Debt crisis: as it happened - October 16, 2012

16.19 The German politician quoted by Bloomberg has said that he wasn't referring to Spain in his comments (see 14.09). So, on the bail-out, it looks like things are back to square one.

15.59 George Soros says that if the world could persuade Germany to pull out of EMU, Europe’s never-ending crisis "would disappear in thin air". Ambrose Evans-Pritchard writes:

The residual euro would fall to a level that better reflected economic fundamentals in Southern Europe. Competitiveness would largely be restored at a stroke, without the need for debt-deflation. There would be no further risk of large sovereign defaults.

Mr Soros said — as he has many times before — that the current course is pushing euroland into a "lasting depression, and it is entirely self-created".

Indeed. "Entirely self-created". Repeat that a hundred times. There is nothing seriously wrong with Europe's underlying economy. It has magnificent companies, great creative skills, a global current account surplus and relatively low debt. (That is not a misprint. Europe does not have a debt crisis. It has a political crisis. It is so badly structured and so badly run that moderate debt has been allowed to mushroom into a crisis).

15.38 Police had to step in today after Downing Street in-fighting between Number 10 and the Treasury. Rosa Prince, online political editor, writes:

Police have been forced to step in to break up a cat fight between Larry the Downing Street cat and Freya, First Moggy of the Treasury. It is not known what caused fur to fly between the feline residents of Nos 10 and 11 Downing Street. Relations between their human occupants are far more amicable than when Tony Blair and Gordon Brown were prime minister and chancellor respectively.

15.29 It seems that negotiations between Greece and the troika have broken down over a disagreement over wage reforms. Greece is now weeks away from bankruptcy and this could put a spanner in the works and prevent the release of the next tranche of bail-out cash.

15.19 There are suggestions on Twitter that Greek talks have ground to a halt. We'll bring you more on that as it comes in.

14.39 Rumours of a Spanish bail-out have pushed markets higher today, particularly - unsurprisingly - in Spain. The IBEX is now up 2.7pc.

14.35 US inflation data (CPI) was also out today, rising in September to 2pc.

14.09 Two senior German politicians have said that they'll back Spain's cunning plan (see 12.48) to ask for a bail-out from the ESM, then not use it, in order to drive down their bond yields so they can borrow more money...

It's a change of heart for Germany. Previously Wolfgang Schäuble had said that a bail-out should be a last resort for the country.

On the other hand, it's unlikely that Spain will get the line of credit without strings attached. Michael Meister, a deputy caucus leader of Angela Merkel’s Christian Democratic bloc, told Bloomberg on the phone:

We’d have to look at any application that Spain made, whether for a precautionary credit or a full program. The applicant will have to decide. But one thing is clear: Whatever is requested, it won’t be without conditions.

^{Germany's Chancellor Angela Merkel, left, and Spain's PM Mariano Rajoy}

13.53 Wall Street is up and running, and following Europe's gains.

The Dow Jones is 0.72pc higher in early trading, the S&P 500 is up 0.81pc and the Nasdaq has climbed 0.66pc.

13.29 A quick update on the European markets just before Wall Street opens up for the day. These rumours of a Spanish bail-out (see 12.48) are pushing shares up.

The FTSE 100 is up 1pc, the CAC is 1.26pc higher and the DAX has climbed 1.31pc.

12.48 Spain has come up with a cunning plan, reports the Financial Times. Everybody's waiting for it to take a bail-out, but the government seems reluctant. Now, a senior official says Spain is "comfortable" with asking for a line of credit from the ESM bail-out fund - but it won't actually use it to borrow any money.

So, what's the point?

Well, it hopes to use the potential for borrowing to satisfy certain rules so that the ECB can begin buying its sovereign debt. “The credit line is not fundamental, it is circumstantial,” said the official. This in turn will drive down the cost of Spain's debt.

Spain continues to wait and see how the crisis unfolds before deciding whether or not to make a full bail-out request, and has seen borrowing costs dip slightly recently. But eurozone sources say a request could come next month.

12.03 John Walker, national chairman of the Federation of Small Businesses, has issued a statement on this morning's inflation figures:

The continued fall in inflation towards the two per cent target mark can only be good news for small businesses in an otherwise challenging environment. With the September inflation rate setting business rates increases for the following year, it will please small firms that the rate has fallen from the 5.6 per cent high of last September. However we remain concerned that only one month, rather than an average across 12 months, is used to set the increase and want the Government to review this process.

11.44 An interesting report from Open Europe this morning warns that proposals for a eurozone banking union could make it "virtually impossible" for the UK to block any new financial rules in the future, potentially leaving the City vulnerable. Open Europe Director Mats Persson said:

The UK Government is absolutely right to seek protection against the 17 eurozone members starting to write the rules for all 27 countries. A space simply has to be created in the EU for countries that do not intend to join the euro. The UK has leverage in these talks, including a veto over part of the banking union proposals.

11.18 The OBR has admitted that spending cuts and tax increases may have hit economic growth harder than originally assumed. It released a report this morning which evaluated its forecasting record:

Along with many other forecasters, we significantly overestimated economic growth over the past two years. This likely reflected several factors, including the impact of stubborn inflation on real consumer spending, deteriorating export markets on net trade, and impaired credit conditions, euro area anxiety and demand uncertainty on business investment. Fiscal consolidation may also have done more to slow growth than we assumed.

Commenting on the OBR forecast evaluation report, TUC general secretary Brendan Barber said:

At the time the government set out its austerity plans, the OBR thought that the economy would grow by 5.7pc from 2010 to mid 2012. Instead it has grown by only 0.9pc.

The economy has massively disappointed and yet the government is sticking to a fiscal plan based on decent growth forecasts. The Chancellor should think again and start taking action to get the economy moving.

11.12 Graeme Leach, chief economist at the Institute of Directors, has commented on the UK inflation figures out this morning:

The fall in the headline rate of inflation to a three-year low in September is clearly positive news, as last year’s utility bill rises fall out of the figures.

Unfortunately, the main reasons for falling inflation are persistently weak growth and a lack of money moving about in the economy. In the short-term, low growth in the money supply should continue to dampen inflation. However, as the energy companies have announced another round of price hikes recently, we may well see another tick upwards soon.

11.02 Like Spain, Greece has held a bond auction this morning. And, like Spain, it saw borrowing costs fall. It sold €1.6bn of three-month debt with a yield of 4.24pc slightly lower than a previous auction in September.

10.54 S&P cut the credit rating on a bunch of Spanish banks this morning, but there are also reports that the sovereign rating will be cut later by Moody's... We'll bring you more on that as it comes in.

10.21 Good news for Spain this morning: it shifted €4.9bn in year-long and 18-month bonds at slightly lower rates. Yields on 12-month debt were 2.82pc, and 3pc on 18-month bonds. The country's borrowing costs are edging down.

09.58 Time for some reaction to the inflation figures. David Tinsley of BNP Paribas said there were no great suprises in the data, and that it left the door open for more money printing:

Inflation is higher than the MPC were expecting in August but it is still coming down, so I think that provides room for more easing in policy by way of QE in November. Clearly that is a closer decision than it was.

Tom Vosa of National Australia Bank said:

Slightly stronger than we had thought. I think alcohol prices were up a little bit, utilities prices were down although that is only going to last really for this month, in those annual terms.

In reality, we're looking at the squeeze into real household income which has been the constraint on consumption. That is going to continue now into mid-2013.

Does this mean that the MPC won't be voting to extend QE? This is roughly in line with where we were, last year the rise in utilities prices didn't prevent them from doing a bit more QE so I don't think that will be a constraint this time around.

But the hope they had that we would see real income start to grow from early next year really now looks like to have been dashed.

09.45 As we briefly mentioned a couple of minutes ago, CPI fell to 2.2pc in September - the lowest level in almost three years. The last time it was that low was November 2009.

However, the 2.2pc figure is year-on-year and last September's figure (5.2pc) had been bumped-up by large energy price rises, so there's a downward distorting effect.

There are also warning signs that it could rise again in coming months as energy suppliers once again hike their prices by up to 9pc. A YouGov survey published yesterday showed that Britons see rising energy prices as the biggest threat to their standard of living over the coming year.

09.41 A quick update on the main European markets now, which have been trading for just over and hour and have made gains. Achim Matzke, European stock indices analyst at Commerzbank, said:

The discount (priced into assets for euro zone and global growth worries) is clearly reduced and next year we expect the economy will pick up. Equities are forward looking and if you wait for the pick-up it will be too late.

The FTSE 100 has risen 0.39pc, the CAC is up 0.33pc and the DAX 0.52pc.

09.30 UK inflation (CPI) data is just out, showing that the rate dropped from 2.5pc last month to 2.2pc in September.

09.19 EU car sales figures (a good indicator of economic health) for September are out this morning. It's not good news: last month was the 12th consecutive fall. Demand across the 27 countries was off 10.8pc from the same month last year, with only 1.13m new registrations. However, the UK market grew 8.2pc year-on-year.

09.11 Spain's finance ministry held a press briefing last night and said that a decision on requesting a bail-out is not imminent. We reported yesterday morning that the country could ask for financial aid from the eurozone next month. The wait continues...

08.59 So, we've touched on Portugal and France this morning, now to Greece: Angela Merkel yesterday ruled out letting the debt-laden country default on its debt.

Her statement is being taken as the latest sign that Germany is softening its stance on Greece, ahead of a report from the troika on its efforts to hit austerity targets demanded as conditions of its bail-out.

And it looks as though that change of attitude will come just in time for Greece, which admitted yesterday that it was unlikely to be able to deliver the next €13.5bn in spending cuts which it needed to secure a further €31.5bn in bail-out cash. Without it the country will go bankrupt at the end of November.

08.51 France's business federation has warned that the country is sliding into a grave economic crisis and risks a full-blown “hurricane” as investors flee rocketing tax rates. Laurence Parisot, head of employers’ group MEDEF, said:

The situation is very serious. Some business leaders are in a state of quasi-panic. The pace of bankruptcies has accelerated over the summer. We are seeing a general loss of confidence by investors. Large foreign investors are shunning France altogether. It’s becoming really dramatic.

08.39 The German government including Angela Merkel sees David Cameron and the British as standing on the sidelines of Europe and heckling, just like Muppets characters Statler and Waldorf, claims Der Spiegel.

The magazine said the German Chancellor saw "a Europe in which the British are at best spectators in the gallery, like Statler and Waldorf, the two old men on The Muppet Show." Charming.

08.32 Portugal unveiled its 2013 budget yesterday, bringing further austerity measures demanded as conditions for its €78bn bail-out package. Here are some of the key facts and figures:

• Income tax will rise from 9.8pc to 11.8pc

• The budget deficit will be 4.5pc of GDP

• Spending cuts worth €2.7bn will be enacted next year, partly by laying off 2pc of the country's 600,000 public employees

Opposition Socialists called the budget a "fiscal atomic bomb" and 2,000 protesters gathered outside parliament last night. Finance Minister Vitor Gaspar said the budget - one of the most harsh in Portugal's history - was necessary to meet the country's bail-out targets:

We have no room for manoeuvre. Asking for more time would lead us to a dictatorship of debt and to failure.

^{Topless protesters shout anti-austerity slogans outside the Portuguese parliament last night.}

08.30 Good morning and welcome back to our live coverage of the eurozone debt crisis.

Debt crisis live: archive