Portuguese storm gathers as EU leaders fight over Greece

The FTSE 100 fell 1.1pc and Germany's DAX was off 1pc, while the iTraxx Crossover index measuring credit risk in Europe jumped 30 points to 637. Yields on Italian 10-year debt rose 21 points to 6.08pc.

The worries over Portugal continued to mount even as German Chancellor Angela Merkel backed away from demands for a European austerity commissioner to take control of the Greek budget, averting an explosive clash with Athens.

"We don't want controversial talks, but a discussion that is successful for the Greek people," she said, insisting that Germany's plan was just one many of options.

The change of tack came after Berlin's allies in the northern creditor bloc warned such heavy-handed diplomacy had become offensive and breached the spirit of the EU project.

"You never stoop to insults in politics. It solves nothing," said Austria's Chancellor Werner Faymann. Luxembourg's foreign minister Jean Asselborn said it behoves Europe's most powerful state to display a "little more caution", advising Germany to "watch out" as passions grow stronger.

The dispute overshadowed the summit, intended to promote EU growth and tackle youth unemployment – now 22pc Europe-wide and 51pc in Greece. Talk of growth at a time when EU austerity has entrenched severe slumps across southern Europe has left markets bewildered.

While EU leaders fleshed out a German-inspired "fiscal compact" to police the budgets of EMU states, Finland called it "at best unnecessary and at worst harmful" while Luxembourg deemed it a "waste of time". The pact has been weakened, allowing a breach of the new structural deficit limit of 0.5pc of GDP in a wider range of circumstances.

On Monday night, 25 of the 27 EU nations signed up to the fiscal compact, with the Czech prime minister joining the UK in staying outside the deal.

While German calls for an EU commissar for Greece are not new, the aggressive tone of the draft shocked EU veterans. It stipulated that Athens must give "absolute priority to debt service", "transfer national budgetary sovereignty", and agree to terms that make it impossible for Greece to "threaten lenders with default". Furious Greek leaders rejected the terms as debt servitude.

Analysts have questioned whether Germany deliberately called for conditions that Athens cannot accept, perhaps to force Greece's withdrawal from the euro and set an example to others.

The softening of the German stance does not in itself settle the Greek crisis – even assuming Athens agrees soon to a deal with private creditors for debt relief near 70pc. Greece will almost certainly need a further €15bn on top of the €130bn package in force, yet Mrs Merkel has warned that Germany will not provide any further funds.

Jacques Cailloux from RBS said there would be a chain reaction if the troika halts payments and sets in motion a Greek default and exit from EMU.

"That would the disaster scenario. Those who think this could be contained don't know what they are talking about. There would be extraordinary contagion, as we are already seeing in Portugal, spreading back to Spain, Italy, and France," he said.

Citigroup thinks Portugal's economy will contract by 5.7pc this year and 3.5pc next year, replicating the downward spiral seen in Greece as austerity began to bite.

While Portugal has delivered on its promises, the task may be Sisyphean with a combined public and private debt of 360pc of GDP – 100 percentage points higher than in Greece. Grit alone cannot overcome the same chronic lack of competitiveness.

Europe's leaders have vowed that they will not inflict a "haircut" on Portugal's creditors, insisting that Greece is a "special case". The relentless exodus from Portuguese debt suggests that investors do not believe them.

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Facilitates global sell-off as in the Japan and Wall Street fight back

The damaged Fukushima Daiichi Central nuclear where several explosions took place. Photo: Getty

The benchmark Nikkei 225 closed 5 FP7, with the broader Topix 6 FP6 increase but London of the main shares index added just points of 0 1pc with 5,700.81 open.

Gains in Europe has been also muted DAX 30 Frankfurt 0 FP7 and Paris's CAC 40 amounting to 0 5pc.

Other Asian markets had followed Japan higher, then even if the number of victims human and economic disasters, including an escalation of the nuclear crisis, remains uncertain.

At a time given the Nikkei climbed more FP6 but fell back after the Japan suspended operations to prevent a nuclear power plant disaster down after a surge of radiation is too dangerous for the workers to remain in the installation.

Most wanted shopkeepers deals after panic selling sent the index sinking 10 FP6 the day before. The Nikkei closed at its lowest level in nearly two years on Tuesday after the fall of more than 1 600 points, or 16pc, during two days - its worst two-day sell-off since 1987.

During this time, the Central Bank has pumped cash markets of money from Tokyo for a third day.

The Bank of the Japan injected 3.5 billion yen (£ 27bn), following injections totalling 23 billion yen ($283 billion) over the last two days. Contributing to banking shares perk up, lifting Mitsubishi UFJ Financial, the largest bank in the country, 2 2pc.

Exporters of power plant of the Japan took their breath after suffering staggering losses. Toyota Motor, constructor of no. 1 in the world, increased 6 4pc, Sony shot up to 7 5pc and truck-maker Isuzu was 7 3pc higher.

Industry heavy share rose the shock of the disaster gave way to thoughts of the reconstruction. Kobe Steel rose 11 3pc and Matsu Construction increased 4 8pc.

However, investors still remain tight on a crisis of change quickly to a central nuclear crippled northeast of the Japan. Authorities were still struggling to control the situation at the plant in Fukushima Dai-ichi after a string of explosions and fires, and a burst of radiation.

"It's very early days for the calculation of any impact on the economy and the stock and bond markets," said Sarah Williams, head of Japanese equities at Threadneedle based in London, which manages approximately $65bn assets.

"Until the safety of these plants is assured, investors remain cautious."

Markets elsewhere in the region of pointe. ABN Korea of added South 1. 8pc 1,957.29 and S & P/ASX 200 the Australia increased by 0. FP7 to 4,558.20. Landmarks in New Zealand, Singapore and Taiwan were also higher.

Shanghai Composite China has 1. 1pc, and actions on the Hang Seng in Hong Kong were flat.

Markets in Indonesia and the Philippines - who rely on the Japan for a relatively large share of their export - were down. Viet Nam and the Malaysia also fell.

The nuclear crisis swept financial markets of the world Tuesday as fears grew that the disaster to the Japan could slow the global economy. The Japan is the third largest global economy, manufacturing goods of automotive computer chips and bought 10pc of U.S. exports.

However, Wall Street counter. Index Dow Jones Industrial closed just 1. 1pc - or 137.74.49 points-11, 855. 42after fall as much as 3pc at a given time. FTSE 100 Xenopus Britain also melts to terminate 1. 38pc to 5,695,28. Earlier, the blue-chips were fallen to a minimum of expense 5622.53 year, wiping about £ 32bn offshore of the value of the index.

Levels of market in London and New York had expected a rebound in Japanese stocks today, claiming that the world liquidation had been exaggerated.

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Spain orders drastic caja clean-up to win confidence and fight off EMU debt contagion

 The Spanish media reports that the cajas have yet to come clean on 80bn euros of exposure to property loans Photo: AFP

The weaker banks, or "cajas", must raise Tier 1 core capital to 10pc by September if they depend on wholesale capital markets for more than a fifth of their funding or if less than a fifth of their shares are in private hands. If they fail to do so, the government will seize control through the state bailout fund (FROB).

The demands are even tougher than the broad-brush plans unveiled last month and shows the determination of the authorites to cut out any cancers rather than allowing the sort of drift that bedevilled Japan in the 1990s.

The move comes after yields on Portuguese 10-year bonds punched to a post-EMU high of 7.66pc, renewing fears of a spill-over into Spain. The European Central Bank intervened on Thursday to restore calm but it is clear that Euroland euphoria over Chinese purchases of Portuguese debt has not lasted long.

Jose Manuel Campa, Spain’s economy secretary and the architect of the financial overhaul, acknowledged that the most vulnerable cajas are unlikely to find private investors. "It will be a challenge. They have not taken part in the equity markets for some time," he told The Telegraph.

Only five of the 17 cajas meet the 10pc rule. Caixa Nova is 6.0, Unnim is 6.22, Caixa Galicia 6.43 and Catalyunia Caixa 6.6. Even the giant Caja Madrid with €328bn (£277bn) of assets has core capital of just 7.1, though it is already preparing a stock listing.

Mr Campa is hopeful that cajas will be able to raise "a big chunk" from investors given the strides made in cleaning up their books. He said fresh capital of €20bn will be enough to restore the caja industry to health, disputing claims by City analysts that €40bn to €80bn will be needed. "These high numbers are based on very stretched scenarios, with a fall in house prices by 50pc and land prices by 70pc," he said.

Madrid is basing its estimates on bank stress tests last July that included a severe double-dip recession, with a 3pc fall in GDP over the two years of 2010 and 2011. Since the economy in fact contracted by just 0.1pc last year, it would take a dire relapse at this point to exhaust the safety buffer.

However, there is a risk that Spain may have missed a chance once again to "get ahead" of the crisis. A report this week by the world’s Financial Stability Board (FSB) said the sheer scale of Spain’s property bubble had overwhlemed the country's seemingly tough rules on loss provisions.

While the FSB praised Spain’s latest efforts to strengthen its banking system, there was a sting in the tail. "Such determined actions became necessary partly because of the delay in addressing earlier the structural weaknesses of savings banks," it said.

The Spanish media reports that the cajas have yet to come clean on €80bn of exposure to property loans, and are under fresh scrutiny by central bank inspectors.

Mr Campa blamed the renewed eruption of the bond crisis last Autumn on Franco-German talk of haircuts for holders of EMU sovereign debt, coupled with the failure of the Irish authorities to carry out rigorous stress tests of their banks. "That really hurt us. We had made huge efforts to be transparent, but the Irish crisis devalued the quality of the tests for everybody."

The fate of the cajas is inseparable from the Spanish property market. Mr Campa said construction has fallen from 700,000 homes year during the bubble to around 200,000 until well into the next decade, helping to clear an overhang of properties estimated by consultants RR de Acuna to be as high as 1m.

The uber-bubbles were in the Madrid suburbs and parts of the tourist belt on the coast, but the market is much closer to balance in the rest of the country.

Mr Campa, a free market economist who taught at New York’s Stern School of Business with arch-bear Nouriel Roubini, was brought in to restore Spain’s credibility in world finance after the crisis was in full swing.

He advises astute investors that right now may prove to be the optimal moment to buy a house in Spain. "The Germans are coming back. We need the English, too," he said.

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Aussie dollar breaks the buck as Australia, India fight Fed with 'quantitative tightening'

 The surging 'Aussie' captures the shift in the world's economic centre of gravity to the Pacific region. It was worth half a US dollar nine years ago. Photo: AFP

The long-awaited moment of "triple parity" seems imminent. The Swiss franc is already worth more than a greenback, and the Canadian dollar is seemingly poised to break through as well.

The surging "Aussie" - widely seen as a play on the China growth story and used by traders as a proxy for the Chinese yuan - captures the shift in the world's economic centre of gravity to the Pacific region. The currency was worth half a US dollar just nine years ago.

Australia's reserve bank said the "the economy is now subject to a large expansionary shock from the high terms of trade and has relatively modest amounts of spare capacity. The risk of inflation rising again over the medium term remains".

The move caught markets off guard. Credit growth has been cooling off over recent weeks and inflation is still just at 2.8pc - compared to 3.1pc in the UK - but the bank appears concerned about the risk of a wage spiral.

HSBC said emerging markets and commodity exporters such as Australia are opting for "quantitative tightening" to offset the liquidity effects of quantitative easing in the US, which is causing a flood of money into faster growing economies. Several states are toying with capital controls.

India's central bank has also tightened further, raising rates a quarter point to 6.25pc. It has imposed draconian housing curbs to reduce "excessive leveraging" and prick the bubble, limiting mortgages to 80pc of property values.

It may have responded with too little too late.

"Interest rates have been negative in real terms for 26 months, and heavily negative for several months," said Maya Bhandari from Lombard Street Research.

"Inflation is 9.8pc and is is going to get worse as the Fed's QE2 pushes up food prices, so a quarter point rate rise is not going to make much difference. They are relying on `administrative measures' instead of doing what they need to do," she said.

Ms Bhandari said the authorities had let rip with a "huge monetary and fiscal boost" before the elections in May 2009, leaving a legacy of overheating that is now coming back to haunt. The combined central and state budget deficit - including fuel subsidies - is nearly 11pc of GDP.

HSBC's currency team said the Australian dollar may be nearing its peak. "One concern relates to the deflating of the property bubble in China. This could happen gently but, if not, the Aussie will not avoid the fall-out. A sharp fall in Chinese property prices may very well lead to a deep examination of Australia's property bubble, and Australian banks," they wrote in a client note.

The report said Australia's lenders rely heavily on funding from abroad to finance the country's internal boom, creating a risky mismatch in liabilities. "Rationally or irrationally, this could turn very sour. The Aussie party looks set to come to an end soon," it said.

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