The Italian connection - BCE

For months, European media have focused on "Merkozy"—German Chancellor Angela Merkel's partnership with French President Nicolas Sarkozy. As Europe's leaders prepare for a decisive summit on Friday, however, hopes for a breakthrough in the euro-zone debt crisis may hinge on a different pairing: that of the German chancellor and European Central Bank President Mario Draghi. With pressure from financial markets rising, the German leader and Italian central banker appear to be the only Europeans with the political clout and purse to save the euro. What is less clear is how far each is willing to go and how long they will wait. Mr. Draghi and many of his colleagues on the ECB governing council are reluctant to take radical steps that could cause a political backlash against the central bank in Germany, Europe's largest economy and the ECB's biggest financial backer. "Draghi knows that one country in Europe has a 28% share in the ECB," said Michael Fuchs, a senior lawmaker in Ms. Merkel's conservative Christian Democratic Union. "It would be smart" if Mr. Draghi continued to heed the sensibilities of his biggest shareholder, Mr. Fuchs added. Yet most economists say the crisis has become so bad that only the ECB, with its ability to create euros, can prop up bond markets and make sure countries such as Italy and Spain can refinance their debts in the market. Ms. Merkel and other German government officials usually refrain from commenting publicly on ECB decisions, in keeping with Germany's belief that central banks should be independent. In negotiations behind closed doors, however, the German government is showing more openness to a bigger ECB firefighting role in the euro crisis. Economists say the ECB will likely cut its key interest rate as soon as Thursday—or if not, then almost certainly in January. Many also expect Mr. Draghi to announce on Thursday that the ECB will lend to banks for longer maturities and with looser collateral requirements. Mr. Draghi's words on whether the ECB is prepared to give the IMF a loan to strengthen the IMF's role in Europe will also be watched closely. But Mr. Draghi isn't expected to change his stance just on ECB bond-buying, the policy that economists say really matters. Last week, he hinted that the ECB stands ready to help governments more, provided governments help themselves first by agreeing to a stricter budgetary regime. "Other elements might follow, but the sequencing matters," Mr. Draghi said.

The ECB has already done quite a bit of bond buying, which it has disingenuously dressed up as a way of helping the "monetary transmission system". The sophistry of this explanation is ridiculous. No, what the ECB has been doing is trying to drive bond yields in the distressed single currency nations down to more tolerable levels.Even so, the numbers have been very low against what the Federal Reserve has been doing in the US, and the Bank of England in the UK. As long as Germans believe that bond buying by the central bank is essentially monetisation of public debt – the sort of stuff that led to the Weimar hyperinflation of legend – it will be blocked from meaningful action. Mr Draghi's challenge is therefore to persuade Berlin that bond purchases are for a different purpose – demand management. This is essentially the justification that underpins QE in Britain and the US. In both cases, the intention is eventually to sell the accumulated bond holdings back to markets, or to run down the positions by allowing the bonds to mature. To better support this justification, ECB bond purchases would have to be much more widely spread than at present. It would have to include German bunds in proportion to the size of the German economy alongside Italian, Spanish and Portugese debt. But as I say, Mr Draghi faces an uphill struggle. Germans would prefer to suffer, or even see the euro collapse completely, than tolerate such an unconventional approach

EUROPE - The Polish finance minister appears to have dashed hopes that a big package will be decided tomorrow. Jacek Rostowski gave this indication in a letter to Eurogroup President Jean-Claude Juncker last night, according to the FT Brussels by Peter Spiegel. Since Poland holds the rotating presidency of the EU, Rostowski is charged with calling meetings of the Ecofin, comprised of finance ministers from the 17 countries that use the euro. Here's what he said: As things stand at present, I understand that the full package may not be ready by Wednesday, 26 October. Were this the case, the presidency would need to postpone the Ecofin council meeting by a day or two. Therefore I would like to ask you to keep me informed on when the remaining elements of the package will be completed by the Eurogroup so that I can convene the Ecofin meeting as promptly as possible. Stock markets have turned negative after comments from German chancellor Angela Merkel and rumours that tomorrow's meeting of eurozone finance ministers has been cancelled. The FTSE has tumbled more than 30 points to 5515, a 0.6% fall. Spain's Ibex is down 1.1%, Portugal's PSI 1.4% and Italy's FTSE MIB 1.2%. Merkel said Germany was opposed to a phrase in the draft EU summit document that calls for support for the continued use of 'non-standard measures' by the European Central Bank. EU sources told Reuters said the phrase referred to the ECB's purchase of bonds from countries like Italy and Spain. Greek prime minister George Papandreou hopes Wednesday's EU summit will draw a line under Greece's economic crisis. He appealed for unity in his Socialist party to approve the latest round of austerity measures. He said the deal, which could include a reduction of up to 60% in the face value of Greece's debt of more than €200bn, would help reduce the burden on ordinary Greeks. Papandreou told Greek president Karolos Papoulis in a televised discussion before leaving for the summit: Tomorrow we want to be able to turn the page, so that we, as Europe and as a country, can move forward. We have been fighting a great battle... for these burdens and responsibilities to be shared, so that the Greek people can breathe and move forward with the country's rebirth. It takes a sense of calmness and unity from all parties.

Last night's farewell gala in Frankfurt for ECB president Jean-Claude Trichet, who steps down at the end of the month, was a lavish affair by all accounts. The two-hour event at Frankfurt's historic Alte Oper concert hall, interspersed with musical interludes, was attended by a number of political dignitaries such as former French president Valery Giscard d'Estaing and former German chancellor Helmut Schmidt who fell over themselves to praise Trichet as a great European. Schmidt, wheeled onto the stage in a wheelchair, used the opportunity to lash out at the "dramatic inability of the EU's political bodies to curb the dangerous turbulence and uncertainty". Only the ECB directorate, under Trichet's leadership, he said, had proved effective and able to act. "The constant talk of a 'euro crisis' is mere chatter on the part of politicians and journalists," Schmidt said. "In truth, we have a crisis in the ability to act of the EU's political bodies. This inability to act is a much bigger danger for the future of Europe than the over-indebtedness of individual eurozone countries." Trichet, who turns 69 in December, will hand over to Italy's Mario Draghi on 31 October. The farewell gala began with a short film spanning the Frenchman's eight-year reign and ended with a concert by the Mozart Orchestra under its founder and chief conductor, the legendary Italian maestro Claudio Abbado.

The Spanish and French bond auctions have gone reasonably well this morning. Spain sold €3.91bn of government bonds in its first auction since Moody's cut the country's sovereign rating by two notches on Tuesday. France sold €7.49bn of fixed coupon bond and is due to sell inflation-linked debt later, only days after Moody's warned its top credit rating could be under threat.

Lot's of "smoke" again ...

Jose Manuel Barroso has said he will this week propose “individual criminal responsibility for financial players to be recognised in European law”. The plans for an EU-wide directive would focus on curbing high frequency trading. “We have seen abusive behaviour, and some of this caused the current crisis. We are going to clamp down on these practices,” Mr Barroso told Le Parisien. “Those who violate the rules will face criminal penalties. This will be a first in European legislation and a strong signal.” The Commission will invoke new powers under Article 83 of the Lisbon Treaty allowing the EU to impose minimum rules and sanctions on member states when needed “to ensure the effective implementation” of EU policies. The clause allows the EU to broaden the European Arrest Warrant beyond limited areas such as terrorism, drug-trafficking, and money-laundering to softer crimes if they have a “cross-border dimension”. G20 finance ministers praised Europe’s efforts to “maximise the impact” of the EU’s €440bn bail-out fund (EFSF) and ensure that the region’s banks are “adequately capitalised”, but there were heated exchanges behind closed door as the Anglo-Saxon states, and India rebuked Europe’s leaders for failing to grasp the nettle and mobilize the full lending power of the European Central Bank. “They clearly have more work to do on strategy and details,” said US Treasury Secretary Tim Geithner. “In financial crises, it is more risky to act gradually and incrementally than to act with bold force”. Diplomats say Mr Geithner’s plan to use the ECB as a guarantor of eurozone sovereign bonds was dismissed out of hand, while the EU failed to offer clear assurances that bank recapitalisation would be carried out with sufficient speed and scale to halt an incipent run on the system. Olli Rehn, the EU’s economics commissioner, said Brussels will announce a “very serious plan” over come days to beef up banks and strengthen the firewall against contagion. German foreign minister Guido Westerwelle politely told the US to mind its own business. “I cannot understand some of the comments of our American friends. You can’t solve a debt crisis with more debt,” he told Bild Zeitung. Germany's finance minister says private holders of Greek government bonds must accept bigger losses to achieve "a durable and sustainable solution" for Europe's debt crisis. Wolfgang Schaeuble told German public broadcaster ARD on Sunday that an agreement struck in July when banks and other investors agreed to renounce on 20 percent of their Greek debt must be renegotiated. He says the private sector's contribution to a reduction of Greece's debt burden "will probably have to be higher." The Institute of International Finance, a global bank lobbying group, says its managing director Charles Dallara is in talks with officials from the 17-nation eurozone about the July agreement. Spokesman Frank Vogl declined to elaborate, but the group's leadership has so far rejected accepting bigger losses.

"Germany at war" to fulfill the RIBBENTROP - MOLOTOV pact provisions - European officials have confirmed that discussions are afoot to boost the eurozone bail-out fund's firepower as part of a grand plan to contain the region's sovereign debt crisis in Greece. Confirmation of the talks, however, sparked outrage in Germany, where opposition politicians threatened to derail the plans by voting against a key amendment to the bail-out fund this Thursday. The head of Germany's constitutional court also piled on the pressure by warning the government not to circumvent the law "by the back door". Despite the wrangling in Germany, markets across Europe staggered back to life on hopes that the crisis could be contained and the recovery restored. In the UK, the FTSE 100 rose 0.4pc to 5,089.37 after £78bn was wiped off shares last week. In France, the CAC 40 rose 1.75pc, and Germany's DAX recovered almost 4pc. Policymakers in Europe are working on a three-pronged plan to ringfence the euro crisis around Greece. Under the proposal, banks across the continent would be recapitalised with tens of billions of euros, the €440bn European Financial Stability Facility (EFSF) would be "leveraged up" through the European Central Bank (ECB) to provide €2 trillion of firepower, and Greece would be subjected to a managed default on 50pc of its debt but stay in the euro. Officials hope the move would restore confidence in Spain and Italy and calm nervous bond markets.
So far, Rusia took over the eurozone energy fields via the euro, that was implemented for this reason only, otherwise making no sense ...ca you imagine how hard would have been to take over the european economies one by one through their individual currencies ?

Christine Lagarde said the money available to the organisation “pales in comparison to the potential financing needs of vulnerable countries”. In the wake of the global credit crisis, the funding of the IMF tripled and Britain’s exposure to it rose to £20 billion. This figure is poised to rise again if financial troubles engulf bigger economies such as Italy and Spain. Yesterday, Alistair Darling, the former Labour chancellor who was in office during the previous crisis in 2008, warned that the problems facing the global economy were worse than three years ago. “There are lessons to be learnt, and they are not being learnt by those responsible at the moment,” he said. “Lehmans [the investment bank that collapsed in September 2008] taught us one thing which is if you know there is a problem, take action, sort it out [in a way] that is more decisive than people expect if you are going to stop it. “The problem with the Greek crisis is that it has been allowed to run on and on and on.” This week could prove crucial in the attempts by European leaders to get a grip on the Greek economic crisis, and financial markets are braced for another turbulent few days. Germany and Greece will have detailed negotiations over an emergency rescue package for the Mediterranean country before a German vote on Thursday to approve a new eurozone bail-out plan. There is growing German anger at helping southern Europe, which will effectively involve taxpayers underwriting other countries’ debts unless they agree to sweeping reforms. Greece may be allowed to go bankrupt and write off some of its debts with other loans restructured and guaranteed by a eurozone bail-out fund. Banks in several countries, including France, may also be recapitalised, although the French central bank chief insisted yesterday that taxpayers’ money would not be used. In total, the scheme could cost up to £2 trillion, and the IMF is also expected to be involved. During talks in Washington, Mrs Lagarde warned that the IMF may need to extend it $400 billion war chest.

“Government's view of the economy could be summed up in a few short phrases: If it moves, tax it. If it keeps moving, regulate it.

The U.S. and Europe can do nothing to steer their economies from falling into recession, says New York University economist Nouriel Roubini. A look at his Twitter page shows Roubini, famous for accurately predicting the severity of the recent recession well before it happened, has abandoned all hope for avoiding double-dipping back into economic contraction. "Economy already in recession. Whatever the Fed does now is too little, too late," Roubini tweets. Forecasts are bleak even among those who believe the U.S. economy is not contracting. Blackstone Chief Operating Officer Tony James puts the odds of a double-dip recession at one in three. Even if the economy technically avoids a recession, defined as two consecutive quarters of economic contraction, weak growth will make it feel like a recession for many, he says. "One percent growth is going to feel like a recession for most of America," James tells CNBC. That means weak economic growth and high unemployment may remain the norm for years. "What has happened is that the recovery we were experiencing in 2010 has basically stalled out," Jerry Nickelsburg, senior economist at UCLA Anderson, tells the Ventura County Star. "We're moving sideways. Consumers are being more frugal, squeezed by high gasoline prices and nervous about the turmoil in the financial markets."
He said today’s economy could be as good as it gets for some time. "Slow economic growth and high unemployment mean times are not going to be good for a while," Nickelsburg says. Big multilateral organizations like the World Bank are getting worried as well. "We’re getting closer to the risks of double dip," World Bank President Robert Zoellick tells Bloomberg. "I still wouldn’t predict it, but it really depends on how the risks coming out of Europe are managed."

Mark Pritchard, the secretary of the 1922 committee of Conservative MPs, is the most senior Tory yet to demand a vote on Britain’s membership of the European Union following the eurozone crisis. Writing in The Daily Telegraph, Mr Pritchard says that the EU has become an “occupying force” which is eroding British sovereignty and that the “unquestioning support” of backbenchers is no longer guaranteed. He says the Government should hold a referendum next year on whether Britain should have a “trade only” relationship with the EU, rather than the political union which has evolved “by stealth”. He warns that the Conservatives will see constituents “kick back” if taxpayers are forced to foot the bill for the failure of “unreformed and lazy” eurozone countries to introduce fully-fledged austerity measures. Mr Pritchard is a leading figure in a group of 120 Conservative MPs who are pushing the Prime Minister to set out a “clear plan” for pulling back from Europe.

I am a strong believer that good reasons, arguments, and evidence are what matter, not credentials. So the short answer to “when should we trust an expert simply because they are an expert?” is “never.” We should always ask for reasons before we place trust. Hannes Alfvén was a respected Nobel-prizewinning physicist; but his ideas about cosmology were completely loopy, and there was no reason for anyone to trust them. An interested outsider might verify that essentially no working cosmologists bought into his model. But a “good reason” might reasonably take the form “look, this is very complicated and would take pages of math to make explicit, but you see that I’ve been doing this for a long time and have the respect of my peer group, which has a long track record of being right about these issues, so I’m asking you to go along this time.” In the real world we don’t have anything like the time and resources to become experts in every interesting field, so some degree of trust is simply necessary. When deciding where to place that trust, we rely on a number of factors, mostly involving the track record of the group to which the purported expert belongs, if not the individual experts themselves. So my advice to economists who want more respect from the outside world would be: make it much more clear to the non-expert public that you have a reliable, agreed-upon set of non-obvious discoveries that your field has made about the world. People have tried to lay out such discoveries, of course — but upon closer inspection they don’t quite measure up to Newton’s Laws in terms of reliability and usefulness.

Greek Prime Minister George Papandreou has held his teleconference with German Chancellor Angela Merkel and French President Nicolas Sarkozy. We weren't expecting anything particularly dramatic, but what has emerged is going to be small consolation for investors. France and Germany came out and said that Greece's future lies in the eurozone. Greece, in turn, promised to stick to its budget program in an attempt to stop its debt crisis worsening. Aside from that, no concrete reassurances emerged. At a teleconference Greek prime minister George Papandreou told Merkel and Sarkozy his country was determined to meet all obligations agreed with international lenders in exchange for an EU/IMF bailout. Officials from the European Commission, European Central Bank and the International Monetary Fund returned to Athens to try to get the Greek rescue package back on track. All three leaders have a vested interest in playing for time over Greece despite the sense that time is running out.

Please stop pretending, Greece in insolvent, it is bankrupt, see the parrot sketch from Monty Python for what the Greek economy is really like. Just to make sure that it is dead, an ex-economy then pushing it even further down with draconian austerity should do the trick.
If I don't believe it then you can be damn sure that the markets don't believe it, and all this sticking plaster means that the problem will be here tomorrow, and the day after that....just kicking the can down the road. All this "bail out" is just free money for them and yet another loss for the taxpayers, who are throwing good money after bad.

Italy is auctioning as much as 7 billion euros ($10 billion) of bonds Tuesday, one day after borrowing costs surged at a bill auction, as Greece’s slide toward default roils global markets. The treasury is selling 4 billion euros of a new benchmark five-year bond, after 10-year yields climbed to a five- week high of 5.571 percent. Investors charged Italy 4.153 percent Monday in a one-year bill offering, up from 2.959 percent a month ago. “It’s rather unfortunate that the Italian auction is taking place when the market is in a panic mode,” said Fabrizio Fiorini, the head of fixed income at Aletti Gestielle SGR SpA in Milan. “Borrowing costs are likely to remain at elevated levels. The rise in Italian yields is manifestation of a lack of market confidence in European leaders’ ability to tackle the problem.” A debt of 1.9 trillion euros -- more than Spain, Greece, Ireland and Portugal combined -- leaves Italy vulnerable to any advance in borrowing costs as it refinances maturing debt. The sales, which also include as much as 3 billion euros of bonds due in 2018 and 2020, will help fund 14.5 billion euros of debt scheduled for repayment on Sept. 15.

Bank of France Governor Christian Noyer said French lenders are capable of facing any Greek response to sovereign-debt difficulties and have no liquidity or solvency problems. “Whatever the Greek scenario, and whatever provisions have to be made, French banks have the means to face it,” Noyer said in an e-mailed statement today. “French banks have neither liquidity nor solvency problems.” BNP Paribas SA, Societe Generale SA and Credit Agricole SA plunged today in Paris on a possible ratings cut by Moody’s Investors Service, extending their more than 40 percent slide in the last three months. Noyer also said 5 trillion euros ($6.8 trillion) of collateral is available in the euro system and the European Central Bank is providing 500 billion euros of refinancing. French banks have added 50 billion euros to their capital in two years, he said.

MARSEILLE, France—The German government has nominated Jörg Asmussen to succeed Jürgen Stark on the executive board of the European Central Bank, Finance Minister Wolfgang Schaeuble said Saturday. At a news conference after weekend meetings of the finance ministers and central-bank governors of the Group of Seven leading industrialized nations, Mr. Schaeuble said he hoped that Mr. Asmussen would be able to assume Mr. Stark's duties toward the end of the year. Jörg Asmussen, Germany's deputy finance minister, has been nominated to the executive board of the ECB. Mr. Asmussen is currently deputy finance minister. His position there is something of an anomaly, as he is a member of the Social Democratic Party in a center-right government of Christian Democrats and Free Democrats. He originally had been appointed by the previous finance minister, Peer Steinbrück, who served under Chancellor Angela Merkel in a "Grand Coalition" until autumn 2009. Finance Minister Schaeuble had kept him on because of his first-hand experience of the first wave of the financial crisis. Mr. Schaeuble said he had notified Jean-Claude Juncker, head of the euro group of finance ministers, of the government's proposal earlier Saturday. The proposal must be endorsed first by the euro group and the euro-zone's heads of state, and the European Parliament and the ECB itself must also be consulted. With Mr. Asmussen having accumulated profound experience of the euro zone's debt crisis over the past three years, and with the substantial political will of Germany behind the proposal, it is unlikely that the nomination will fail.

Stocks sank, while the euro touched a ten-year low versus the yen and a six-month low against the dollar, as concern grew about Greece’s debt crisis. European bank and sovereign credit risk reached all-time highs as 10-year Treasury yields slid to a record. Oil fell 2 percent. The MSCI All-Country World Index retreated 2.9 percent and the Standard & Poor’s 500 Index slipped 2.7 percent to 1,154.23 at the 4 p.m. close in New York, wiping out a weekly gain. The euro sank as much as 2.1 percent to 105.3 yen and fell 1.8 percent to $1.3627 before trimming losses. Ten-year Treasury yields slid as low as 1.89 percent. Credit-default swaps signaled a more than 90 percent probability Greece will default. Stocks extended losses as three German officials said Chancellor Angela Merkel’s government is preparing plans to shore up banks in the event that Greece defaults. The European Central Bank said Juergen Stark resigned from the executive board, suggesting policy makers are divided over how to fight the debt crisis. U.S. President Barack Obama called on Congress last night to pass a $447 billion plan to boost employment after jobs growth stalled last month. “There’s that nagging thought that we can continue to have a downward spiral in Europe,” James Dunigan, chief investment officer in Philadelphia for PNC Wealth Management, said in a telephone interview. The firm oversees $109 billion

The US Federal Housing Finance Agency (FHFA), which is overseeing the remains of failed mortgage giants Fannie Mae and Freddie Mac, is reportedly planning to argue that America's biggest banks failed to check the health of mortgages before they sold them on to investors. The collapse of hundreds of thousands of sub-prime mortgages triggered the 2008 credit crisis and the collapse of Fannie and Freddie. The New York Times said the FHFA is expected to file the lawsuit against the banks, including Bank of America, JP Morgan, Goldman Sachs and Deutsche Bank, as early as Friday. The agency, which is seeking billions of dollars in compensation, claims the banks failed to notice that borrowers were taking on mortgages that they could not afford. The FHFA lawsuit, which follows a subpoena issued to the banks last year, demands that the banks pay compensation to cover some of the $30bn (£18.5bn) Fannie and Freddie lost on mortgage-backed securities. Most of Fannie and Freddie's losses were borne by US taxpayers after the government was forced to step in and bailout the pair to the tune of $141bn. It follows a similar $900m lawsuit filed against Swiss bank UBS in July. At the time UBS said it would "vigorously" defend all charges brought against it. In total the FHFA issued 64 subpoenas to the issuers and servicers of mortgage-backed securities last year. Last week the agency's director, Edward DeMarco, who declined to discuss the pending lawsuit, said there were "more to come". The banks declined to comment to the New York Times.

The International Accounting Standards Board has said European banks may have inflated their balance sheets and profit and loss accounts by not taking full writedowns on distressed Greek debt ---In a highly unusual intervention, the IASB on Tuesday published a letter from chairman Hans Hoogervorst to the European Securities and Markets Authority saying that some banks were using models to mark down the value of Greek assets, where market valuations existed. When accounting for trading assets, banks are required under International Accounting Standard 39 to use arm's-length values taken from actual transaction prices to value the assets on their books. Where trading is very illiquid and market valuations cannot be obtained, they can then use valuation models using internal estimates of value. "There have been indications in the market that some European companies are applying the accounting requirements for fair value measurement and impairment losses in a way that seems to differ from the objective of [accounting standards]. This is evident particularly in their accounting for distressed sovereign debt, including Greek government bonds. Those indications have now been confirmed by recently published financial reports, which show inconsistent application across Europe. This is a matter of great concern to us," Hoogervorst said in the letter. The letter does not name the banks concerned, but the Financial Times said it related to the accounting of BNP Paribas and CNP Assurances. Both took 21% writedowns on Greek debt, much smaller than the hits suffered by other banks, including RBS, which took a 51% writedown. "It appears that some companies are not following IAS 39 when determining whether the Greek government bonds are impaired. They are using the assessed impact on the present value of future cash flows arising from the proposed restructure of those bonds, rather than using the amount reflected by current market prices as required," the IASB letter said.

Analysts argue the German banks face a three-way squeeze. Holdings of financial instruments have been left almost worthless by the Greek crisis. In the never-ending chain that is modern capitalism, German banks have lent funds to institutions that in turn hold Greek sovereign and corporate bonds and other financial instruments such as credit default swaps that insure transactions by Greek companies. Secondly, there is the struggle to improve profits when European economies are slowing. And thirdly, there are the difficulties faced by the government now most investors believe Berlin will find itself insuring the debts of most peripheral eurozone countries within the next couple of years, whether the German electorate likes it or not. The generally held view that Greece, Portugal, Spain and Italy will need vast amounts of financial aid from Berlin via the European Central Bank's lending facility has sent the cost of insuring German sovereign bonds soaring and had knock-on effects for banks. Investors are expected to remain wary of supporting European banks while politicians wrangle among themselves over the extent of the Brussels' bailout fund, the European Financial Stability Facility. The US has similar difficulties. Bank of America, the largest bank in the US, has seen its share price halve this year to less than $8. Before the crash its value was based on a share price north of $50. Citigroup has dived from $50 to $30 a share and Wells Fargo, considered one of the better capitalised banks, has dropped from $34 to $24 a share. As in many western countries, many of the worst-hit financial institutions remain in government hands. The biggest mortgage lenders in the US, Fanny Mae and Freddie Mac, are still government owned and in effect bust without federal support. Germany's Hypo Real Estate bank is in government hands after a €50bn bailout and the UK's Royal Bank of Scotland and Lloyds are still partly nationalised. French banks have escaped, though analysts remain nervous that lending to Latin countries leaves them vulnerable to default.

US Federal Regulators (FTC) - are stepping up their scrutiny of the US arms of Europe's largest banks, amid mounting concerns that the eurozone debt crisis could spill into the American banking system. The Federal Reserve Bank of New York, which oversees the US operations of many large European banks, has been asking for more information about their ability to fund themselves, the Wall Street Journal reported. It wants to know whether they have reliable access to the funds needed to operate on a day-to-day basis in the US, and is pushing them to turn their US businesses into self-financed organisations that are better insulated from potential problems with their parent companies. Officials at the New York Fed are "very concerned" about European banks facing funding difficulties in the US, a senior executive at a major European bank who has attended talks with officials told the Journal. The New York Fed has also been co-ordinating with New York's superintendent of financial services, Benjamin M Lawsky, to monitor European banks' funding positions, amid fears that those in trouble could siphon money out of their US arms. According to Federal Reserve data, foreign banks, many of which have big trading operations in the US, have seen their funding positions there fluctuate wildly in recent months.

End of the Wirtschaftswunder? - Carsten Brzeski of ING said that the German data was a "growth normalisation" rather than a "disappointment" on its own, as Germany should still grow by at least 3% this year. He warned, though, that the German economic recovery is clearly slowing. "Looking ahead, the million-dollar question is whether a solid second quarter is the beginning of the end of the German Wirtschaftswunder [economic miracle] and whether recent market turmoil could push the economy back into recession," said Brzeski. "While German politicians are currently racking their brains on the pros and cons of common eurobonds, the luxury of having an economy running at 'wonder' speed is fading away." Gary Jenkins, head of fixed income research at Evolution Securities, said the German data will "only add to the concern of the market that we are running into headwinds that are going to make a difficult situation even worse". French and German officials have already indicated that Merkel and Sarkozy will not discuss the idea of issuing eurobonds – debt backed by the whole eurozone rather than individual countries. Jenkins believes that eurobonds appear to be the "least worst option at this stage". He said: "A temporary fiscal union may be the endgame, where you have common bond issuance for five years that replaces all individual sovereign bond issuance, after which time that is phased back in over, say another five years. Thus you retain a modicum of moral hazard." Stock markets across Europe fell in early trading, with the FTSE 100 dropping 73 points to 5277. The euro lost ground against the dollar, as traders reacted to the news that Germany had reached near-stagnation. "Following on the back of weak GDP data announced by France this will further undermine any efforts to resolve the eurozone debt crisis," said Max Johnson, a broker at forex specialist, Currency Solutions. But he added: "Looking around the global economy, at least there will be few, if any, cases of schadenfreude."

BERLIN—Barely 12 hours after a reluctant European Central Bank breathed new life into the euro project, German politics dashed hopes that Europe would soon receive a bigger bulwark against a spreading government-debt crisis. A spokesman for German Chancellor Angela Merkel, Christoph Steegmans, removed hopes of a more robust European Financial Stability Facility, saying the fund will stay as agreed at a July 21 European Union summit. "The EFSF will remain what it is, and keep the volume it had before July 21," Mr. Steegmans said at a regular government press conference. The ECB Sunday made a landmark decision to expand its bond-buying program to include Italian and Spanish government debt, a step aimed at stopping a market sell-off that threatened to send their borrowing costs to unsustainable peaks. The ECB hesitated last week to take such a step, which greatly expands its role as an underwriter of government finances. But it was deemed critical to buy time until an improved bailout fund, the EFSF, could be ratified and implemented before October. The changes to the EFSF mandate would allow the fund to buy government bonds in the secondary market. The European Commission has asked for a massive increase in the EFSF's current lending capacity of €440 billion ($628.23 billion) guaranteed by euro-zone governments. Market watchers said a new volume of up to €1.5 trillion or more might be needed to reassure investors that the fund can offset government solvency threats. The euro promptly lost much of the ground gained from the overnight ECB announcement as investors responded to German opposition to a massive build-up in the euro-zone's defenses against debt contagion.