• IIF: our offer is in line with October deal
• Finance ministers insist Greece's creditors must accept lower interest rates on new bonds
• Juncker: Greek programme is off track
• Today's agenda
Time for a round-up of today's main developments. Shares in London and other European stock markets fell after eurozone finance ministers rejected a debt restructuring deal for Greece. Ministers insisted that banks must accept a lower interest rate on the new Greek bonds than the 4% average rate demanded by bondholders.
However, Institute of International Finance boss Charles Dallara, who represents private creditors, insisted that the deal on offer was in line with the Greek rescue plan hammered out last October.
Thankyou for all your great comments - our live blog coverage will resume tomorrow morning.
Professor Simon Evenett from the University of St. Gallen, Switzerland has compiled some thoughts on Davos, which starts tomorrow.
Leaving aside what is said for show, behind closed doors expect discussions at Davos to focus on three key aspects of the eurozone crisis. First, expect banks to collectively warn Germany and France against inflicting too many losses on holders of Greek government debt. Second, expect the same banks to lobby any government that will listen to go slow on raising capital requirements and other regulations that jeopardise a return to the go-go years. Third, expect the rest of the world to tell eurozone governments that no more IMF money will be forthcoming without many strings attached.
While the eurozone will dominate discussions, don't be surprised if the Americans and their European allies use Davos to further marginalise Iran. The consequences of being tough on Iran may well generate the biggest geopolitical surprise of the year.
Quick markets update -- the FTSE 100 closed at 5751, down 30 points or 0.5%. Germany's Dax slipped 17.4 points to 6419.22, a 0.3% fall, while France's CAC ended the day 15.77 points lower at 3322.65, a 0.5% drop.
Chris Beauchamp, market analyst at IG Index, commented that "frustration with the lack of progress on Greece finally begins to make itself felt." We're still some way from a serious sell-off, though.
An update on the situation in Italy -- it now appears that Fitch has been officially added to the list of rating agencies who are being investigated by the country's police.
We mentioned at 12.02pm. Reuters is now reporting that the probe has been extended to cover Fitch, as well as S&P and Moody's. The reason? Fitch's suggestion this month month that it could downgrade Italy by two notches.
S&P has also waded into the row, insisting that the claim that its controlling shareholders were tipped off about future ratings decisions is "groundless".
You can see a full breakdown of the IMF's new forecasts over on our Datablog, where we've pulled out some of the most interesting data into graphics.
Interestingly, the US was the only country whose 2012 growth forecast was not downgraded, with the IMF still predicting GDP expansion of 1.8% this year.
Vindication for America's policy of favouring stimulus measures over austerity? Economist Shaun Richards has another theory....
@EdConwaySky Perhaps the IMF is trying to curry favour with its biggest shareholder........
— Shaun Richards (@notayesmansecon) January 24, 2012
The IMF's latest world economic outlook report also warns governments to adjust the "rhythm" of their austerity measures to avoid derailing economic recovery.
My colleague Heather Stewart explains here that the IMF has warned that the necessary fiscal tightening should proceed at a pace that supports adequate growth in output and employment. As the IMF said:
Countries with enough fiscal space, including some in the euro area, should reconsider the pace of near-term adjustment.
In other words, cutting too deeply will cause more harm than good.
The International Monetary Fund has just slashed its forecasts for economic growth.
In its latest World Economic Outlook report, officially released at 3pm, the IMF cut its world growth outlook to 3.3% from 4.0%.
The eurozone crisis took much of the blame, with the IMF predicting a euro recession in 2012.
The IMF warned that:
The euro area economy is now expected to go into a mild recession in 2012 as a result of the rise in sovereign yields, the effects of bank deleveraging on the real economy, and the impact of additional fiscal consolidation.
The IMF cut its forecast for the eurozone to a 0.5% contraction in 2012, down from a previous forecast of 1.1% growth. Some countries will suffer particularly badly -- Italy is tipped to shrink by 2.2%, and Spain by 1.7%.
The UK is expected to grow by just 0.6%, down from a previous forecast of 1.6%.
The IMF left readers in no doubt about the severity of the situation, warning:
Global growth prospects dimmed and risks sharply escalated during the fourth quarter of 2011, as the euro area crisis entered a perilous new phase.
Greece's creditors have just given their first response to the Eurozone's rejection of their proposed terms for the debt restructuring.
Charles Dallara appears to be sticking to his guns, insisting that the deal on offer from the Institute of International Finance (which he heads) was consistent with the Greek rescue plan hammered out last October - when all parties agreed to a 50% haircut on Athens' loans.
Dallara also refused to say whether the IIR was prepared to drop its demand that Greece pays a coupon of at least 4% on new 30-year bonds that will be issued as part of the proposed restructuring.
Speaking in Zurich, he merely said:
I don't want to comment. I think our position is clear.
So, the brinksmanship continues? Dallara did appear to be trying to strike a positive tone, saying he was optimistic that many of Greece's creditors would sign up for a haircut. As he put it:
If we can reach a voluntary agreement I feel quite confident about large scale
participation.
Standard & Poor's has declared that it is likely to put Greece into "selective default" once its protracted debt negotiations are concluded.
That's not quite as bad as it sounds. Selective default is one notch above "restricted default" (the black mark reserved for when a borrower simply stops repaying their debts). It's also a reiteration of S&P's position from last summer.
The quotes from John Chambers, who chairs S&P's sovereign rating committee, are pretty interesting though. He suggested that Greece might be welcomed back into the capital markets once it has the "right policies", and also argued that the eurozone could survive the Greek crisis, saying:
It's not a given that Greece's default would have a domino effect in the eurozone.
Another interesting details from this lunchtime's press conference in Brussels -- Olli Rehn said it would be much better if Greece agreed a final deal with its creditors in January, adding that he expects agreement "within days".
It's not clear what Rehn's optimism is based on.
The general mood at the press conference was pretty restrained. Or, as Reuters bureau chief in Brussels, Luke Baker, put it:
Lots of "regretting" and "lamenting" going on at #EU finance ministers' press conference. Next there'll be wailing and gnashing of teeth.
— Luke Baker (@LukeReuters) January 24, 2012
Olli Rehn, EU commissioner for Economic and Monetary Affairs, and Michel Barnier, commissioner responsible for internal market and services, are holding a press conference in Brussels now.
Here are some of the highlights (it's being streamed here and there's a replay available):
Rehn said that that the EC backed the idea of bosoting the firepower of the European bailout fund, the ESM (as Mario Monti urged a few minutes ago, and Christine Lagarde recommended yesterday).
On the issue of Greece, Rehn said that all Greece's political parties needed to "broad political backing" to the terms of a second bailout, and that the EU wanted to see "convincing & firm" commitments from all sides.
Rehn also explained that EU finance ministers and officials had discussed the new fiscal compact this morning.
Mario Monti has repeated his call for the European Stability Mechanism to be enlarged beyond its current €500bn limit.
Speaking in Brussels, Italy's prime minister made an innovative argument -- that the bigger the ESM's firepower, the less chance it would need to be deployed at all.
Monti said:
If the amounts are of sufficient size that markets consider them credible, then it is very probably that they will never have to be spend.
He didn't say, though, how large the ESM would need to be. It is due to come into effect this summer, supplanting the European Financial Stability Fund.
Last night the Financial Times reported that Germany was open to boosting its firepowerto €750bn in exchange for strict budget rules via the fiscal compact.
Now, Angela Merkel's spokesman, Steffen Seibert, swiftly denied the report, saying "It is not true. There is no such decision."...
... but the FT story doesn't actually claim that anything as concrete as a decision has been reached, more that Berlin was warming to the idea.
Out in Greece, government officials are still putting on a brave face despite eurozone finance ministers rejecting the offer from Greek creditors (see 7.20am and 7.29am for more details).
Senior sources told our correspondent, Helena Smith, today that they are confident an agreement can be reached with the private sector "soon".
"What people in the government believe is that we can find a solution sometime in the next week or so," one official said.
"There is reasonable optimism," he added although he declined to say when, or if, officials from the Washington-based Institute of International Finance (IIF) would be returning to the Greek capital to continue the talks in person.
Readers will recall that Charles Dallara who heads the organisation now representing global private creditors unexpectedly left Athens on Saturday citing "personal engagments" although face to-face talks were due to have continued over the weekend.
Helena continues:
The country's technocrat prime minister Lucas Papademos is "relieved" that the only obstacle now blocking settlement of the voluntary bond swap is the ongoing imbroglio over interest rates and not the extent of the "haricut" or write-down of Greece's monumental €360bn debt pile.
"The demand [for a lower coupon] was expected. It is the lesser of two evils. If they had wanted to re-open discussion on the haircut we would have had to start the negotiations form the beginning, all over again. Re-regulating the interest rate is something dooable," insisted one insider who is well briefed on the high-stake discussions.
But pressure on near-bankrupt Athens is still at an all-time high. Highlighting Eurogroup chairman, Jean Claude Junker's, assertion earlier that Greece's fiscal adjustment and reform program is far from being "on track", the finance ministry's release today of updated budget execution figures showed that the country's fiscal deficit for 2011 exceeded that of 2010 - despite two years of massive spending cuts and tax increases that have brought ordinary Greeks to their knees.
Italy's crackdown on those pesky credit rating agencies continued today.
Officers from Italy's tax police have visited the offices of Fitch in Milan this morning. According to local reports, the officers are there to make checks in connection with their ongoing investigations into Standard & Poor's and Moody's.
Carlo Maria Capristo, a chief prosecutor in Italy, told Reuters that:
Men from the financial police are at Fitch in Milan.
The investigations began last August, when tax police raided S&P's Milan offices following claims that rating agency actions had caused "fluctuations" in Italian share prices.
Last week they visited S&P again, a few days after the company downgraded Italy's credit rating.
Alarming story of the morning -- a Greek government minister has admitted that he neglected to read the terms of Greece's original loan agreement with the European Union and the International Monetary Fund.
Michalis Chrysochoidis, currently development minister in Lucas Papademos's government, told Skai TV that he was too busy to read the memorandum outlinging the terms of the agreement at the time.
As he put it:
I did not read the memorandum, I had other obligations and responsibilities.As Citizens' Protection Minister, I had to tackle crime. I did not have time to study the memorandum.
Now, here's the really alarming bit -- Chrysochoidis is a candidate to take the leaderhip of the PASOK party, succeeding former PM George Papandreou (who resigned last November after flirting with the idea of a public vote on Greece's austerity).
The financial markets continue to cope well with last night's rejection of the Greek creditors' demands.
The FTSE 100 is currently down 43 points at 5739 (a fall of 0.74%), with other European indices showing similar losses.
So why no panic?
Louise Cooper of BGC Partners reckons that traders "clearly believe" the comments from politicians that a deal will still be done. She wrote today that:
Equity and bond markets have barely reacted to the news today that Athens will have to go back to bondholders and like Oliver Twist, ask for more.Very publically the head of the IIF said at the weekend that they had offered the "maximum" concessions - markets are taking the view that this was a negotiating position and the game of brinkmanship will continue.
Cooper also pointed to the lingering effects of the European Central Bank's offer of almost €500bn of cheap loans last month. This liquidity injection is helping to push down bond yields (as banks buy up government debt).
As she puts it:
The Long Term Repo Operation (LTRO) is being compared to Quantitative Easing which had such a beneficial on the stock market in the US, suggesting there may be more to go.
Today's debts auctions went smoothly.
Spain sold €2.5bn of short-term debt at sharply lower borrowing costs, and received bids for €13.5bn worth of debt.
The yield on Spanish three-month debt dropped to 1.285% (down from 1.735% at the last auction of this type), while it got its six-month paper away at 1.847% (down from 2.435%).
The Netherlands, meanwhile, showed the value of a solid AAA credit rating. It sold thirty-year bonds at a yield of just 2.690%, down from 4.03% at its previous auction nine months's ago.
Annalisa Piazza, economist at Newedge, said that the Netherlands boasted a "safe-haven status", adding that there is "no risks of a downgrade looming on the Dutch debt near term."
The Netherlands also sold €495m of 2013 bonds at yield of just 0.074%, or almost zero.
Here's a bit more detail on the worrying reports this morning that Portugal may need a second bailout.
The Wall Street Journal is reporting that "investors, economists and politicians" fear the Portuguese government may not be able to access affordable borrowing in 2013, when it is due to return to the financial markets.
While the Portuguese government's finances are covered this year as long as it abides by its bailout agreement, Portugal must regain full access to capital markets next year to help repay €9bn in debt coming due in September 2013.
While that date is still far off, the International Monetary Fund could require Portugal to present its financing plans a full year ahead before releasing more aid, as it did with Greece.
The yield on Portuguese 10-year bonds is around 14.3% this morning, showing that investors are pricing in a significant risk that the debt will be restructured.
The other factor, of course, is that Greece's debt restructuring is something of a precedent – for both sides. Bond traders suspect that other peripheral debt could also suffer a haircut, while politicians must wonder how they can negotiate a lower interest rate on their debts.
The Treasury was quick to comment on Britain's public borrowing data, claiming that the milestone reinforced the need for George Osborne's fiscal plan.
A Treasury spokesman said that it:
...shows the unsustainable level of spending this country built up over the past few years, and shows why it is critical for our nation's future that we deal decisively with the deficit.
Here's more detail on the UK's public finance figures for December.
Public borrowing in the financial year so far is now £103.3bn, down from £114.6bn at this stage last year. Tax receipts were boosted by the levy imposed on banks while government spending also fell slightly.
But the bad news is that public sector net debt (excluding the impact of the banking bailouts) rose to £1.004 trillion in December, the highest since records began in 1993 and equivalent to 64.2% of GDP.
Stronger tax receipts – boosted by the bank levy – meant the UK government borrowed less than expected last month. But Britain's total debt rose above the £1 trillion mark for the first time on record, according to official figures.
The Office for National Statistics said public borrowing excluding banking bailouts - the government's preferred measure - fell to £13.7bn last month from £15.9bn in December 2010.
Including the cost of bailing out banks, as well as some revenues from the sector, borrowing came in at £10.8bn in December, down from £13.9bn a year earlier.
Can the eurozone avoid slipping into recession? asks financial data group Markit. Its PMI survey for the eurozone rose to 50.4 in January, from 48.3 in December, indicating the currency bloc's economy is expanding again.
The services PMI improved to 50.5 from 48.8, while manufacturing was still in decline, with the index at 48.7 versus 46.9. All readings are five-month highs but remain at historically subdued levels, Markit noted.
There are rumours that Portugal may need a second bailout. Despite Lisbon's labour market reforms, financial markets fear the country could be next in line to default after Greece – whose debt deal with private creditors has just been rejected by eurozone finance ministers. According to financial data firm Markit, Portuguese debt insurance costs have hit record levels.
It looks like the German economy had a decent start to the year (and will avoid recession). The latest PMI survey shows manufacturing in Europe's largest economy grew in January for the first time since September. This briefly boosted the euro to $1.3021 from $1.3006.
According to Markit, which compiles the surveys, the German services PMI rose to 54.5 from 52.4 in December, while the manufacturing PMI poked its head above 50 – the line that separates expansion from contraction – and registered 50.9 versus 48.4 in December. The composite PMI hit a seven-month high.
Some sad news from Italy, where a demonstrator taking part in a truck drivers' protest against rising fuel prices has been run over and killed in an apparent accident.
The Italian man was run over by a truck driven by a German in the northern town of Asti, Italian police said.
As we reported yesterday, truck drivers in Italy have blocked roads across the country to protest against government reforms to open protected sectors including transport up to competition to create more jobs. The truckers demand easier rules on claiming reimbursement of excise duties on fuel, caps on insurance costs and a crackdown on unlicensed operators.
Other groups – railway workers, petrol station owners, pharmacists and lawyers – have also threatened to strike.
Christine Lagarde, managing director of the International Monetary Fund, took to the airwaves this morning to discuss the latest developments.
Lagarde told Germany's Deutschlandradio that she was "determined to be positive" about the Private Sector Involvement (PSI) talks, adding that:
Everybody has to participate.
Yesterday, Lagarde urged European leaders to increase the firepower of their bailout fund to avoid dragging the global economy down. She warned that the world risked an economic spiral reminiscent of the 1930s.
European stock markets have fallen in early trading, following eurozone finance ministers' refusal to accept Greek bondholders' 'maximum offer'.
Germany's Dax dropped 1%, while the FTSE 100 index in London and Spain's Ibex have both lost 0.6% while Italy's FTSE MIB and France's CAC slipped 0.4%.
So, not a panic selloff. Michael Hewson, market analyst at CMC Markets, said traders are managing to remain "sanguine" about the slow progress (and lack of progress) of the Greek talks:
It would appear that last night's rejection by European finance ministers of the private creditors' so-called line in the sand of a 65%-70% haircut, and a 4% coupon hasn't really affected sentiment that much.
Here's today's agenda:
• Manufacturing and services PMIs for January for France, Germany and the eurozone - 8am-9am GMT
• UK public finances for December - 9.30am GMT
• IMF publishes its latest World Economic Outlook report: 3pm GMT
European bond auctions:
Netherlands bond auction - 9am GMT
Spain bill auction - 9.30am GMT
Malta bill auction - 10am GMT
+ US Federal Open Market Committee starts two-day meeting
Here's a round-up of how the eurozone finance minister's decision has been reported overnight.
Reuters warned that the disagreement "increases the risk that it will prove impossible to strike a voluntary restructuring deal between Greece's creditors and the Greek government", adding:
Negotiations over what's called 'private sector involvement' (PSI) have been going on for nearly seven months without a concrete breakthrough. Failure to reach a deal by March, when Athens must repay €14.5bn of maturing debt, could result in a disorderly default.
Bloomberg says that the deadlock is "reminiscent of October's bargaining over bond losses and risks disrupting the 30 January summit [of EU leaders]".
Brinkmanship over Greece clouded progress toward new fiscal rules and a beefed-up rescue fund, denting newfound confidence in the anti-crisis strategy and threatening to overshadow next week's summit of European leaders.
And The Daily Telegraph explained:
Talks to restructure Greece's debt hit a new impasse after eurozone finance ministers rejected an offer from private bondholders because the cost of sweeteners on new Greek bonds were too high.The ministers have sent the offer back for negotiations," said an official last night. "The ministers want a lower coupon than presented in the offer."
Jean-Claude Juncker, the chairman of the Eurogroup countries, was adamant this morning that Greece's creditors must accept a lower interest rate on the new, longer-dated bonds that are expected to be issued in exchange for their existing Greek holdings.
Juncker told reporters in Brussels that:
Ministers asked their Greek colleagues to pursue negotiations to bring the interest rates on the new bonds to below 4% for the total period, which implies the interest comes down to well below 3.5% before 2020.
Juncker also declared that: "It's obvious that the Greek programme is off track", indicating that he expects bondholders to take greater losses.
This raises the stakes between Greece and its bondholders. Last weekend, the Institute of International Finance said that it had already made its "final" offer to Greece.
Good morning, and welcome to another day of our live coverage of the eurozone debt crisis....
...a crisis which deepened in the last few hours after eurozone finance ministers rejected the offer from Greece's creditors to restructure its debts.
Following yesterday's meeting in Brussels, ministers insisted that banks must accept a lower interest rate on the new Greek bonds that they will receive as part of the deal. The 4% or higher coupon demanded by the Institute of International Finance (IIF) (who represent Greek creditors) is simply not acceptable, they said.
The move is likely to raise fears that Greece will not agree a deal with its lenders in time. We'll be tracking all the reaction and developments this morning.
Later today the International Monetary Fund will publish its latest economic forecasts for the world economy. A draft version of the report leaked last week, so markets are already expecting the IMF to slash its growth predictions.
On the economics front: the latest UK public finances data will be released this morning, and we'll also get a healthcheck on Europe's manufacturing and services sectors.
There's also a few bond auctions to look forward to, from Spain, the Netherlands and Malta.
We'll also keep an eye on events in Davos, where the World Economic Forum officially begins tomorrow.