Germany's AAA credit rating affirmed as Bank of England slashes forecasts (2024)

European stock markets are closed, after a slow-paced day.

FTSE 100: up 4 points at 5845, + 0.08%

German DAX: down 6 points at 6961, -0.1%

French CAC: down 12 points at 3440, -0.37%

Spanish IBEX: - 60 points at 7150, 0.8%

Italian FTSE MIB: up 9 points at 14665, + 0.07

Michael Hewson of CMC Markets comments:

Today’s broader weakness has largely been as a result of some profit taking after the gains of recent days and a rather downbeat press conference from the Bank of England where Governor Mervyn King downgraded growth forecasts for the UK economy, and suggested that the economy would continue to grow well below the long term average for some time to come.

As it's quiet, I'm scooting off (the Olympics won't watch itself). Cheers all, and goodnight!

Last week, I asked readers to send over their stories of how the financial crisis had affected them.

Now, our own Laura Oliver has cleverly created THIS INTERACTIVE MAP out of your contributions. It shows how people around the world have been touched by the events that began on 9 August 2007, and the beginning of the credit crunch.

If you missed out, it's not too late to contribute. Just click here. If your entry isn't there, drop me an email and I'll fix it (graeme.wearden AT guardian.co.uk) [some entries are still being processed].

My colleague Simon Neville has also been speaking to some of you, for this piece.

Interesting story on Reuters this afternoon, about how one of the men who helped create the euro now fears the single currency won't last in its present form.

Otmar Issing, 76, has written a book called "How we save the euro and strengthen Europe" (excellent news, this means we can all go home).

In it, Issing warns that it "remains to be seen" how many countries will still use the euro in the long term.

Asked how worried he is about the euro, Issing replied:

Much more strongly than I could have ever imagined.

We are still a long way off saying 'that's it, now we are sure to make progress'. Substantial reforms in almost all countries are still pending.

Issing served on the board of the Bundesbank for many years, and was also an executive board member of the European Central bank between 1998 (when the ECB was founded) and 2006.

Conspiracy theorists among you will not be surprised to hear that Issing has also worked for Goldman Sachs.

Despite slashing its forecast for UK economic growth to around zero this year, the Bank of England could still be too optimistic.

That's the view of Louise Cooper of BGC Partners this afternoon, who reckons Sir Mervyn King is "increasingly powerless" in the face of the eurozone crisis, the weakness in the banking sector, and the world economic slowdown:

Looking at the two sides, the negative factors seem to massively outweigh the positive: Eurozone crisis, global growth slowdown and banking industry fragility significantly outweigh QE stimulus (does it work?) and slightly wealthier consumers (whose spending has held up remarkably well already according to retail sales data).

To me the balance is still for GDP downgrades. In his latest downgrade Mervyn has not gone far enough.

Governor King faced some criticism from the press this morning over the latest revised forecasts (not that he accepted the blame). He'd get a rougher ride if the Bank's latest predictions prove too optimistic.

George Osborne, chancellor of the exchequer, has just commented on the Bank of England's decision to slash its growth forecasts.

Osborne claimed the UK economy was "healing", but conceded this was a "slow and difficult process", due to problems at home and abroad.

Alarmingly, Osborne also declared that "the government now has the chance to give 110% effort" to get the economy running, now that plans to reform the House of Lords have collapsed.

The chancellor trotted out his 110% line two weeks ago, after the news that UK GDP had shrunk by 0.7%. We're not sure it sounded any better this time....

Rating agency Fitch has just affirmed Germany's credit rating at AAA with a stable outlook.

Fitch said Germany's underlying economic situation was good, pointing out that it is the only major advanced economy which had a lower unemployment rate in the first half of this year than in 2007.

Here's the full statement:

The affirmation reflects Germany's longstanding credit strengths and robust economic performance over the past two years. Against the background of fragile global recovery and the intensification of the eurozone crisis, Germany has recorded strong GDP growth and a declining trend in unemployment, partly as a result of previous structural reforms.
Several factors contribute to Germany's solid macroeconomic position. Germany is the only major advanced economy which had lower unemployment rate in H112 than it had in 2007. The level of German GDP has increased by a cumulative 5.8% since the beginning of 2010, compared to 2.3% for the eurozone. The monetary conditions set for the entire eurozone by the ECB are accommodative for Germany given the strong cyclical position of its economy. As a consequence of safe-haven capital inflows, yields are also at extremely low levels. Furthermore, Germany has a strong net external creditor position and a large, albeit gradually declining, current account surplus.

The German financial sector has stabilised since 2009 and liquidity is abundant in the current environment. However, meeting Basel III requirements will remain a challenge for German banks in light of modest profitability and still a high leverage. Since mid-2008, German banks have cut their total eurozone exposure by €332bn, a 30% fall, of which €187bn was withdrawn from Greece, Italy, Spain and Portugal, a fall of 44%. Despite this fast pace of deleveraging, the quality of the remaining assets may well deteriorate further as the recession deepens in the periphery.
Germany has all the ingredients of a declining public debt path. The economy is growing, budget deficit is moderate and nominal interest rates reached record low levels. Nevertheless the longer track record serves as a warning sign. Despite the fiscal rules of the eurozone, the debt/GDP ratio had increased to 83% by 2010 from 55% in 1995. During the 13 years of monetary union, the German debt ratio declined in only five years and has been above the 60% reference value since 2003.

Following the pledge of €100bn to recapitalise the Spanish banking sector, Fitch considers the likelihood of disbursing all of the EFSF's €440bn lending capacity to have risen significantly. Given Germany's maximum guarantee of EUR211bn, this would translate into a 7pp increase in the gross debt/GDP ratio.

Germany remains exposed to the systemic component of the crisis. A significantly deeper recession of its large eurozone trading partners could also push Germany into recession with negative repercussions for the fiscal stance as well. Furthermore, additional sizeable contribution to eurozone bail-out funds, on top of the EFSF guarantees, could push German debt level above 90% of GDP, close to the upper limit Fitch generally considers consistent with a 'AAA' rating. Materialisation of these risks would put downward pressure on the rating.

Fast food giant McDonalds has blamed the eurocrisis for disappointing financial results today, hours after Dutch Bank ING also missed its forecasts.

McDonalds told investors that sales in Europe fell 0.6% in July, due to weak demand in Germany and in several Southern European countries. Sales were even down slightly (0.1%) in the US.

Globally, McDonalds posted flat sales last month - its worst performance for nine years, and a surprise to analysts and shareholders who reckoned the company was largely immune to the wider economic woes.

For its part, ING had reported a 20% drop in net profits for the second quarter of 2012. Bad debt provisions rose, with the company being hit by the decline in the Spanish economy. (more here, on the FT).

And to compound the gloom, France's central bank predicted that the country will fall into recession in the current quarter. The Bank of France said it expects GDP fell by 0.1% between April and June, and predicts a similar drop between July and September.

Add in the Bank of England's decision to slash its growth forecasts, and you have plenty of evidence that the global economy is worsening.

As tomorrow is the fifth anniversary of the credit crunch, we'll be holding a live Q&A to address as many queries as possible on the crisis.

You can get to the front of the queue now by posting on this page. Kicks off at 11.30am BST Thursday.

While we're on the subject, this interactive covering the key developments since 9 August 2007 is worth a look. What a journey we've been on.

Protests have been taking place in Athens today over the government's plans to privatise parts of the banking sector.

As these pictures show, a group of demonstrators marched to the Greek finance ministry, where they shouted slogans opposing the privatisation drive.

Employees of Hellenic Postbank are staging a 24-hour strike today, as part of their opposition to a plan to sell the state-controlled lender.

Here, you can see a protest outside the company's HQ in Athens:

Germany may be struggling in the Olympics, but it continues to perform well in the bond markets, selling €3.4bn of 10-year bunds with solid demand today.

Borrowing costs rose slightly, with the average yield on the bonds (ie, the rate of return demanded by investors) coming in at 1.42%, up from 1.31% at the last auction.

Germany received offers for nearly twice as much debt as it sold. Alessandro Giansanti, rate strategist at ING in Amsterdam, said this shows that investors are getting jittery about the crisis again:

The market is getting more cautious and waiting for more action from the ECB and from the governments.

To back up that point, Spanish bond yields have been inching higher today.

Meanwhile, over in Greece...there is great concern over the finance minister’s dramatic admission yesterday that the country may have to lay off civil servants to make up for a €4bn shortfall in EU-IMF-mandated spending cuts

With the media almost unanimously proclaiming that thousands of civil servants could lose their jobs, the Greek finance minister Yiannis Stournaras’ announcement has not gone down well. The authoritative daily, Ta Nea, proclaimed that the idea of reviving a special labour reserve where state employees would be placed on reduced pay had caused “open disagreement” within the ruling coalition. At a meeting of the three party leaders supporting the government late Tuesday, the leftist leader Fotis Kouvellis accused Stournaras of “moving beyond the realms of what had been agreed” by the three parties. “At the meeting it became apparent that the proposal could torpedo the fragile unity of the [conservative-led] government” the paper opined, pointing out that both Kouvellis and the socialist Pasok leader Evangelos Venizelos had vehmently opposed the idea. Several commentators agreed that the move was highly risky for a government whose cohesion was far from assured – all three parties had described mass lays off as a “red line” prior to general elections in June.

But officials, who say Stournaras will hold tete-a-tete talks with prime minister Antonis Samaras this afternoon “to go through the figures,” reiterated this morning that as controversial as it may be the scheme “was back on the table.” “We are discussing everything, we are looking at everything, we are searching for the best solutions,” the government spokesman Simos Kedikoglou said of the quest to come up with €11.5bn in cuts – a condition of further EU-IMF rescue loans for the debt-choked country. He added that the top priority was to build “an independent, modern state” by first of all moving ahead with the privatisation of state assets. “Our main goal is to change the structure of the economy and to send the message to investors that the economy is changing and is worth investing in.”

Helena also reports that Greek officials are downplaying an interview by Eurogroup chairman Jean Claude Juncker, in which he says that Greece's exit from the euro would be "manageable but that does not mean it is desirable."

Juncker’s remarks were not out of the ordinary, said the government spokesman Simos Kedikoglou told NET TV. “Mr Juncker has repeatedly shown that he supports Greek efforts,” he said of the country’s attempts to reign in its debt mountain, at 160% of GDP still the biggest in the 17-nation bloc.

My reading of Juncker's remarks (transcript here) is that he was not trying to suggest that a Grexit was a good thing, just that the situation is less dire than a few months ago.

Here's some reaction to the Bank of England's quarterly inflation report, and the news that the UK central bank expects no GDP growth this year:

John Hawksworth, PwC's chief economist:

It seems likely that we have entered a 'new normal' period where growth will be relatively subdued by historic standards for some years to come as the banking system remains impaired and global commodity prices remain relatively high and volatile.
On the brighter side, inflation looks set to fall back to target over the next year, which should ease the squeeze on consumer finances. We would therefore expect the MPC to sit on its hands until at least November before considering any further changes in monetary policy.

TUC general secretary Brendan Barber:

We all know the economy is currently stuck in a rut but it’s now looking less like a blip and more like a much longer slump.

The UK’s dire economic performance is causing permanent damage and putting thousands of jobs on the line. It is not good enough for the Chancellor to stand by and rely on the Bank’s monetary policy measures to get us out of this mess.

With all the main forecasts now pointing towards a lost decade, it’s time for the government to call time on self-defeating austerity and start looking at ways to stimulate the economy.

Colin Edwards of the Centre for Economics and Business Research:

The UK’s continuing subdued performance is likely to be compounded by lower global growth prospects. The on-going Eurozone crisis hampers the ability of the UK to export its way out of trouble...

The expectation of below target inflation for the remainder of 2012 and into 2013 may give the Bank some room for manoeuvre in further loosening monetary policy to provide a boost to the UK economy. Cebr expect to see a further £50bn of QE before the end of 2012.

The press conference is now over.

There was a late reference to the Olympics, but chief economist Spencer Dale didn't reckon the Games would give the UK economy much of a stimulus. Ticket sales and TV rights should give a "small positive contribution" to GDP.

Dan Atkinson of the Mail on Sunday asks Mervyn King about the situation at Standard Chartered, which has been accused of illegally moving money from Iran.

Does this attack on one of Britain's biggest bank show that a financial trade war is breaking out across the Atlantic?

King reckons not:

Overall, I don't judge that my colleagues in the US or elsewhere have those intentions... We need to judge such cases on its merits.

Earlier in the process, King appeared to suggest that the US regulator which accuses Standard Chartered of malpractice had deviated from the usual procedure by announcing the charges, rather than waiting until the case were more advanced.

Here's the fan chart from the Bank of England's new quarterly inflation report.

The dark green part of the fanchart shows the most likely path of GDP growth. You can see that it shows growth recovering in the second half of this year, but the drop in output already suffered means there will be no meaningful growth in 2012.

That compares to the Bank's previous forecast of 0.8% growth.

Olly Barratt of Feature Story News asks Mervyn King to elaborate on his statement that the eurozone crisis goes on and on and on. Does that means he isn't confident of a resolution?

King points the finger of responsibility overseas, towards the likes of Mario Draghi in Frankfurt, saying only European leaders and policy makers can decide if there's going to be action.

King added:

We watch with concern and great interest, and we'll help them in anyway we can, but it's up to them.

Mervyn King admits that the global economy is in a worse state today than he would have expected nearly four years ago, when the world was rocked by the collapse of Lehman Brothers.

He admits that he would have expected the banking sector to be in a stronger position:

The loss of confidence that has led bank's funding costs to be as high now as they were then is a surprise.

The second factor is the eurozone crisis. Even though the "structural problems" within the single currency were visible, King did not expect such a severe situation, or "the depression we're seeing in Greece".

Kathryn Hopkins of The Times drags Mervyn King's attention back to the minutes of the Bank's last meeting, where it gave some consideration cutting interest rates below 0.5%. Wouldn't that actually backfire?

It would, agrees the governor, who indicates that such a move is unlikely.

It would damage some financial institutions.. more counterproductive than beneficial.

That sent the pound spiking against the dollar, erasing earlier loss to a new high of $1.5645.

From the press conference, my colleague Larry Elliott comments that"King seems very wary about cutting bank rate from its historic low of 0.5%.

On the eurozone crisis, Mervyn King is clear – the situation is still far from being solved, and European leaders need to do more. Even Mario Draghi's recent comments about protecting the euro at all costs fail to cheer the governor.

The overall outlook for the eurozone crisis has not changed over the last three months, says King, adding:

It's a saga that goes on, and on, and on.

Amen to that.

The eurozone crisis is so serious, and its future path so uncertain, that the Bank is refusing to predict how it will affect UK exports or global economic confidence.

Governor King is getting quite a grilling in this press conference (reflecting that fact that the journalists there have heard him promise 'jam tomorrow' for some time now).

Paul Mason of Newsnight suggests that the Bank of England should stop trying to use monetary policy to offset the impact of chancellor George Osborne's fiscal tightening, and call for a Plan B instead.

King rejects the idea, saying that Osborne's plan looked "pretty sensible" back in 2010. Overseas factors have undermined it, he argues.

The Bank is also standing by its forecast that UK GDP would have been 0.5% higher if the Diamond Jubilee had not taken place.

Mervyn King's opening statement is now online, here.

Here's the key section explaining why the Bank has slashed its growth forecast:

The overall outlook for growth is weaker than in May reflecting downside news in the near term and, in the medium term, the possibility that the weakness in output and productivity growth that we have seen since the financial crisis persists.

GDP growth is more likely than not to be below its historical average rate in the second half of the forecast period.

Sir Mervyn King argues that Britain is not as deeply in recession as the Office for National Statistics says (the ONS figures show that the UK has shrunk by 1% during 2012).

The governor argues that the Britain has been "broadly flat" for the last two years.

He also says there is no urgent needs for a new stimulus, given the Bank only recently voted to increase its quantitative easing programme by another £50bn.

The Bank of England's new forecast is now that inflation will be slightly below target in the medium-term.

Our economics editor Larry Elliott believes this means it's likely that the Bank will announce further monetary easing measures in the months ahead, especially as the growth forecast also being cut.

Ed Conway of Sky News asks the first question, and throws Sir Mervyn King's Olympics analogy straight back at him. Given the Bank's persistent, "spectacular" failure to predict inflation or GDP, its forecasting arm has fallen off the podium.

Certainly not, says the governor, blaming one-off factors such as high energy costs or turbulence overseas. Our underlying thinking was right, he argues.

Sir Mervyn King turns to the London Olympic Games* for inspiration.

Unlike the Olympians who have thrilled us recently, he says, the UK economy has not yet reached full fitness. It is to the Olympic team that we must look for inspiration in a challenge that could take years to achieve

Mervyn King says the underlying picture for the UK is that output has "continually disappointed expectations of recovery". (in other words, the Bank's forecasts have been continually too optimistic).

King also says that there are "early indications" that the Funding for Lending Scheme (Britain's latest attempt to persuade the banking sector to lend more) is having an effect.

And we're off!

Sir Mervyn King begins the press conference by saying that UK inflation has fallen back close to the Bank's target of 2%, but quickly warns that the economic picture is weak - partly because of the crisis in Europe.

We are navigating rough waters, and storm clouds continue to roll in from the euro area.

The governor also confirms that the MPC has cut its growth forecasts, a decision he blames on "persistent weak productivity growth".

Sir Mervyn King is famously fond of sport (regularly spotted at Wimbledon and Lords during calmer days). So will he chuck an Olympics metaphor into his opening statement at 10.30am?

Economics editor Larry Elliott (who'll be at the press briefing) reckons Merv won't be able to resist a pun about Britain's economy not being among the gold medalists. So let's see - I've wagered Larry that the governor will avoid the temptation.

Here are some more serious forecasts of what to expect:

Ilya Spivak, Currency Strategist at DailyFX:

The document is likely be relatively thin on near-term policy prescriptions as Mervyn King and company remain in wait-and-see mode to gauge the impact of the recently unveiled ECTR and FLS programs. The deterioration in UK economic data since the last report is likely to skew the tone toward the dovish side of the policy spectrum, which may reboot stimulus hopes and cap losses.

Vicky Redwood of Capital Economics:

No doubt Mervyn King will repeat the line given in May that, due to the big uncertainties, the MPC is not focusing too much on any small undershoot on inflation nd that it is the big picture that matters. Nonetheless, a below-target inflation profile would clearly leave the door open to more stimulus. After all, we assume that the forecasts still won’t take account of any of the more extreme downside risks associated with the euro-zone. Accordingly, we continue to expect a further extension of QE and an interest rate cut in November – if not before.

European stock markets are down this morning, dropping away from their recent four-month highs. Nothing terribly dramatic, yet....

Spain's IBEX: down 89 points at 7121, -1.25%

Italy's FTSE MIB: down 37 points at 14620, - 0.24%

FTSE 100: down 25 points at 5816. - 0.4% (mainly due to various shares going ex-dividend).

German DAX: down 21 point at 6946, - 0.3%

French CAC: down 10 points at 3442, - 0.3%

Traders are eager to hear what Sir Mervyn King has to say, as Joshua Raymond of City Index explains:

Given the shocking slump in GDP for the last quarter of -0.7%, the market will also be very keen to hear of how the BoE expects UK output to bounce back in quarters three and four.

I mentioned at 7.58am that the Bank of England's previous forecasts have been too optimistic. This is a theme taken up by Shaun Richards, independent economist, this morning:

Conservative MP Douglas Carswell (no fan of today's central bankers, or the EU), has also put the boot into the Bank.

Expect today’s announcement to be accompanied by calls for even lower rates and yet more print-money-and-pray economics. How many more months of stagnation do we need before we start to recognise that our central bankers have got it wrong?

Since the financial crisis hit, we have given central bankers carte blanche to decide policy. And they have made a mess of it. Central bankers are no more capable of engineering sustainable economic growth than Soviet planners.

The Bank of England continues to respond to our economic predicament as though the problem was fundamentally caused by a lack of demand. It isn’t. We are in this situation because of the expansionary credit policies pursued by central bankers in the years that preceded the credit crunch.

Certainly, it doesn't appear that quantitative easing has delivered much economic growth (it's mopped up a lot of UK debt, though). But given the scale of Britain's debt deleverating, a long period of weak growth (or worse) looks inevitable. Mervyn King would argue that it's not his job to run the economy – that's Carswell's party's responsibility.

The pound is already losing some ground in the currency markets, before the Bank of England's new forecasts are even released (at 10.30am BST)

Sterling is now down around half a cent against the US dollar to $1.5575 (although pretty flat against the euro at €1.259).

Some nasty data out of Spain: industrial output fell by 6.3% on a year-on-year basis in June, for the 10th monthly fall in a row.

Production of capital goods (ie machinery and heavy-duty tools) tumbled by 12.8%, while consumer durable goods output fell by 11.9% – a sign that Spain is being badly hit by its domestic recession, and weak economies abroad.

We saw another sign of that this morning from Germany: whose trade surplus widened in June, with a small drop in exports being more than cancelled out by a 3% drop in imports.

Reuters explains:

Coming on the heels of worse-than-expected industrial orders for June, the trade data pointed to weakness in Europe's growth engine and paymaster as the euro zone crisis and austerity measures implemented in struggling states bite.

Shipments to euro zone countries, which make up around 40 percent of all German exports, fell by 3.0 percent year-on-year in June but exports to non-euro zone countries were up 4.8 percent, the data showed.

The rating agency warned that Greece was likely to miss the financial targets set by its international lenders, which increased the risk of the country defaulting on its debts.

S&P said:

We see the likelihood of shortfalls, owing to election-related delays in the implementation of budgetary consolidation measures for the current year, as well as the worsening trajectory of the Greek economy.

If you were with us last night, you'd have read that Greece is still struggling to find €4bn of savings (out of a target of €11.5bn), and may have to place some public sector workers into a special "labour pool".

S&P currently gives Greece a CCC, which is deep into junk territory.

12 months ago, the Bank of England predicted the UK economy would rattle along with +2% growth in 2012. Just three months ago, it reckoned Britain would still manage to expand by 0.8%.

Now, though, even that looks too bullish. With the UK shrinking by 0.3% in the first quarter of this year, and 0.7% in the second, the Bank will have to slash its forecasts again. Many economist believe it will forecast no growth at all this year.

Sir Mervyn King is likely to be grilled about the prospect of another cut in interest rates, when he faces the cream of Britain's economic journalists this morning.

Our preview of the quarterly inflation report is here, and here's a flavour:

The chancellor, George Osborne, will come under pressure as a result to soften austerity measures and move to boost growth in the economy. The IMF last month said the government should ease its fiscal consolidation, which includes spending cuts and tax reforms, if the recovery continued to stall.

As the sluggish economy weighs on prices, inflation forecasts are likely to be cut as well, with the consumer price index dipping below the government's 2% target by the end of the year.

Good morning, and welcome to our rolling coverage of Europe's financial crisis.

The big event today is the Bank of England's quarterly inflation report, which will show the UK central bank's latest forecasts on growth and the cost of living.

With Britain sinking deeper into a double-dip recession, we can expect plenty of gloom from Sir Mervyn King. His views on the eurozone crisis, and the state of the rest of the global economy, should also be interesting.

The rest of the agenda has a Germanic feel, with the latest German trade data (already out), industrial output, and an auction of 10-year bunds. There's also trade data from France, and industrial output data from Spain.

And we'll be fighting the August lull by tracking all the latest machinations across the eurozone....

Here are some timings:

• Bank of England quarterly inflation report published: 10.30am BST (CORRECTED)

• Bank of England press conference: 10.30am BST

• German industrial production for June: 11am BST

• German auction of €4bn of 10-year bonds: morning...

• Eurozone crisis
• Eurozone crisis live

• Bank of England
• Mervyn King
• Greece
• Fitch

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