Debt crisis: live

14.15 In other news, Barclays is to pay penalties of £290m to settle claims that it manipulated the interbank lending rate. The Telegraph's Louise Armitstead tweets:

14.02 German finance minister Wolfgang Schaeuble has said he did not wish for interest rates for Germany to remain so low because this was an expression of concern in financial markets rather than stability.

According to Reuters, when asked if he wanted rates to stay at levels he described as "unnaturally low," Schaeuble said:

The answer is no, because I believe interest rates which are in practice negative rates are an expression of worry in the markets rather than stability.

Mr Schaeuble said he did not fear further downgrades for Germany caused by exposure to the euro zone debt crisis, after a downgrade by the Egan-Jones agency. "I am not worried about that. We remain solid," he said.

13.35 Vicky Redwood, chief UK economist at Capital Economics, has written a missive on whether leaving the EU would damage the UK economy:

A referendum on the UK’s membership of the EU seems to be becoming a more realistic prospect. We think that concerns about the economic disruption if the UK were to leave are overdone. In fact, the economy could end up better off.

...

So what would be the effects on the economy if the UK were to leave? Pessimists point to the potential adverse effect on UK trade, as the EU would then in theory be free to impose on UK exports the “common external tariff” which applies to all goods imported into the EU. There are also concerns of a drop in inward investment to the UK if she cuts her connections with the rest of Europe.

However, there are several reasons why in reality the UK would be unlikely to suffer much. For a start, the UK could leave the EU but still be part of a free trade agreement with the rest of Europe. Norway, Liechtenstein and Iceland are all outside the EU but are part of the European single market through their membership of the European Economic Area.

...

Meanwhile, there are likely to be many benefits to leaving. The UK would escape all manner of regulations coming from Brussels which may be restricting UK growth – in particular relating to businesses. The BCC (perhaps not impartially) estimates that the annual cost of EU regulation for UK firms is £7.4bn. And George Osborne has recently faced a struggle with the EU to allow the UK to impose tighter capital regulations on UK banks than the minima agreed under Basel III. The UK would be free to adopt stricter immigration controls than at present; or if it wanted to maintain relatively free travel, it could become part of the Schengen Area of free movement.

13.19 Ireland is said to be hoping to make a return to the short-term bond markets on schedule and stay there. Reuters reports that in what Ireland hopes will be a prelude to a resumption of long-term borrowing before an €85bn-bailout runs out next year, the country's debt agency reiterated this month that it plans to issue Treasury bills for the first time in almost two years "over the summer months".

13.09 Here are a couple of documents for you to peruse at your leisure regarding the summit later this week. First is Herman van Rompuy's letter of invitiation (mentioning the all-important family photo) and here's an agenda for the meeting.

13.03 Germany's government has formally backed the introduction of a financial transaction tax in the EU if at least eight other member countries join in.

According to Bloomberg, Angela Merkel’s cabinet, at a meeting in Berlin today, agreed to ask the European Commission, the EU’s regulatory arm, to introduce the tax.

Italy, France and Spain are among EU countries that back a financial transaction tax, according to the statement. Germany aims to use the EU device known as enhanced cooperation, which generally requires the agreement of nine EU members if all 27 countries can’t reach a consensus, the government said.

12.51 Economist Nouriel Roubini was just on Bloomberg TV discussing the unfolding euro crisis and the German reaction to all of these proposals to mutualize debt.

Roubini told Bloomberg that the Germans worry about three things:

• One is about moral hazard. They say, "if we agree on these things, there's not going to be enough effort by Italy and Spain.
• Secondly is a time consistency problem. If you agree on that stuff and they don't delever, then Germany is going to take a huge amount of risk.
• And three, there is a huge amount of credit risk the Germans are going to take by backstopping the debt on one side and also the deposits. You need also EZ-wide deposit insurance.

He then said that basically Germans are being asked to marry a non-virgin, and before they're willing to do that they want to see some absinence...

The Germans say, "you lost your virginity. Now you sign a contract; you say, 'I'm a boring virgin.' Be abstinent for the next two years. Show me your soul and two years from now, we're going to get married. But today, I commit to marriage today? Forget it."

12.27 Apparently, Angela Merkel and Francois Hollande, who are meeting in Paris this evening, will make a statement at 7.15pm, European time.

12.18 Activists in Germany are making their views known on Germany's spending policy. A campaign by the Initiative Neue Sociale Markwirtschaft, critical of German spending policy, especially regarding senior care, parent child care support and proposed eurobonds, have erected these effigies of German vice chancellor and economy minister Philipp Roesler, Angela Merkel and German Social Democrats chairman Sigmar Gabriel near the Chancellery in Berlin.

12.10 It seems that Mario Monti has won his final confidence vote on the reforms to labour law (see 07.52)

12.08 As well as Mrs Merkel, Evangelos Venizelos, Greece's Pasok party leader, has also been holding forth this morning on the crisis. According to Bloomberg, he said that immediate intervention is required to stem a deepening recession and revive a reform program which has stalled due to the political situation.

Here's Zerohedge's take on Venizelos' comments:

11.57 Merkel says that if Germany is over-strained, it would have unforseeable consequences for Europe.

11.56 Merkel says she strongly disagrees with EU proposals that join debt liability needed for bloc. She also reiterates that euro bonds are economically wrong and counterproductive. She says that joint debt liability can only come once controls on national states are in place. She will ask EU countries if they are ready for treaty changes and will tell other leaders that time is of the essence. Merkel expects controversial discusssion at the Brussels summit and eyes will be focused on Germany. She reiterates that Germany does not have unlimited strength.

11.47 Angela Merkel says she is pleased that at least nine EU countries are ready to go ahead with a financial transaction tax.

11.42 More from Mrs Merkel. She says that European Investment Bank capital must be boosted by €10bn. She adds that Europe needs credible banking supervision.

11.40 Merkel adds that Monti and Rajoy have taken important reform steps. She also says that Europe needs new incentives to help youth unemployed.

11.37 Angela Merkel is speaking now. She says there are no quick or easy solutions to the euro debt crisis. She also says that structural reforms must be at the centre of growth initiatives for Europe.

11.29 Some domestic news. Retail sales in Britain rose at their fastest pace in 18 months in June as consumers splashed out for the Queen's Diamond Jubilee celebrations. The CBI distributive trades survey's sales balance jumped to +42 versus +21 in May, confounding expectations for a sharp slowdown to +10.

11.15 Bankia, the Spanish lender, gained temporary approval today for its bailout, but the European Commission said that Spanish authorities will need to present a restructuring plan within six months to offset this support.

The EU executive said the state aid included a conversion of existing state-owned preference shares of €4.465bn into equity and a liquidity guarantee amounting to €19bn in favour of the Spanish BFA group and its Bankia unit.

11.07 On the Finland note, there are signs that Finns are getting tougher on Europe as the crisis drags on. Reuters reports that Finnish Prime Minister Jyrki Katainen sounded almost apologetic a year ago when he demanded collateral in exchange for bailout funds for Greece.

But twelve months on, with the eurozone still in turmoil and Greece nearer to the brink, Katainen no longer sounds sorry for demanding austerity from other member states or for opposing major steps towards closer integration that Finland considers too risky or irresponsible, such as common euro bonds.

"Too many countries have gotten too many loans too cheaply for too long," Katainen told Reuters this month. "We don't want to institutionalise this unless we know everybody will follow the rules, which hasn't been the case before."

10.58 Economist Nouriel Roubini has written a new paper on who might leave the euro first:

10.49 A brief flit around the markets.

Across Europe, equities are broadly higher: the FTSE 100 is up 17 points to 5464; the DAX is up 7 points to 6144; the IBEX is 42 points higher at 6570 and the MIB is up 63 points at 13031.

Spain's 10-year bond yields are down 1.6 basis points to 6.8pc while Italy's are down 4.5 basis points to 6.1pc.

The euro is trading at $1.2486, having fallen to $1.2442 yesterday.

10.21 Nicholas Spiro of Spiro Sovereign Strategy had this to say on the Italian bill auction:

It's always a bad sign when the short end of the curve is being hammered. This is pure risk aversion. While demand from local banks continues to prop up Italy's debt market, the concessions are becoming heftier and heftier with each passing week. While yields are not as high as they were in November, psychologically speaking things are almost just as dire.

The deterioration in sentiment towards Italy is externally driven. While Italy has serious domestic problems, what concerns the markets is Germany's reluctance to do what is necessary in the short-term to shore up Spanish and Italian debt. This is not about the absence of a fiscal and banking union. Those are long-term solutions. Rather, this is about the lack of credible interim measures to bring down Spanish and Italian spreads.

10.13 At Italy's auction of six-month bills, the yield has risen to 2.957pc from 2.104pc at the sale at the end of May. The yield is the highest since December.

10.10 Luis de Guindos, Spain's economy minister, has revealed some of the details of his recent pow-wows with fellow finance ministers. He held a conference call with his French, German and Italian counterparts and would take part in another later this morning after the "top four" ministers met in Paris last night.

Mr de Guindos said that direct recapitalisation of Spain's lenders by using European Union aid funds will be discussed at the summit and will also discuss greater banking union across the monetary union, along the lines laid out in a report by European Council President Herman Van Rompuy.

09.59 Czech prime minister, Petr Necas, has spoken out about the EU proposals for deeper integration, saying his government mandated him not to accept the plans:

The mandate orders me not to accept the proposals that have been in circulated in the media so far...Some proposals like the banking union could have extremely damaging impact on the Czech economy.

09.54 Having been delayed by a staff protest (09.07), the Italian business morale figures are out and showed an unexpected rise to 86.8 in June from 84.2 in May due to an improving outlook for production.

09.51 Institute of International Finance chief, Charles Dallara, has apparently told the German newspaper Die Zeit that the EU summit is "perhaps [the] most important" since its founding and that the EU's future is at stake.

09.30 More pain in Spain. The country's central bank has said that economic indicators suggest that the economy will contract at a faster rate in the second quarter than in the first three months of the year. From January to March, Spain's economy shrank by 0.3pc as Spain fell back into recession for the first time in three years. The Bank of Spain said that data showed private consumption had fallen at a steeper rate in the second quarter than the first while retail sales and car purchases had also shrunk at a faster clip.

09.14 Deputy prime minister, Nick Clegg, has taken time out from promoting reform of the House of Lords to pen a comment for the Financial Times - 'Be alive to the risks and rewards of a banking union' (£).

European leaders will meet on Thursday to map a response to the eurozone’s troubles. Eurozone states will embrace further integration to save monetary union, starting with moves towards a banking union. In the coming months these steps will inevitably turn into big strides to closer fiscal union, with important implications for the UK.

Our coalition government has supported that shift and will continue to do so, knowing that the eurozone’s collapse would be disastrous for our economy. But we will defend the single market, on principle and because it is vital to UK prosperity and the 3m jobs that depend on it. In the lead-up to the summit, we must be wary of caricatures: that a “new thing” called banking union now threatens the UK, and that our government stands up for City exceptionalism and deregulation.

09.07 The statisticians are revolting. In Italy, a protest by staff has delayed the release of Italian business morale data by half an hour.

Reuters reports that statisticians, researchers and computer technicians from ISTAT, Italy's national statistics office, have occupied the room where the data are handed out and are holding a labour union assembly. The 42 staff won an internal promotion two years ago that has not yet been recognised.

The Business confidence figures for June, scheduled for 0800 GMT, will now be published at 0830, the protesters said. The reading is forecast to fall to 85.5 from a three-year low of 86.2 in May.

08.56 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.

08.35 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.

08.23 Some flashes appearing on Reuters from Mariano Rajoy, Spain's prime minister. He has apparently said that Spain cannot fund itself at current yields for a long time and that the key issue for Spain today is to finance itself on the international markets.

08.18 Yesterday, we learnt the world's oldest bank, Italy's Monte dei Paschi di Siena, was to be handed €2bn by the government to cover a capital shortfall. Today, the bank announced plans for an up to €1bn capital increase, 4,600 job cuts, branch closures and a sharp reduction in its loan book to shore up its finances.

08.10 London's bourse has just opened and the FTSE 100 is up 22 points to 5469. 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.

08.05 Early this morning, the Microsoft offices in Athens were apparently attacked, with assailants driving a van through the front doors and setting off an incendiary device that burned the building entrance. A police source told Reuters that the van contained three inflammable gas canisters and five cans of gasoline. There are no reports of any injuries at the moment.

AP reports that there was no immediate claim of responsibility. It added that several small extremist or domestic terrorist groups are active in Greece, usually targeting official buildings, banks or symbols of state power with small bombs or incendiary devices.The attacks usually occur late at night and rarely cause injuries.

07.52 Still with Italy, the country's parliament is set to today approve a controversial labour market reform so prime minister Mario Monti can go to the Brussels summit with it in his hand to reassure his EU partners.

Mr Monti's government reckons the reform is key to kick-starting growth in the recession-hit economy. The project, which was revealed in March after months of disputes with trade unions, is based on the Danish "flexicurity" model, which aims to ensure both flexibility and security in the labour market.

AFP reports that it includes incentives for employers to hire workers but also eases the procedure for letting them go in case of a downturn, and will help young people get jobs though apprenticeships, in a country hit by high youth unemployment.

07.40 Italy faces another key debt auction today where it will sell as much as €9bn in six-month bills. Yesterday, the country paid 4.7pc to sell two-year paper, a new high since December, as investors expressed their doubt over whether this week's summit will deliver a decisive solution to the debt crisis.

Meanwhile, Mario Monti, Italy's prime minister, is expected to send a letter to European leaders today explaning the progress Italy has made with reforms.

07.35 Ahead of this week's EU summit, Angela Merkel and Francois Hollande will meet in Paris today to try to square their differences over how to tackle the crisis. Those differences were thrown into relief yesterday as Mrs Merkel ruled out jointly guaranteed eurozone debt for "as long as I live". Hollande supports the idea of eurobonds.

Before that meeting, Mrs Merkel will address the lower house of Germany's parliament later this morning.

07.25 That expectation of a muted market was echoed by Craig Erlam at Alpari. He said:

Markets are struggling to pick up momentum in either direction as we near the end of the week. Usually, we see sentiment pick up as we near a summit, with optimism high that the meeting will generate some form of solution to the dire situation in the Eurozone. Each time we see this optimism quickly disappear after the summits as leaders re-appear full of smiles and no plans.

This week we are seeing something different. We are seeing people adopt a "wait and see" approach. The effect of this has been low volatility in the markets and only small moves in prices. I expect if this summit fails to bear any fruit, we will see this repeated many times in the future until the leaders get a grip. At the end of the week we are likely to see a big reaction whatever happens.

07.17 Markets are expected to struggle to gain much momentum this morning as traders sit tight ahead of this week's summit. Michael Hewson of CMC Markets commented:

This week’s EU summit continues to act as a cloud over markets with expectations getting lower by the day. Yesterday’s events did nothing to change the mood of prevailing pessimism, especially after German Chancellor Angela Merkel was reported to have ruled out any idea of jointly guaranteed eurozone debt for "as long as I live", and thus ruling out any notion that we would see a step towards Eurobonds at this week’s summit.

07.12 Why don't governments just let ailing economies default, asks Jonathan Compton, who heads the aptly titled Bedlam Asset Management.

He argues that fear of contagion if a eurozone country leaves is just a "fairy tale designed to frighten voters into submission". More from Mr Compton:

One is that sovereign default is normal, especially after major banking crises. Only 13 of the G20 countries (the world's wealthiest nations) existed a century ago.

Of these, only two have not defaulted. Many have repeatedly reneged. The other is that default can be beneficial. Markets already expect several EU countries to 'restructure', hence Greek and Portuguese 10-year government bonds are now worth 16pc and 65pc of their face value; but discussion remains a political heresy because the eurozone has some aspects of a religious cult. The result is an absence of analysis on how to manage the cyclical inevitability of default, or to reap the benefits.

It is also worth noting that for many countries default is their normal condition. Spain is the winner, officially defaulting 18 times since 1550. Greece has done so five times since its re-creation in the 1820s, and has been barred international borrowing for 110 years out of the last 190.

07.10 Meanwhile, the countdown continues to Brussels' latest do or die summit.

Yesterday, the EU's 'Gang of Four' unveiled what has been billed as the master plan to save the euro. Bruno Waterfield, our Brussels correspondent, has compiled a handy Q&A explaining the ins and outs of this grand plan.

07.00 Over my dead body. That's what Angela Merkel had to say yesterday on the idea that we could see eurobonds any time soon. Speaking at a private meeting with MPs, she ruled out jointly guaranteed eurozone debt for "as long as I live".

The German Chancellor's comments were met with applause. One participant reportedly shouted: "We wish you a long life!"

06.45 Good morning and welcome back to our live coverage of the European debt crisis.

Debt crisis live: archive