Allegations of corruption against Spanish PM Rajoy and reports that former Italian PM Berlusconi is gaining ground in the country’s polls ahead of this month’s election took some of the shine off the euro on Monday.

Notwithstanding its latest wobble, we continue to forecast an appreciation of the euro to $1.40 by mid-year as sentiment towards the euro-zone slowly improves. But we are also sticking to our forecast that that the exchange rate will slip back to $1.25 by year-end – a view which is predicated on the assumption that the crisis will flare up again in the second half of the year.

That being said, Monday’s news underlines the fact that such a flare-up could happen at any time. 

Spain’s governing People’s Party (PP) has just said it will take legal action against whoever has leaked documents published last Thursday that purported to show Prime Minister Mariano Rajoy receiving €250,000 that had been hidden from tax authorities.

"All those who may have attributed, leaked and published,” the documents -- allegedly drawn up by two former PP treasurers -- may be subject to the action, third-ranking PP member Carlos Floriano told a news conference called before Rajoy is due to speak to the media alongside Angela Merkel after a summit in Berlin.

Rajoy denied the allegations in a televised speech on Saturday, but did not take questions. On Sunday, opposition Socialist leader Alfredo Pérez Rubalcaba called for Rajoy to resign, which the premier has ruled out.

Also on Sunday, opinion polls showed the PP’s popularity had tumbled from when they won power in November 2011 to within a whisker of the Socialists, although neither party would be able to command anything like a majority.

Fed up with record unemployment, an economic crisis with no signs of ending after five years and now fresh reports of corruption almost daily, Spanish voters have increasingly turned to small parties or the streets. Police helicopters buzzed central Madrid rooftops for three nights in a row after Thursday’s allegations as protestors rallied outside PP headquarters.

"Citigroup said it now expects Spain's economy to contract by 2.2pc this year and another 2pc in 2014, pushing unemployment to 28pc.The effects of the slump will overpower any gains from fiscal austerity. The bank said public debt will surge from 88pc to 110pc of GDP in just two years." "Premier Mariano Rajoy has so far resisted a full rescue from the EU bail-out fund (ESM), fearing a political backlash and loss of sovereignty. Yet the ECB cannot purchase Spanish debt until Madrid pulls the trigger and signs a "memorandum"." "Julian Callow from Barclays said the ECB’s Mario Draghi is “itching” to buy Club Med bonds, seeing this as a way of targeting monetary stimulus on the countries in trouble - without an causing inflationary spillover in Germany - but he is paralyses until Madrid relents." Ah, when it all collapses the EU socializes private debt and gets to appoint another country's leader. Now I see what the strategy is. Meanwhile, Ireland has now a debt to GDP ratio of 120% and rising are now predictably making noises such as, forgive us our debt or else the best boy in the class is going native! Put "precautionary" loans in place as we will not be able to exit the bailout without a second bailout i.e. "precautionary loans" or if you prefer a "bailout extension" call it what you like, just make sure the money is there for us! The government are back in talks to extend their sweet heart deal Croke Park deal with the 23 public sector unions that represent government workers, so no surprises. They will be requiring additional funding to finance the Labor trade union government nexus. Labor are in coalition. As for Spain they will get their bailout from the ESM with a vicious MOU attached. They will underestimate (deliberately) how much they require, the further austerity will cause even greater unemployment and they will be on the road to Greece and the EU will be on the road to either break up or an admission that democracy has been overthrown and that you cannot rule a democratic EU. The whole project has been derailed because it was never possible to unite countries of such diverse cultures and work ethics. France wants to be socialist, therefore it needs Germany which is capitalist to pay up! Greece does not collect taxes so it wants them collected elsewhere and passed on to them otherwise they might have to pull out and it might be a systemic risk, Cyprus needs a bailout they too could be "systemic" and what about all that Russian money? Sure Russia might give a dig out? It is a tower of Babel ... I wonder whether most people in more stable Northern European countries realize just what exposure they are going to have to these bailouts via the ESM (for that is what the EU are now touting as the Spanish rescue vehicle)The ESM can make a capital call any time it likes on it's EZ members at 7 days notice and it's officers are immune from prosecution in any EU jurisdiction.. and it's records inviolable. So all those EZ member states that thought they were relatively safe are going to end up providing whatever funds a bunch of people with no accountability whatsoever demand of them. Budgetary independence and fiscal prudence gone in a flash and they never even noticed....Well, the next round of protests/riots ought to be interesting. Maybe Draghi, LaGarde, Merkel, Barroso, Van Rumpy and Rajoy could sit down with the hungry masses to explain how the worst is behind them.

Russia's largest oil producer, state-controlled OAO Rosneft, ROSN.RS -0.31%said Monday it has raised $16.8 billion in bank loans and plans to sign a trade-finance package with two international oil traders to finance the buyout of TNK-BP BP.LN -0.01%. Rosneft is acquiring TNK-BP, Russia's number three oil producer, from BP PLC and the AAR consortium of Soviet-born billionaires in deals worth $55 billion in cash and shares that will create the world's largest listed crude producer. Under the deal, agreed to in October, the AAR tycoons will get more than $28 billion when the deal closes in the first half of 2013. BP will hold a 19.8% stake in Rosneft as part of its deal to sell out of TNK-BP.

To finance the purchase of BP's 50% stake in TNK-BP, Rosneft said it obtained a five-year loan of $4.1 billion and a two-year $12.7 billion loan from a group of international banks. Under the agreement, Rosneft said it plans to sign contracts to supply up to 67 million metric tons of crude oil in total for a period of five years, subject to a prepayment. Rosneft would use future oil exports as collateral for the trade financing from the traders. The supplies are expected to commence in 2013, the company said, but didn't provide any financial details of the deal.

The police are becoming frequent guests at Deutsche Bank headquarters in Frankfurt. For the second time in a week, authorities raided the bank in connection with an ongoing investigation, this time looking for evidence of witness collusion relating to court testimony in a high-profile case pitting Deutsche Bank against the family of the deceased German media magnate Leo Kirch.

The raid took place on Wednesday, but only became public early on Thursday afternoon, partially because it was not nearly as disruptive as a raid conducted a week ago Wednesday, when authorities showed up with 500 armed police and secured the bank's lobby. Nevertheless, the new search and seizure operation underlines yet again the dark cloud of suspicion that hangs over Deutsche Bank despite its stated desire to turn over a new leaf.

Police confiscated documentation and data on Wednesday, but did not make any arrests, according to a spokesperson for the public prosecutor's office in Frankfurt. The visit marks the second such raid in connection to the Kirch proceedings, the first having taken place in November of 2011.

At its heart, the Kirch case is a civil suit. The family accuses former Deutsche Bank supervisory board head Rolf Breuer of hastening the demise of Leo Kirch's media conglomerate by voicing doubts in an interview about the company's creditworthiness. Last Friday, a court in Munich decided in favor of the Kirch family and indicated damages Deutsche Bank would be forced to pay would be somewhere between €120 million and €1.5 billion.

Latest Low Point

But prosecutors also believe that several senior bank executives and board members, including Breuer, former CEO Josef Ackermann and two others, may have illegally coordinated their testimony prior to initial hearings in that case. They deny the charge. Officials on Wednesday were looking for information that could provide clues as to whether the quartet had indeed acted illegally.

Wednesday's raid marks just the latest low point in a 2012 full of them. The investigation relating to the emissions certificates directly implicates current co-CEO Jürgen Fitschens and it led to five arrests last week, though all suspects have since been released from pre-trial detention. Still, it could prove a difficult corner for the bank to wriggle out of. Fitschens is said to have signed a questionable tax declaration for the year 2009 which included refund claims on fraudulently traded emissions certificates. The investigation has been ongoing since 2010, but authorities seem to believe that Deutsche Bank's criminal intent was greater than the financial institution is willing to admit.

The bank, Germany's largest, also stands accused of having played a role in the LIBOR scandal, which saw prominent international banks collude to manipulate the key international lending rate. On Wednesday, the Swiss bank UBS was fined $1.5 billion for its role in the ploy by US, British and Swiss regulators. Furthermore, a former bank employee has also accused Deutsche Bank of having cooked its books during the peak of the financial crisis in order to avoid being forced to accept a government bailout. There are several additional legal proceedings pending as well.

According to the Süddeutsche Zeitung, in a story which will appear in the paper's Friday edition, this week's raid is linked to last week's. In a pre-publication press release, the Munich daily reported that investigators confiscated information last week that was also linked to the Kirch case and decided to come back for more. It is unclear for how long the investigation will last.(source...der spiegel)

In conclusion....nada, nothing ...lots of hot air ...

European leaders wound up their final summit of 2012 on Friday in much the same manner as they started the year – kicking the euro crisis can down the road, playing for time, crossing their fingers, hoping the worst is behind them.

In almost three years since the Greek drama erupted in February 2010 and spread quickly around the fringes of the eurozone, the leaders have never quite managed to get ahead of the curve despite 22 summits and countless meetings of eurozone finance ministers.

This week's two-day summit in Brussels repeated the pattern. It was supposed to lay out a grand plan and timetable for reforming and stabilising the euro regime through a battery of federalising political and fiscal moves. In the event, the documents from the EU council president, Herman Van Rompuy, were shredded amid more clashes over fundamentals between Berlin and Paris, while an even more ambitious blueprint from the Commission president, José Manuel Barroso, was simply ignored.

"One wonders how these two gentlemen will enjoy Christmas," quipped Andrew Duff, the Liberal Democrat MEP and ardent European federalist.

Van Rompuy, who has had a very bad month, was told to come back in the middle of next year with a better, more modest plan. The mood was darkened further by German Chancellor Angela Merkel dismissing claims that the worst was over for the eurozone and stressing that the bloc faced two years of painful reforms, slow growth and high unemployment.

"The changes we are going through are very difficult and painful," she said. "We have tough times ahead of us that cannot be solved with one big step."

Despite the stalemate and the seeming complacency, leaders concluded their summit keen to list the year's achievements. And they do have things to brag about

The leader of Italy's anti-establishment Five Star Movement political party, the second most popular by opinion polls, has added his voice to the anti-austerity rhetoric that will likely dominate the country's upcoming election campaigns. Beppe Grillo, an Italian comic, echoed Silvio Berlusconi's scathing criticism of the current prime minister Mario Monti's policies as 'German-centric' when he told US broadcaster CNBC that Mr Monti is a mere "bankruptcy curator" who "needs to disappear". He said:

The ECB puts out money that is meant to help our banks,but they do not use it to finance our businesses, but they give it to them to buy back their debt, to help French and German banks. That was Monti's work. The CNBC interview came on the same day Mr Grillo expelled two prominent party members who had voiced criticisms over his leadership style, branding it dictatorial. His expulsion of the pair unleashed at outpouring of criticism from the party's young supporter base, who compared him to famous dictators including Benito Mussolini and Joseph Stalin.

German Finance Minister Wolfgang Schäuble is a clever orator. In comments to the press on Tuesday, he first made sure to praise Greek reform efforts before turning to the most recent measures passed to prop up the heavily indebted country. Then he said that the new aid package, aimed at reducing Greece's overall debt load and giving the country two extra years to meet its budget deficit reduction targets, won't cost German taxpayers a penny. It is a bold statement. And one that leaves plenty of room for interpretation. Particularly given Schäuble's follow up. Berlin, he said, will suffer a "reduction of revenues." It is a typical Schäuble formulation: a bit ambiguous and slightly misleading. But the numbers are clear enough. Germany will forego some €730 million ($944 million) in revenues in 2013 as part of the deal hashed out on Monday night in Brussels between euro-zone finance ministers and the International Monetary Fund. It is a compromise that avoids, for now, the kind of debt haircut that Berlin had been so opposed to. But it marks the first time that the crisis in Greece will have a direct effect on the German budget. The deal clears the way, finally, for the payout of the long-awaited next tranche of emergency aid for Athens. Whereas that tranche was originally to be €34.4 billion, euro-zone finance ministers lumped it together with the next chunk of aid due and approved the payout of €43.7 billion. Before it can be delivered, however, German parliament must approve the plan pushed through on Monday night, which it is expected to do on Friday. Parliaments in Finland and France also have to clear the deal, but neither is expected to block it.

On Cyprus Bailout, there will be no agreement until the Ecofin meeting on 13th december. Holdups: (according to cyprus mail)

1. Still no data on bank capitalisation needs - expected friday, at least the preliminary version.
2. The cypriot legislature has to pass 20 bills implementing the "preliminary agreement" with the troika.

If anyone thinks the greek parliament had to do this legislation without sufficient time to deliberate, think about the cypriot parliament. They spent most of the negotiations with the troika, arguing that they didn't actually need it. And then suddenly caved in, because there was a bank run on Laika / Cyprus Popular Bank. (That nobody outside the local media and, err, me appears to have noticed). There's no report from the troika, there is no certainty that the banks can safely be recapitalised.

And the deadline from the ECB to recapitalise the banks is January 20th. And the state may run out of money before christmas.

A real mess....As usual something stinks. Must be something to do with the horse trading that goes on. Albeit dead ones, hence the stench. They'll be compromise and what will be left will be the usual fudge & a toothless banking union so full of holes that it would resemble a string vest. Alas poor Uk gave up its veto some time ago on financial matters! We are not there to determine any outcome and its likely banking supervision will be imposed across the EU not just the EZ! Meanwhile the rest of the world moves ahead, including the US, and the EU is stuck in its self inflicted cesspit. God help our young people across the continent

Greece's national debt is €301 billion. Population is 11 million - so a family of four owes €109,500.

Average net salary is €14,000 - so (assuming a family of four has one average earner) that debt is 7.8x annual income. This is their share of the national debt only - it does not include their own mortgage or personal debt.

Sustainable? My arse...... Even if the haggling to knock off €20 billion succeeds, the result is still bullshit.

How many times does the obvious have to be said?The Greek debt is so great that there is no realistic prospect of it ever being repaid. Creditors and creditor governments and institutions are just trying to buy time until some further write down or orderly default can be implemented that will not be too politically damaging to them. All the time hoping that Greece's current account balance can be kept moving into the black so that further bailouts to cover current government spending can be avoided.
All this fancy financial footwork has one goal only, to save the Euro. No one gives a damn about the mess the Greeks have got themselves into and for which they will pay dearly, and rightly so.But for how long can Greece avoid social and political explosion while they are the guinea pigs for a heroic surgical experiment designed to save the architects of the Euro from the folly of their creation.

The feeble EU will....

European banks have asked the European Commission to postpone the introduction of tougher global bank capital rules by a year to 2014 after U.S. regulators told lenders they did not expect the new regulations to take effect in 2013......The feeble EU will almost certainly cave in. Europe is SO bust that it needs the bankers, more than the bankers need the EU. This would show that the EU is no more than a grubby little exercise (or project) to allow politicians to borrow "however much it takes" to get as many European people "hooked for good" on Europe's spend, spend, spend socialist politicians as possible. And, later on, if US banks decided to play by less strict rules, then don't let them trade in Europe? The new Basel rules are not that strict anyway. They are only designed to try and make it a bit more difficult for banks to go bust when the next crash happens. It tries to raise the cover provided for banks debts turning bad from 2% to 7%. Meaning if more than 2% of the loan book goes bad now - the bank goes bust. The authorities have plucked a 7% figure out of the air as being sufficient cover for all future banking crises.

Quarto RECH - well I wish you stupid Europeans good health and enjoy the german boot on your neck ...

On the "escrow" account:  The European citizens should know, however, that loans to Greece are paid into an "escrow" account and are used exclusively to repay past loans and to recapitalise near-bankrupt private banks. The money cannot be used to par salaries and pensions, or to buy basic medicines for hospitals and milk for schools. The precondition for these loans is more austerity, paralysing the Greek economy and increasing the possibility of default. If there is a risk to the European taxpayer losing their money, it is created by austerity.`The Greek message to Angela Merkel, Alexis Tsipras, The Guardian 8/10/12....What is needed is a full implementation of the promise to remove government liability for private financial sector banking debts, not only in Greece but in every EU nation state. This was mooted some time ago only to be followed by political elite class vacillation over whether or not pre-2012 debts could be included. The only way forward for the countries shouldering the burden of insolvent banks is to place responsibility for those debts back onto the banks and make the policy retrospective....Well,....Draghi enters lion's den to sell bond-buying plan (reuters)

Well actually it's just the Bundestag Budget and European Committees, but they're probably happy to be described as "lions". Given the amount of extra paperwork dumped on them by the Constitutional Court regarding EZ crisis-handling, they could do with being pepped up I expect.

It's a good report by Reuters, in any case.

I expect the big questions to be about Spain," said Guntram Wolff, deputy director of the Brussels-based Bruegel think-tank and a former Bundesbank economist.

"There is a lot of opposition to a programme for Spain. They are against it because they fear it would open the floodgates at the ECB. The concerns run very deep, also in the SPD."

Yes, the SPD are fiscal conservatives too.

But amid the concerns, there was general agreement that Draghi had done the right thing in offering to explain his policies at a time when many citizens in Europe feel momentous decisions are being taken without their input.

"One of the big problems of Europe is that European institutions only talk to voters through national governments," said Wolff. "So it's important to have a direct link to the people, and this is a step in that direction."

Yes. Draghi was really quite wise to make the offer to appear before the Bundestag committees.