• Greek sources say deal could come before weekend
• Government spokesman: Troika talks are 'tense'
• Private creditors 'to offer 3.75% coupon'
• Today's agenda
• Davos live blog
Even if Greece does agree a deal with its creditors, its people face the prospect of even further austerity measures.
With the EU/IMF Troika pushing for wage and bonus cuts, Greek government spokesman Pandelis Kapsis admitted that further belt-tightening measures were bound to exact "a huge social and economic cost".
Kapsis added that the time had come for all parties to make their stance clear:
The formation of this government [in November] was a political decision and [showed] that we wanted to do what was needed for Greece to stay in the euro with a continued supply of funds from the EU. If now, in the face of political or social costs ... we decide openly as a society and political system to choose a [different] road [then we should know] that it will be much worse, much more painful for its citizens and full of danger and unpredictability. But every society and political system makes it choices. I think the moment has come when everyone should say seriously what they believe.
Potential cutbacks include suspending automatic salary increases, reducing social security contributions and abolishing or reducing holiday pay known as the 13th and 14th annual salaries.
Barclay's chief executive Bob Diamond has been discussing the euro crisis in Davos today.
Diamond reckoned that the banking sector was "somewhat more comfortable" about the sovereign debt crisis than a year ago, and credited the ECB's offer of cheap loans.
Just in -- yields on Italian 10-year bonds have dropped below the 6% mark for the first time since 6 December.
Ashraf Laidi, a leading currency analyst, points out that Italian bond yields have been pretty calm (although high) since November, when Mario Monti was installed as prime minister.
When ITA yields fall 20% from their highs & ITA-GER spread is little changed since Nov, it's a global yield story not Ezone story #forex
— Ashraf Laidi (@alaidi) January 26, 2012
An urgent cabinet meeting of 12 ministers has begun under the aegis of prime minister Lucas Papademos, Helena Smith reports from Athens.
The politicians, who range from the Greek minister of finance Evangelos Venizelos to the greek minister of defence Dimitris Avramopoulos, come from the three parties participating in the interim coaition.
Insiders say that Papademos is likely to use the meeting to "bang heads" over the need for EU and IMF-mandated reforms to be not only speeded up but enforced with immediate effect.
The technocrat economist, say aides, is acutely aware of the stinging criticism levelled at his administration over the lack of headway Greece has made in recent months and "feels the time has come for broader concensus over the need for reforms."
On Wednesday several MPs refused to vote through legislation opening up closed professions.
Olli Rehn has thrown his weight behind the proposal that eurozone governments and institutions should increase their contribution to Greece's second bailout, if the country's creditors don't stump up enough.
Rehn has told Reuters that it was essential that a deal is agreed to bring Greece's public debt down close to 120% of GDP by 2020. Interestingly, Rehn suggested that it is almost certain that public bodies will have to put their hands in the pockets.
Rehn said:
We are preparing a package which will pave the way for a sustainable solution for Greece, and in that package, yes, on the basis of the revised debt sustainability analysis, there is likely to be some increased need of official sector funding, but not anything dramatic.
Rehn also said that he was confident that a deal will be agreed between Greece and the private sector in the next few days, "preferably still in January, not February."
On Wall Street, the Dow Jones has opened more than 40 points higher at 12800, a 0.3% rise.
A (belated) lunchtime round-up. Stock markets have been cheered by the Fed's pledge to keep interest rates close to zero until at least late 2014. The FTSE has risen through the 5800 mark, up 82 points at 5805, a 1.4% gain. Germany's Dax has climbed 1.8% while France's CAC is up 1.5%.
There are hopes that a Greek debt restructuring deal is close, with reports that Greek bondholders are willing to accept a 3.75% interest rate on new bonds.
Greece's talks with the troika are "tense," according to a Greek government spokesman. And Germany does not expect the troika report on a second Greek rescue package to be ready for the EU summit on Monday.
In Davos, where the great and the good (??) are gathered, the majority still fear for the euro's future.
There have been some strong numbers on the US economy today.
Durable goods orders rose 3% in December, beating expectations of a 2% rise, with November's 3.7% increase revised up to 4.3%. The data pushed the underlying trend - as measured by the latest three months - up to 3.1%, from 1.5% in November.
Also today, US jobless benefit claims fell 2,500 in the last four weeks, providing further hope that improved orders at US companies are encouraging firms to take on extra staff and reduce the unemployment rate.
Chris Williamson, chief economist at economic data group Markit, said:
The latest increase [in durable goods orders] could be in part attributed to aircraft orders, but even after stripping transportation products out the underlying trend has accelerated. At 3.2%, the increase in orders excluding transportation goods in the final quarter of last year was 3.2%, the strongest gain since last February.
The data add to a growing batch of consensus-beating statistics from the US that raise hopes that economic growth is picking up again in the world's largest economy. Fourth quarter GDP figures, due out tomorrow, are likely to show an annualised increase in the region of 3%, representing a marked contrast to declines seen in other developed countries, such as the UK and Germany.
Stronger growth in the US is particularly welcome for exporters in other countries, such as the UK and emerging markets, as it may help to boost global export demand and offset weak demand from the Eurozone as the region's sovereign debt crisis rolls on. A growing US economy may help ensure any downturns in the UK and Eurozone are short and shallow.
Spain's new prime minister has just repeated his call for the European bailout fund to be enlarged. Mariano Rajoy insisted that everyone would benefit, as:
the bigger the bailout mechanism is, the less it will probably be used.
Mario Monti made a similar argument a few days ago. No surprise really, as Spain and Italy would benefit most from the promise of a huge bazooka.
Rajoy was speaking at a press conference with Angela Merkel in Berlin. She told reporters that talks between Greece and its creditors were on "quite a good path" (as we indicated at 12.41pm)
Sweden's finance minister was pretty critical about the situation in Greece today.
Calling for a stronger firewall around Greece, Anders Borg told CNBC that:
The program in Greece is probably one of most off-track International Monetary Fund programs that I have ever seen.
Helena Smith, our correspondent in Athens, has learned that Charles Dallara who heads the Institute of International Finance (IIF) representing global bondholders, is travelling to Athens with a much bigger team of bankers and other private creditors who will also participate in today's discussions.
Although the talks, due to start at 8PM local time, have been described as "informal" by the IIF, Greek officials say the presence of a bigger bondholder representation should be interpreted as a "positive sign" that a deal is finally in the offing.
Underscoring the optimism, the Greek government spokesman, Pandelis Kapsis, has described the climate of the high-stakes negotiations as "warm". Kapsis told Helena that:
The atmosphere of the discussions with Mr Dallara is very good, in fact I could say warm.
The same, however, cannot be said of the ongoing negotiations between the debt-burdened country and mission chiefs respresenting the EU, ECB and IMF (known collectively as the "troika") who are in town to determine the terms on which Athens should be given a second package of rescue funds, this time amounting to €130bn in addition to the write-down that will wipe off an estimated €100bn from Greece's €360bn debt pile.
Troika representatives have held a series of fiery discussions with government ministers and other top officials throughout the week over the deficit reducing measures taken so far, and are none too pleased with what they have heard.
Kapsis said:
The climate that prevails in discussions with our partners is tense and problematic.
The debt inspectors are apparently applying "extraordinary pressure" for the interim government to adopt further belt-tightening measures to boost the country's lagging competitiveness now widely seen as a major obstacle for Greece's economic recovery.
"They are pressing us very hard," said another senior official who has been party to the talks. "They keep saying you need to regain competitiveness and the only way you can do this is to reduce costs and lower wages."
At €750 per month, Greece's minimum wage is €150/month higher than that of Spain, the monitors insist.
"'They are determined that is reduced by 5% and that holiday bonuses are scrapped. Politically that is a very big ask after all the measures [increased taxes. wage and pension cuts that] that have already been taken."
Predictably, unions are up in arms. Pame, the communist aligned labour force, has just announced that it will be stepping up strike action with another general walkout due on February 9th.
Portugal is coming under relentless pressure in the financial markets today, adding to fears that it, like Greece, will require a second bailout.
The yield on Portuguese 10-year bonds hit a euro-era high of 15.13% -- more than double the 7% mark that has typically been seen as unsustainable.
Five-year Portuguese bonds are yielding 20.27%.
Greek bank shares have surged by as much as 17% today, on hopes that a rescue deal can be agreed by the weekend.
Alexander Moraitakis, head of Nuntius Securities, told Reuters:
The market expects the PSI (private sector involvement) will succeed, it will mean substantial debt relief for Greece.There is also talk banks will be recapitalised with common, non-voting shares which will mean managements will stay in private hands.
In Davos, David Cameron has urged eurozone leaders to follow Britain's "bold and decisive" action in dealing with its crisis as he warned that the continent was facing a "perilious" moment.
Addressing the annual world economic forum, the Prime Minister said three things needed to done urgently in 2012 - resolving the situation in Greece, recapitalising weak banks, and agreeing a new bailout fund for troubled eurozone countries.
The UK PM told Davos:
This is not a moment to pretend there's not a problem. It's not the moment for fear of failure to hold us back.
More details in our Davos live blog.
We should caution, of course, that we have been here before. Optimism that a meaningful deal is close can soon shrivel as the different sides struggle to get an agreement nailed down.
For a start, a coupon of 3.75% is still higher than EU finance ministers have been looking for. Second, will sufficient numbers of creditors accept a coupon below 4%?
Economist Shaun Richards, for one, remains to be convinced, pointing out on Twitter that Greek debt has fallen in value again today:
Yet more rumours that there is a debt haircut (PSI) deal for #Greece clash with her one-year bond yield rising to 435%! #euro #eurocrisis
— Shaun Richards (@notayesmansecon) January 26, 2012
Confirmation from Athens that a deal could be close.
Helena Smith reports:
The Greek government is optimistic that the long-awaited bond swap deal will be "wrapped up" in the coming days and "very possibly" as early as tomorrow.
Sources close to the country's prime minister Lucas Papademos, who is personally overseeing the negotiations, have just told her that there is a "great deal of convergence" on the one issue that has prevented an agreement being reached so far: the interest rates on the new bonds.
Crucially, it appears that Greece's creditors have indeed proposed a coupon [interest rate] of 3.75% on new bonds issued as part of the deal (as flagged up at 10.27am)
One of Papademos' senior aides told Helena that:
We are reaching common ground. There are no huge differences to justify that a deal will not be reached. All that remains are minor concessions on both sides and when it comes to the coupon I can assure you they will be made.
Another official, with intimate knowledge of the discussions, said while the IMF had been playing hardball over issue rates, "the last thing it wants is a disorderly default in Greece."
The pressure on private creditors to accept lower coupons had been borne of "a determination to make Greece's debt management more sustainable," the official added.
In the end the new interest rate would likely be around 3.75%, insiders reckon.
The prediction chimes with Helena's piece out of Athens last night in which she quotes an official saying that: "A few decimal points on coupons are not going to derail the process. If necessary, minor concessions will be made."
Time for a look at the markets - the FTSE is now 60 points ahead at 5783, a 1% rise. The German market has climbed 1.3% while the French stock market is up nearly 1%.
Ilya Spivak, currency strategist at FXCM, notes the positive sentiment in European markets as the momentum from the US offsets the crisis in the eurozone. He also notes the lower yields in the latest Italian bond auction, which dropped to 3.763%.
European shares are pushing higher and S&P 500 stock index futures are firmly in positive territory, hinting more of the same is on tap as Wall Street comes online, after the Federal Reserve took a dovish turn at yesterday's FOMC policy announcement. Not surprisingly, the outcome is stoking risk appetite amid hopes that Ben Bernanke and company will amplify already emerging positive momentum in the US recovery, helping to offset a recession in the Eurozone and slowdown in Asia expected this year. A broadly successful Italian bond auction is likewise helping matters. Rome sold €4.5bn in zero-coupon 2014 paper at an average yield of 3.763%, down from 4.853% at an auction of similar debt in December.
With the Fed prepared to promise more stimulus for longer even as US data improves and inflation expectations tick higher, another debt crisis flare-up in the Euro area seems like the only thing that can meaningfully weigh on equities from here. An opportunity for just such an outcome will come early next week as EU leaders gather for yet another summit, with another failure to sort out the now almost-mythical "fiscal compact" or the Greek PSI fiasco threatening to unleash more blood-letting. In the near term however, it stock markets' upward momentum seems likely to remain generally intact.
It appears that Greek bondholders are prepared to improve their "final offer" of a 4% interest rate on new Greek bonds that they would receive in a debt swap, if Greek press reports are to be believed.
The top negotiator for private creditors, Charles Dallara, returns to Athens today. His improved offer reportedly includes an average coupon of 3.75% on new bonds. The interest rate on the new bonds has been the main stumbling block in the negotiations.
"In Paris, Charles Dallara talked with top bankers to determine their stance and, according to sources, they will submit a new improved proposal for an average interest rate of 3.75%," centre-left Greek daily Ethnos wrote without naming its sources.
Another daily, Kerdos said participation of public sector creditors including the ECB in the swap deal was a pre-condition for that offer, which it said could bring the average interest rate to about 3.8%. Conservative daily Kathimerini said the new coupon could be lower than 4% and near 3.75%.
The chairman of BNP Paribas, one of the banks on the committee leading talks for creditors, however, suggested yesterday that bondholders would not make concessions easily.
"The offer that is now on the table is the maximum acceptable for a voluntary deal," said BNP chairman Baudouin Prot. "All the elements are now in place."
The Institute of International Finance, which Dallara heads, said today's discussions would be "informal" and aim to sort out all legal and technical issues quickly. But the interest rate is likely to be another focus.
Success for Italy in the bond market this morning. It has just raised €5bn from investors, at sharply lower interest rates.
Italy sold €5bn of two-year bonds at an average yield of 3.763%. That's the lowest interest rate since August 2011, and much lower than the 4.85% it had to pay in December to get a similar auction away.
One of our readers (instinct), has asked some interesting questions:
Just a question - has the ECB bought Greek government bonds in the open market in recent months at a face value of c€40bn? Because if so, they must have cost the ECB only a fraction of the face value.
Secondly, in refusing to 'participate', is the ECB insisting that it must receive face value for these bonds that cost it so much less?
If I have my facts wrong, please accept my apologies, but I haven't yet read anything to contradict this. As it has been reported, it could be that the ECB is looking to make a huge profit, and that in buying those bonds it has made the Greek government's problem far worse - if they had remained in the market, they would have been subject to a haircut, but now the Greeks must pay back every cent?
We've put this to a fixed income analyst, who says:
The ECB buy directly from the market, not from Greece, so if there is ultimately a profit then the "loser" in the trade is whomever the ECB bought from. Not Greece.
The euro just hit a five-week high against the dollar, touching $1.316.
The news last night that the Federal Reserve doesn't expect to raise US interest rates until 2014 has pushed the dollar down against most currencies. The pound has climbed back above $1.571 vs the US dollar.
Out in Davos, though, the great(?) and the good(?) of world finance still fear for the euro's future. Larry Elliott reports from the World Economic Forum:
The majority of experts at a private discussion in Davos said they thought the dollar would strengthen in the course of 2012. That was not because they were especially bullish about the prospects for the US but rather because they were worried about the possibility of a break-up of the euro.They were pretty evenly split about whether the euro will survive in its current form.
For all the latest from the WEF, check out our Davos live blog. Gordon Brown is hosting a session now....
Headlines flashing on Reuters: A senior German official says he does not expect the troika report on a second Greek rescue package to be ready for the EU summit on Monday.
Here is some reaction to "Helicopter Ben'"s comments last night. Ben warns more helicopter drops may be necessary, says Michael Derks, chief strategist at FxPro.
In a surprisingly (but also refreshingly) candid admission, Fed chairman Bernanke declared last night that another round of quantitative easing may well be necessary to alleviate "high and persistent unemployment in an underperforming economy". With inflation still low and Europe a potential drag on the economy, the Fed chairman clearly feels that more asset purchases are a risk worth taking if it helps the recovery become more self-sustaining. Also disconcerting was the fact that Fed officials lowered their growth expectations for this year, a shock for many who had become more confident in the outlook for the US economy.
Despite recent pronouncements from various Fed officials suggesting that more QE may well be required, Bernanke's statement caught dollar longs completely unawares, with the dollar index down more than 1%. For the army of euro shorts, there was an even greater flurry of position-squaring, with the single currency soaring to $1.3125 after languishing under $1.2950 at the start of the New York session. Bernanke's dovish tone helped both stocks and bonds, with the S&P up 2% from the low for the day and the yield on five-year treasury notes falling to a record low of 0.76%.
Big Ben did the gold bugs a huge favour as well – the price is above $1,710 this morning, up from $1,650 before his statement. QE is becoming the preferred tonic of choice for policy-makers – both the Fed and the MPC signalled their intentions to use it again yesterday.
After International Monetary Fund chief Christine Lagarde's suggestion yesterday that public sector creditors may need to participate in a Greek debt restructuring, there has been a simmering row over whether the European Central Bank should take a haircut.
Lagarde said: "If the level of Greek debt held by the private sector is not sufficiently renegotiated, then public sector holders… should also participate…"
Gary Jenkins of Swordfish Research says:
Interesting negotiating tactics for the head of the IMF to say that when talks are still ongoing between the IIF and Greece. I must try and play Ms Lagarde at poker sometime…
Whilst there are ways and means in which the ECB could become party to the proposed writedown without it being too much of an embarrassment for them the possible unintended consequence of raising this issue might be that the ECB losses its enthusiasm for its bond buying program and decides to freeze it, or at least slow it down, until the matter is resolved.
An official representing the IIF repeated the line that their offer on the table was the "maximum acceptable" and all eyes and ears will remain on Athens today.
Michael Meister, the deputy floor leader for German chancellor Angela Merkel's Christian Democrats and the party's finance spokesman, has firmly rejected suggestions that the ECB take losses on its Greek debt holdings.
"I can't imagine that European politicians would allow third parties to make such an indecent claim on our central bank," Meister told Bloomberg yesterday.
European finance ministers who met in Brussels at the start of the week signalled they would push bondholders to accept bigger losses, with coupons below 3.5% for debt to be serviced until 2020, and below 4% over the 30 years of the next Greek package.
It's a fairly light agenda today...
• Italy consumer confidence data - 9am GMT/10am CET
• Italy auctions €5bn of 2014 bonds - 10am GMT
• CBI UK retail sales for January - 11am GMT
• US durable goods orders for December - 1.30pm GMT / 8.30am EST
+ Talks resuming between Greece and the IIF
World Economic Forum continues in Davos
European markets have got off to a good start again: the FTSE 100 index in London is 19 points ahead at 5742, a 0.3% gain. France's CAC, Spain's Ibex and Italy's FTSE MIB are all up 0.7% while Germany's Dax has climbed 0.6%.
Good morning and welcome back to our live coverage of the eurozone debt crisis and world economy. Greece and private creditors will return to the negotiating table today in a desperate attempt to avert a default on its debt mountain.
Bloomberg reports that Charles Dallara and Jean Lemierre, negotiating on behalf of private creditors, return to Athens today after European finance ministers insisted bondholders take bigger losses on their Greek debt.
On the other side of the pond, the US Federal Reserve - America's central bank - said last night interest rates would stay close to zero "at least through late 2014" - longer than previously indicated. Chairman Ben Bernanke expressed concerns about the pace of the economic recovery.
"I don't think we're ready to declare that we've entered a new, stronger phase at this point. We'll continue to look at the data," he said at a press conference. His pessimism contrasted with Barack Obama's more upbeat message about the economy in his state of the union speech on Tuesday night.