern countries are already providing some support to Greece through their membership of the IMF - with the UAE contributing 0.32% of total funds. I reckon Venizelos is suggesting they could take part in the large-scale Greek privatisation programme (airports, the state lottery, and even some islands are on the block).
Venizelos also told his audience that "an asymmetrical warfare" was being fought in the eurozone:
...between states, international organizations and the organized market entities on the one hand and the speculative aspects of the market on the other hand.
He also claimed that the long-running push to agree a debt-reduction deal with Greece's creditors was going well (despite reports today saying they are going badly):
Our discussions with the private sector regarding the PSI scheme have advanced and are now at a very good point. We are ready for a next meeting, maybe tomorrow morning, with our friend, Charles Dallara, from IIF.
IIF represents Greece's many lenders, who are being asked to accept a 50% haircut on their loans.
The full speech is online here.
There's an interesting report in German newspaper Handelsblatt tonight -- suggesting that Christine Lagarde has accepted that "tens of billions" of extra euros need to be handed to Greece.
According to Handelsblatt, the IMf accepts that the deteriorating Greek economy means that its second rescue package is not large enough. As things stand, Greece will not hit its target of reducing the national debt to 120% of GDP by 2020.
Where might that money come from? If the IMF decides it must make up the difference, then the UK might be asked to contribute -- putting George Osborne on the spot.
It also appears that Lagarde and Angela Merkel have agreed to bring the negotiations over Greece's debt reduction to a rapid conclusion.
Handelsblatt says that the two leaders have agreed that their goal is to complete the private sector participation "in the next few weeks". That would give enough time to sort out the paperwork and hand over Greece's next aid tranche before €14bn of debt comes up for repayment.
Tomorrow could be a hectic day in the eurocrisis.
Spain is holding its first sale of government bonds this year (it is selling three and four-year debt), while Italy will look for buyers of shorter-term debt (135-day and 364-day Treasury bills).
The Bank of England and the European Central Bank are both holding their monthly interest rate-setting meetings.
Analysts at Daiwa Capital Markets predicted that:
Both the BoE and ECB are likely to leave policy unchanged this month, but Draghi could possibly signal further ECB easing in the months ahead.
Philipp Hildebrand, who quit as chairman of the Swiss National Bank following revelations of currency dealings, is walking away with a pay-off of 900,000 Swiss francs (or £615,000).
From the FT tonight:
The bank said Philipp Hildebrand's contract entitled him to 12 months' pay. The first six months covered his notice period, with the remainder compensating him for a clause in his contract preventing him from working for another bank until next January.
Hildebrand stepped down on Monday, saying he could not prove that he was unaware that his wife was dealing in the US dollar while he was pondering whether to intervene to push down the value of the Swiss franc.
Hildebrand insists that he and his wife are innocent of collusion, and a pre-Christmas investigation by PricewaterhouseCoopers found no evidence of wrong-doing. However, the news of his payout is likely to put banking pay under the spotlight yet again.
I'm a bit late with this story, but it's still worth a read.
In Greece, local chemists are running out of painkillers and asthma inhalers as the Greek population suffer from the worsening economic crisis.
Bloomberg reports that:
For patients and pharmacists in financially stricken Greece, even finding aspirin has turned into a headache.
Pharmaceutical groups say that almost half the country's 500 most-used medicinesare in short supply -- including vitally needed products such as blood-thinners.
So why is the economic crisis to blame? One reason is that the Greek government has cut the price at which medicines are sold, to lower its own costs. That means suppliers can make higher profits by selling their wares in other countries.
Another factor is the weakening Greek economy:
Wholesalers and pharmacists say the system suffers from a lack of liquidity, as public insurers delay payments to pharmacies, which in turn can't pay suppliers on time.
The human cost of the financial crisis -- on top of the recent rise in suicides in Greece.
Over in the US, a sale of ten-year government debt has just seen investors accept record low interest rates.
The 10-year Treasury bonds were sold at an average yield of 1.9% - the first time ever that debt of this kind has been shifted at under 2%. Even that that low price, there was strong demand -- the bid-to-cover ratio came in at 3.29 (meaning the US could have sold three times as much debt as was on offer).
This is the first auction of long-term US bonds since America's national debt reached the size of the overall US economy (a dubious milestone passed earlier this week).
Marketwatch has a good write-up about the details of the US auction, here.
The idea that the UK could increase its IMF contributions has gone down badly with Margot Parker, a UKIP parliamentary candidate. She tweeted that
@MargotLJParker: Eurozone crisis live: George Osborne says UK could increase IMF payments http://t.co/1I3mTd7b UK taxpayers bashed again eh!!
Sentiments that could be shared inside Westminster too....
So, how significant is George Osborne's comments this afternoon about the possibility of the UK boosting its contributions to the International Monetary Fund (see 3.10pm)?
The word from sources in the Treasury this afteroon is that the chancellor has not changed his stance on the IMF.
However Andrew Tyrie, the Conservative MP who chairs the select committee, believes that Osborne's remarks are significant. He told my colleague Jill Treanor that:
What the chancellor appears to have been doing is sending his opposite numbers a message that his room for manoeuour is limited, while at he same time he also appeared to be saying that he was not excluding more support for the IMF.
The key point, we believe, is that G20 finance ministers are holding a summit in Mexico next month. The issue of IMF funding will certainly be discussed. If there is broad agreement to boost the IMF's firepower, then the UK government would be under some pressure to join in.
But a major increase in funding would need parliament's approval -- and many Tory MPs might block it (see 3.36pm)
The rumours this evening is that the negotiations over Greece's debt reductions plans are not going well. The situation is so worrying, in fact, that European governments may have to dip into their pockets and provide billions of extra euros.
Reuters quotes a senior banking source saying:
Private sector involvement is going badly.
Another reckons that governments are now "mulling an increase in their share of the burden".
The background here is that Greece is trying to agree a 50% haircut with its lenders. Some creditors appear to be playing hardball, while there are also fears that a 50% reduction may not be enough.
So how much money might EU governments have to provide? Dow Jones sources reckon it could be €15bn.
Albert Edwards, one of the City's most famously bearish analysts, has warned this afternoon that the next 12 months will be desperately grim.
That's the bad news. The good news is that 2012 will be the nadir of the current crisis.
Edwards, who works for Société Générale, told a conference in London this afternoon that 2012 will be a stinker because the Chinese economy will suffer a hard landing.
He explained that:
It is hard to think 2013 and onwards can be any worse than this year if China hard lands.
(via economics editor Larry Elliott, who's at the briefing)
Why might China's economy stumble this year? There are several possible causes -- some economists fear the country's housing market could collapse. Other experts reckon its banking sector is hiding away masses of bad loans.
The Financial Transaction Tax raised its head again today - figuratively speaking - when Italian prime minister Mario Monti compared it to the Loch Ness Monster.
Monti said the idea of imposing a small levy on all financial transactions shared one characteristic with the Highlands's most famous resident -- it keeps disappearing, then reappearing. He supports the idea, but only if it can be implemented across the EU. As the Associated Press explains:
Monti, who studied at Yale with economist James Tobin, who first proposed the levy, said his one-time mentor likened the tax's popularity through history to the Loch Ness Monster.
"You see it, it disappears, then reappears," Monti said. "In this phase I think it has more sense than in others given the velocity of financial transactions, which can cause damage, and not just benefits."
But will the FTT slide back into the murky depths, or is it finally ready for the limelight? The French are absolutely determined to bring the tax in - and hope to draw up plans by this spring. Britain argues that the tax would need to be imposed globally.
George Osborne will face a fight with his own backbenchers if he does attempt to increase the UK's contributions to the International Monetary Fund (as he suggested at 3.10pm).
Parliamentary arithmetic means that Conservative eurosceptic MPs could defeat the plan (unless opposition MPs voted with the government).
Two Tories have already voiced their concerns this week. Conservative MP Douglas Carswell told City AM that:
I suspect that if the government pushes it to a vote they may well find they cannot rely on a majority.
A total of 30 Tories rebelled last July when the goverment asked the Commons to approve another £9bn for the IMF, cutting its majority to 28 (as Labour opposed the increase).
Sir Peter Bone MP also opposes Britain paying more to the IMF, saying last weekend that:
Enough is enough.
Chancellor George Osborne has just suggested that Britain could increase its payments to the International Monetary Fund.
Osborne is appearing at the Treasury select committee in parliament -- officially to answer questions the Independent Commission on Banking. The MPs, though, were keen to discuss the financial crisis, and ask whether the UK could raise its IMF contributions.
Osborne reckoned he was the first finance minister anywhere in the world to suggest the IMF needed more resources. He then explained that:
"We are absolutely enthusiastic supporters of a well-funded IMF.
If there is a case to be made for additional IMF resources we should hear it from the IMF. If it is a good case then ourselves and other countries like Japan, like Australia, will look at that, I am sure, favourably.
[6pm: updated with fuller quotes from GO]
Osborne then skirted around the issue of whether it would be more than the 4.5% that the UK usually contributes... but also spelling out that any money should go into "general resources" and not to bail out the EU.
(with thanks to my colleague Jill Treanor, who is watching the session).
Britain's contributions to the IMF have to be approved by parliament. Last year, MPs gave the green light to a budget of €40bn, of which around €30bn has already been committed. That's why the UK refused to contribute €30bn to an IMF loan to the eurozone last month.
Afternoon all. The euro just suffered one of its periodic wobbles. The trigger appeared to be our old friend - the French downgrade rumour.
The euro fell to $1.2673 in the last few minutes, on rumours that Standard & Poor's had finally done the deed. This was followed by 'sources' at the French Treasury insisting that a downgrade was not imminent [by convention, rating agencies warn their victims sovereign nations before changing their credit rating].
The Gallic denial sent the euro bouncing back over $1.27, before sliding back again close to a new 15-month low of $1.2668..... Something's afoot? The pound's also falling against the dollar ($1=£1.5344) as risk aversion returns.
It's good-bye from me, Julia Kollewe. I'm handing over to Graeme Wearden.
Time for a look at the markets. The FTSE is down more than 30 points at 5665, a 0.55% fall. Germany's Dax has slipped 17 points, or 0.5% while France's CAC has lost 31 points, or 0.5%.
Markets were spooked by bearish comments from credit rating agency Fitch. David Riley, the head of sovereign ratings at Fitch, said the ECB should ramp up its buying of eurozone debt to prevent a "cataclysmic" collapse of the euro.
A strong German bond sale this morning was seen as a sign that investors were flocking to safe-haven debt, and sparked worries that Spanish and Italian auctions on Thursday and Friday may struggle.
Alex Paterson, a trader at Liberum Capital, said:
Because the German auction has gone so well, the market is wary that these [Spanish and Italian] auctions may not go so well.
But the sell-off on stock markets could also have a technical element to it as it came when the market was "at the top of its range," he said.
Speaking at her office in Berlin after talks with Italian PM Mario Monti, Angela Merkel stressed that the eurozone's top priority at the moment is to secure a second aid package for Greece. She said it had to be sorted out before European leaders could start working on how to boost growth and jobs.
The German chancellor said:
The eurozone's first obligation this year is to resolve a second Greek programme and finalise these negotiations with the banks so that we can then concentrate on structural problems in the eurozone.
The press conference has now finished.
The euro has clawed back some losses and German Bund futures retreated from the day's highs after Merkel suggested Germany may add more funding to a permanent eurozone bailout fund.
The German chancellor said Germany would be prepared to pay more capital into the European Stability Mechanism when it is launched later this year. The euro briefly leapt to $1.2730 from $1.2690 before the comments.
A bond trader told Reuters that the comments "seem like a change of tack" - suggesting Germany is taking a "more proactive approach to the crisis".
More comments from Merkel:
We have said from the beginning that we want to work closely together among the big economies in the European Union and especially in the eurozone. I don't need to stress that that doesn't mean that we want to exclude the economies that aren't quite as big but I believe it is particularly important that everyone of us makes his contribution to the stabilisation of the euro zone.
We also talked about the next summit, ... which should concern itself with the question of how we can advance growth and employment beside (the topic of) budget solidity.
I want to stress there are measures that cost money and those growth-supporting measures that are in the structural area, so it's important we talk about labour law, that we exchange experiences among one another.
Monti, for his part, is insisting Italy will work closely with France and Germany to solve the eurocrisis. Leaders from the three countries will meet on 20 January.
Merkel said she wasn't 45 mins late for her press conference because she was arguing with Monti - but because they had so much to discuss. The two have discussed ways of increasing growth in the eurozone - and she said there are ways of doing this that don't cost money - structural methods.
The press conference in Berlin has started. Merkel kicked off by praising Italy for taking huge steps on structural reforms and the budget. She also said it was positive that plans for a European fiscal pact are progressing. The next summit will not just focus on budget deficits but also look at how to encourage economic growth in Europe.
The German chancellor said:
We have followed with great respect how quickly the [Italian reform] measures are being implemented.
We talked about how positive it is that the fiscal compact has already made good progress in negotiations.
While we're waiting for Merkel and Monti, there is more bad news from Greece. Helena Smith, our Athens correspondent, reports:
The country's development minister Michalis Chrysohoidis has this morning revealed that Athens' budget deficit will definitely be above target, predicting it will reach 9.6% of economic output in 2011, way above the 7.5% the Greek finance ministry had originally hoped for. The news came as Fitch Ratings also pronounced that Greece's financial woes could still exacerbate the eurozone crisis if private creditors fail to agree on a debt reduction deal widely seen as the meatiest part of a second package of rescue funds for the debt-stricken nation.
Sounding the alarm, Fitch's head of sovereign ratings David Riley said the country "still has lots of potential to plunge Europe into crisis" and that "time is running out."
Athens is racing against the clock to wrap up what have broadly been described as "extremely complex" negotiations with private investors ranging from banks to insurance companies on accepting a 50% reduction in the face value of the bonds they hold.
Charles Dallara, managing director of the International Institute of Finance (IIF) is, according to local media, expected to arrive in Athens later today in a bid to conclude the talks before international debt inspectors, from the EU and IMF, also arrive in town next week.
Addressing an international economic forum outside Athens, Chrysohoides was at pains to emphasise the "good news" saying that "absorption of European Union funds has exceeded all expectations". His upbeat take chimed with that of Olli Rehn, the EU's Economic and Monetary Affairs chief who is busy telling anyone who will listen that a second bailout deal for Greece is "only weeks away."
The EU and IMF agreed to part with a further €130bn in financial aid for the indebted country last October - if the deal is not signed and sealed by March when Athens has to cough up 14 bn euro to cover maturing debt, Greece faces economic armageddon.
Angela Merkel and Mario Monti are due to give a joint press conference in Berlin soon. You can watch it live here, from the Bundeskanzleramt in Berlin.
TradeDesk_Steve Steve Collins tweets:
Merkel's speaking in a min... any positive comments should offer an opportunity to sell EUR on the rally
Barclays Capital warns that a skyscraper building boom in China and India may be a sign of an impending economic correction. AP reports that
Barclays has mapped an "unhealthy correlation" between construction of the world's tallest buildings and impending financial crises over the last 140 years, including the Great Depression and the Asian financial crisis. Today, China is home to over half the 124 skyscrapers now under construction worldwide.
India, which has just two skyscrapers, is building 14, including the world's second tallest tower, in the financial capital Mumbai. Barclays says such clusters of building activity usually coincide with periods of easy credit, excessive optimism and rising land prices, which often occur before market corrections.
Bad news for orange juice lovers. Fears that the US might ban OJ imports from Brazil drove orange juice futures to a record high on Tuesday. Health regulators have begun testing all incoming shipments for traces of an illegal fungicide called carbendazim.
According to the Food and Drug Administration, a US juice producer had detected low levels of carbendazim in orange juice concentrate imported from Brazil, the top grower which accounts for more than 10% of the US supply. The pesticide is banned in US citrus but it is used on orange trees in Brazil to fight mould.
Meanwhile, cocoa futures rose to a 7-week high early on Wednesday, extending this week's steep rally fuelled by a sharp slowdown in port arrivals in top producer Ivory Coast following adverse weather. Arabica coffee futures edged higher while raw sugar futures were slightly lower.
The latest draft version of the EU fiscal compact treaty has been leaked. London-based think tank Open Europe said:
After the last draft, this one now looks to be much more in line with the UK's demands and suggests that the UK still has some negotiating power or some allies willing to argue a similar line. For the eurozone, it actually may not be great news since it seems to be watered down in terms of enforcement mechanisms and is likely to breed fears over the potential weakness of the treaty in tackling the eurozone crisis.
Open Europe's director Mats Persson added:
This latest draft marks a provisional victory for Cameron and Clegg – the references to the single market are gone and the role of the EU institutions watered down. The fact that the changes line up closely with UK objectives suggests that the Government may have more allies than has often been portrayed.
The strengthened commitment to incorporate these new rules into the EU Treaties within the next five years sets the stage for another round of EU negotiations involving the UK, potentially another source of leverage for the government in the future.
At the same time, however, the narrower role for the EU institutions in enforcing the rules for eurozone countries that run large debts may be seen by markets as a weakness reminiscent of the original Stability & Growth Pact.
More reaction to the German bond auction.
Jeremy Cook, chief economist at foreign exchange company, World First, said:
This was the first auction of 5 year German debt that has yielded less than 1%, and demand was strong - shifting €8.97bn against a target of €4bn.
This comes in the same week that a 6 month paper auction from Germany was sold with negative yields, i.e. paying to lend money to Germany.
It all suggests that despite all the 'soothing talk' from some members of the EU political class, the market is still very concerned about solvency, going forward.
This news comes a couple of hours after the initial estimate of German GDP for Q4 last year was revealed as "roughly" -0.25%, a number which could be revised lower.
This represents bad news for the entire eurozone. If Germany's not growing, nobody will be.
Here's some reaction to the German bond auction, courtesy of Reuters.
Annalisa Piazza, market economist at Newedge Strategy in London, said:
Demand was super-strong with total bids at €8.97bn for a 2.8 bid/cover. The line was priced at an average 99.24, with no auction tail, further underpinning the strong auction results...The amount retained is a touch higher than average but the auction would have been strong anyway.
Richard McGuire senior fixed income strategist at Rabobank in London, said:
Germany's five-year auction went well. €3.15bn of the five-year Bobl was issued with the Bundesbank retaining €847m... This positive result has provided an uplift for the front end with short dated yields 1-2 basis points lower.
Germany has sold €3.15bn of of its new 0.75% five-year benchmark bonds. The auction drew more demand than the previous bond sale in early December, with the bid to cover ratio at 2.8% compared with 2.1%. The average yield, or interest rate, was 0.9%, down from the 1.1% seen at the previous auction.
The picture on European stock markets is mixed. The FTSE is down just 1.7 points at 5694 now while shares in Germany, France, Spain and Italy have edged higher.
While the latest UK trade figures are not that bad, the outlook isn't great. Chris Williamson, chief economist at Markit, said:
UK goods exports fell in November, reversing some of the huge gain seen in October and causing the trade balance to widen. However, exports nevertheless appear to have regained a modest upward trend in recent months, which is likely to have persisted into December. Trade is nevertheless unlikely to contribute strongly to UK economic growth in 2012, which looks set to be a challenging year as signs of improved demand from countries such as the US and China are likely to be countered by weak demand in the eurozone.
Looking ahead, there are signs that exports fared well in December, but the longer term outlook is one where 2012 looks set to be a challenging year for UK exporters.
Some more reaction to the German GDP numbers. David Miller, partner at Cheviot Asset Management, said the lack of growth in the fourth quarter shows that Germany could now be on its way into a shallow recession and can't afford to be complacent about the eurozone debt crisis.
Germany's 3% growth for the year was respectable but the fourth quarter saw a marked slowdown, which hints at a possible shallow recession later this year.
The growth is apparent in the industrial companies that export but the financial sector is weak and domestic consumption is just not picking up.
The GDP figures today show just how important propping up the euro is for the Germans. Firstly, the euro is undervalued relative to what the Deutschmark would be, which is why the exporters are doing well. Secondly, German growth this year is dependent on health of export markets and, as the bulk of it's export markets are European, the euro must be propped up to enable growth.
One of our readers, ballymichael, makes an interesting point about the meetings that aren't happening.
Hmm.
Note the meetings that aren't happening. Mr. Cameron seems remarkably blithe about the three biggest eurozone economies and the head of the IMF going into daily huddles with each other and discussing things like the FTT and Eurozone
Or possibly, he still believes he's (ho-ho) "Vetoed" everything?
Meanwhile, visceralpelican makes an equally valid point:
Cor Christine, easy on the sunbeds and fake tan
Germany has had a good crisis, says Jane Foley, senior currency strategist at Rabobank.
Germany has confirmed a 2011 budget deficit of just -1.0% of GDP. Last September the European Commission had forecast that it would take until 2012 for the country to register this improvement. While the eurozone is most likely presently in recession and although German growth slowed in Q4, Germany continues to have a relatively good crisis. Last week both German unemployment and export data brought positive surprises. This was reminiscent of data in 2010 when Germany's economy powered ahead supported by strong demand for German exports.
In the first half of 2010 German exporters benefitted as the euro was pushed lowered by the Greek financial crisis. On a trade weighted basis the eurozone's nominal exchange rate is currently pressing below those 2010 lows which puts the trade weighted euro back at levels not seen since 2003. For Germany its adoption of the EUR in 1999 has been a remarkable boon to trade. European Commission data showed that Germany's real effective exchange on a steep downward trajectory between 1995 and 2008 and, after a modest appreciation into 2009, a softer tone then emerged as the Greek debt crisis kicked off.
Movements in effective exchange rate illustrate that Germany has benefited significantly from its association with weaker Eurozone countries. A Germany outside of EMU would no doubt be strangled by a sharply stronger exchange rate. While it is of huge importance that all countries within EMU adopt prudent budgetary policies, it is also imperative that Germany plays a key part in stimulating growth in other parts of the system by stimulating domestic demand.
The UK trade figures are out. Britain's trade in goods deficit widened more than expected to £8.6bn in November, reversing the previous month's record narrowing. October's deficit was revised to £7.9bn.
Exports fell, especially to countries outside the EU, while imports of oil and chemicals hit record highs. The trade figures tend to be volatile but will add to concerns over Britain's ability to grow.
Our man in Rome, John Hooper, has picked up this newspaper interview with Mario Monti in German daily Die Welt.
Die Welt this morning carries a long interview with the Italian prime minister, Mario Monti, ahead of his meeting today with Angela Merkel. His core message could be summed up as "Give us a break! We're doing our bit. Now let up".
Monti, who said he had "always worked for an Italy that as much as possible resembles Germany" (interesting to see how that goes down in Naples) said the key issue now was growth rather than the budgetary discipline the Germans are so keen to impose.
Italians were bracing themselves for a round of liberalisations that many would find painful. "The problem is that, despite these sacrifices, the EU is not meeting us halfway in terms of a reduction in interest rates," he said.
Monti will also be arriving in Berlin with a warning, and a rebuke. He said that, if all the euro was seen to bring was suffering, then there was a risk that Italians could be tempted by eurosceptic populism. And he told his interviewer the "EU's biggest mistake in the last 10 years" was the decision taken by France and Germany in 2003 not to respect their budgetary commitments under the Maastricht treaty.
Germany will auction €4bn of the new 5-year benchmark this morning.
Citi analysts Peter Goves and Aman Bansal say:
We expect the auction to be well supported by ongoing demand for sub-5yr AAA paper as evident from the extremely low level of yields and recent strong auctions.
Some good news from Italy, where the public budget deficit narrowed to 4.3% of GDP in the first nine months of 2011, compared with 4.6% in the same period of 2010. The improvement in the government finances was due to revenue growth, of 1.6%, outpacing spending growth of 1.1%. In the third quarter, the deficit amounted to 2.7% of GDP, down from 3.5% a year earlier. Italy's official target is to bring the deficit down to 3.8% of GDP in 2011, from 4.6% in 2010.
The European Central Bank's overnight lending to European banks has hit another peak, of €1.9bn, compared with €1.5bn the previous day.
European shares edged lower from Tuesday's one-week closing high amid nervousness ahead of key bond acutions in Italy and Spain later this week.
The FTSE is now down 16 points at 5680, a 0.3% fall, while Germany's Dax and France's CAC are now flat after slipping in early trading.
Keith Bowman, equity analyst at Hargreaves Lansdown, told Reuters:
A touch of nerves is creeping back ahead of some significant debt auctions. If the auctions go reasonably well, investors will just leave the issue on the back burner and concentrate on the quarterly results season. If we were to see a badly received auction, then that could certainly cause further concerns.
On Thursday, the Spanish Treasury looks to raise between €4bn and €5bn from three debt auctions, including one of a new three-year benchmark bond, while on Friday, the Italian Treasury will be selling up to €4.75bn of fixed-rate bonds.
Greece and private creditors are inching closer to a deal on a bond swap to halve the country's debt load. Charles Dallara, the head of the Institute for International Finance which represents global banks and insurers, is expected in Athens later this week for meetings with top Greek officials. In October, IIF members agreed to accept a 50% reduction in the face value of their Greek bonds.
Greece needs to clinch a deal to secure further bailout funds from its eurozone partners and the International Monetary Fund, in order to stave off a default in March when €14.5bn of its bonds mature.
Under the proposal tabled by banks, private creditors will voluntarily accept a nominal 50% discount, or haircut, on their Greek bond holdings in return for a mix of cash and new bonds. They would swap their old bonds for new ones at 35% of their face value and an average coupon of 5%, along with a cash payment amounting to 15% of the old bonds' face value. This could lead to a bigger "net present value" loss of 60% to 65% for private creditors.
However, the proposal also includes a sweetener which would allow for a bigger return on the new bonds if the economy does better than expected. And it asks that the new bonds should have "pari passu" status which means holders would have priority in claiming assets in case of default.
Germany, Europe's largest economy, grew by 3% last year, as expected - down from 3.7% growth in 2010, the strongest since reunification two decades ago (and compared with a sharp 5.1% contraction in 2009).
Export growth slowed to 8.2% from 13.7% in 2010 but private consumption finally picked up, growing by 1.5%, up from 0.6%, according to the Federal Statistics Office. Consumers went out and spent more as unemployment fell, with the jobless rate hitting the lowest level in December since the country was reunified.
However, the German economy shrank by 0.25% quarter-on-quarter in the final three months of last year.
"The economic recovery took place primarily in the first half of the year," said Roderich Egeler, the head of the statistics office. "2011 saw strong private consumption," he added.
Jörg Zeuner, chief economist of Switzerland's VP Bank, said:
Germany cannot isolate itself so easily from tensions within the eurozone. In addition, the export sector is facing a difficult period given the fall in global demand. Another quarter of contraction and thereby a technical recession is distinctly possible. However if there is no further escalation in the eurozone debt crisis, the German economy should still grow in 2012, albeit at a moderate 0.5%.
The FTSE has slipped about 7 points to 5689, a 0.1% fall. Germany's Dax and Italy's FTSE MIB are also down 0.1% while Spain's Ibex is flat and France's CAC has lost 0.2%.
Here is today's agenda:
• German GDP for 2011 at 8am
• Italian third-quarter deficit at 9am
• UK trade for November at 9.30am
• German €4bn auction of 5-year notes at 10.15am
• Merkel and Monti meet in Berlin, press conference at midday
• Sarkozy and Lagarde meet in Paris
• George Osborne appears before TSC on banking reforms at 2.15pm
• IFF chief Charles Dallara expected in Athens today to discuss Greek haircut
All times are GMT
Welcome back to our rolling coverage of the European debt crisis. More meetings of European leaders today: German chancellor Angela Merkel meets Italian prime minister Mario Monti in Berlin, with a press conference at midday, while it is French president Nicolas Sarkozy's turn to meet IMF chief Christine Lagarde after Merkel's meeting last night.
On the economic data front, German GDP growth is expected to have slipped back to 3% in 2011. It will be interesting to see how much demand Germany sees for 5-year notes at its €4bn auction today, after it sold short-term bills at negative yields recently.
In the UK, the trade deficit looks to have worsened slightly to around £8.4bn, after October's surprise improvement to £7.6bn. This would still enable the chancellor to meet his targets for 2011.
European stock markets are expected to open slightly lower as worries over the eurozone debt crisis ahead of Spanish and Italian bond auctions later this week outweigh recent optimism about corporate earnings and the US economy.
Financial spreadbetters are calling London's FTSE 100 index 13 to 16 points down, or 0.3%, while the Dax in Frankfurt is set to open 28 points, or 0.5%, lower, and the CAC in Paris is expected to slip 10 points or 0.3%.