Euro crisis -- Markus Huber at ETX Capital said that tight trading in European equities was likely to continue for at least the first half of today's trading session ahead of the anxiously awaited EU summit:
The problem with the EU meeting is that although expectations are very low for a positive outcome investors are increasingly running out of patience which is putting additional pressure on politicians. Unfortunately it is not all about Germany just agreeing to Eurobonds and everything will be fine but also about important and necessary reforms which need to be implemented by all countries in order to avoid a much more severe crisis in the future. The question is if politicians indeed have the necessary time available which will be needed in order to negotiate and implement these reforms, however any progress being made towards a more stable and financially viable Euro-zone would certainly be welcomed by investors and bring periphery yields down to more sustainable levels in the long run.... Spanish bond yields last week jumped to the dangerously-high level of 7pc and the country yesterday saw its borrowing costs rise sharply in an auction of short-term debt. But today, the yield on Spain's 10-year bond is down 4.7 basis points to 6.7pc.
It turns out that Mariano Rajoy has been speaking in the Spanish parliament this morning, saying that he will ask ask other European Union leaders at a summit this week to use existing EU instruments to stabilise financial markets. He said:
I will propose measures to stabilise financial markets, using the instruments at our disposal right now. The most urgent issue is the one of financing. We can't keep funding ourselves for a long time at the prices we're currently funding ourselves.
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Chancellor Angela Merkel sharply criticised a seven-page blueprint from four senior EU leaders opening the way to a eurozone political federation and made it clear she would not yield to intense pressure to move towards the common issuance of eurozone debt in the form of eurobonds to lower the cost of borrowing for vulnerable countries such as Spain and Italy.
Merkel's tough stance appeared to open up the prospects for a clash with Mario Monti, the increasingly beleaguered Italian prime minister, who is trying to restructure Italy's creaking economy but is impotent in the face of the financial markets raising the price he pays to borrow. Italy was forced to pay 2.96% to sell six-month bills, up from 2.1% a month ago. Its benchmark 10-year yield was up slightly at 6.22% and faces a key test with an auction of €5.5bn of five and 10-year bonds.
There were no signs of any concessions from Merkel either towards President Francois Hollande of France who will use the summit to proclaim he has forced the EU or the eurozone to adopt policies shifting the emphasis from austerity and spending cuts to a growth and jobs agenda.
The summit is likely to agree a "growth pact" nominally dedicating €130 bn to foster jobs creation and infrastructure projects.
But the scheme is essentially an exercise in repackaging already agreed measures or re-directing already committed EU funds.
Merkel told parliament in Berlin, before going off to Paris to see Hollande, that she would not allow "Germany to be overstretched" by bankrolling borrowing to save the euro.
Unusually, she predicted "controversial discussions" at the two-day summit, signalling that she was ready for a row.
Merkel heads to Brussels for crucial euro summit Francois Hollande and Angela Merkel have differing views on debt management Continue reading the main story
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European Union leaders are preparing to meet for a closely-watched Brussels summit on the fate of the euro.
On the summit's eve, German Chancellor Angela Merkel held two hours of talks with the French President Francois Hollande in Paris.
The two remain at odds on how to move forward, with Germany opposed to pooling debt while France insists the eurozone needs further integration.
Mrs Merkel has warned there is no "magic formula" to solve the crisis.
"Because I know the expectations and hopes that are pinned on this summit, I will repeat right at the start what cannot be said often enough," Mrs Merkel said in Berlin before the Paris talks.
"There is no quick solution and no simple solution. There is no one magic formula... with which the government debt crisis can be overcome in one go."
Mrs Merkel left for Brussels without making further statements after her meeting with Mr Hollande but said that "progress" for a pact for growth had been made and she hoped European leaders would adopt a 130bn-euro ($162bn) stimulus package.
Mr Hollande, who became French president on a ticket of anti-austerity, has been a strong supporter of the growth package.
European authorities have unveiled proposals such as the creation of a European treasury, which would have powers over national budgets.
The 10-year plan is designed to strengthen the eurozone and prevent future crises, but critics say it will not address current debt problems.
Spanish Prime Minister Mariano Rajoy said on Wednesday that his country could not afford to finance itself for long at current bond rates.
Spanish 10-year government bonds have been trading at yields above 6.8%, coming close to the 7% considered unaffordable.
8.38am: In a jab at the Italian and Spanish leaders who have warned their countries' rising borrowing costs are unsustainable, the German government source warns against "exaggerated panic mongering" over the surge in interest rates on Spanish and Italian government debt.
8.28am: More from the German government source, who expresses scepticism that a new instrument can be developed to tackle Italy's problems. The source reiterates that it's up to the governments themselves to decide whether, when and how to use the available instruments.
Seeking to dampen pre-summit expectations, the source also says that "the question of progress towards a fiscal union cannot be resolved in one day". He reiterates Germany's opposition to using bailout funds to recapitalise banks while supervisory controls remain at the national level.
8.19am: A German government source is briefing journalists. Reuters reports him as saying that with the EFSF and ESM bailout funds, the EU already has all the necessary instruments at its disposal to deal with the crisis. The source also highlights the need to come up with precise, quick, appropriate help and a reform programme for Spain
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