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Italy bank shares dive on credit rating alert

Unicredit was one of the banks whose shares fell sharply in the wake of the Moody's warning
Shares in leading Italian banks fell sharply after the credit ratings agency Moody's said it may downgrade their status.
Moody's report, published late on Thursday, put 16 Italian banks and two government institutions on review for a possible mark-down.
Shares in the country's biggest bank, Unicredit, lost 5.5%.
Intesa Sanpaolo, Italy's second-largest bank, and Monte Paschi also dropped. Trading was suspended in some banks.
Other factors weighing on bank shares included fears that Italian banks could be forced to raise more capital as a result of imminent stress tests.
Credit ratings help investors to determine the strength of an institution or company.
They affect the rate of interest a borrowing organisation must pay. The weaker the credit rating, the higher the cost of borrowing.
Moody's put Italy's public debt on review for possible downgrade amid concerns about low growth and high public debt, which at 120% of gross domestic product (GDP) is one of the highest in Europe.
Greece's debt is 150% of GDP.

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US consumer spending fails to rise in May

Falling car sales were partly blamed for the unchanged consumer spending

US consumer spending was unchanged in May, the first time there has been no growth since September 2009.

Adjusted for inflation, spending contracted by 0.1% compared with the month before, according to the Commerce Department.

Consumer spending accounts for about 70% of US economic activity.

Incomes grew by 0.3% in the month, which was 0.1% above the rate of inflation, reversing a 0.1% inflation-adjusted decline in April.

"While there are no major surprises, there is little good news in this report," said David Sloan at IFR Economics.

"The data does show that core inflationary pressures have gained some momentum."

Falling car sales were partly blamed for unchanged consumer spending, which may be partly connected to production shortfalls following the disruption to car parts producers caused by Japan's earthquake and tsunami.

Also, petrol prices peaked at more than $4 a gallon in May, but have since fallen back, which economists say may increase consumer spending in the following months.

"It was a little bit of a blow to consumers from the higher energy prices and the supply chain issues," said Stephen Stanley at Pierpont Securities in Stamford, Connecticut.

"We'll see a nice rebound in third-quarter GDP on the back of full production in the auto industry."

April's figure was also downgraded to show a 0.3% growth in spending, which equates to a 0.1% decline after inflation is taken into account

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Greece: French banks ready to roll over loans, Sarkozy

Nicolas Sarkozy is trying to forge a plan for French banks to give Greece longer to repay

French President Nicolas Sarkozy says his country's banks would help Greece by giving it 30 years to repay.

France's Figaro newspaper said banks are ready to relend - or roll over - 70% of loans they hold.

The plan is being worked out by the French government and bankers.

Greece, which has not yet exhausted all its first 110bn-euro (£98bn, $158bn) bail-out, is already standing by for further rescue loans expected to be up to 120bn euros.

Losses

However, the German government and others have been pressing for banks and other private-sector lenders to Greece to be involved this time round.

German banks are reported to be very interested in the French model being discussed.

A group of international bankers are currently meeting eurozone officials in Rome to discuss the crisis.

The matter is fraught because credit rating agencies, who determine the credit-worthiness of borrowers, have already said they will view any roll-over of loans by banks as a technical default, something that is tantamount to bankruptcy.

The head of the eurozone's rescue fund, Klaus Regling, is talking to the ratings agencies to explore ways to avoid a default rating.

European policymakers - notably the European Central Bank - are also concerned that the move could force Europan banks to recognise billions of euros in losses on Greek debts they currently hold, and could also trigger payouts on credit derivative contracts.

'Restart the system'

Meanwhile, in earlier comments, Axel Weber, the former president of Germany's central bank, said the piecemeal approach to Greece's debt problems would not work.

Mr Weber said EU governments should accept that at some point they would need to "restart the system".

The ex-Bundesbank chief said the current options for Greece were either a default with debt writedowns, or for Europe to guarantee all Greece's debts.

He said that repeatedly offering aid would only work for a limited time.

Mr Weber - who was once seen as a likely candidate to run the European Central Bank - said: "There are, unfortunately, only very limited options: Either a default or partial haircuts or a guarantee for the outstanding amount of Greek debt."

He added that "the current piecemeal approach of repeated aid programmes inevitably leads to the latter solution. At some point you've got to cut your losses and restart the system."

Opposition

This week is another crucial one for the indebted country.

The Greek parliament will discuss a new range of austerity measures, which include introducing income tax on earnings of 8,000 euros (£7,142, $11,600).

The ruling party has 155 seats in a 300-seat parliament and polls suggest the proposals are opposed by three quarters of Greece's 11 million population.

On Sunday, Greece's deputy prime minister said some of the key cuts and fundraising measures may not be passed.

They must be agreed before the country can get its hands on the latest slice of the 110bn euro support package.

The country cannot stay financially afloat without that.

Protestors were again out on the streets on Monday and a two-day national strike is planned for Tuesday.

Previous demonstrations have culminated in riots.

Contamination

Meanwhile, two major investors have warned of the gravity of the situation facing Europe.

The joint head of the world's biggest bond fund manager, Pimco, has said Greece's sovereign debt restructuring is inevitable.

And leading investor George Soros, who reportedly made £1bn when the pound crashed out of the euro's forerunner, the ERM, said the world was on the brink of another disaster.

"Let's face it: we are on the verge of an economic collapse which starts, let's say, in Greece but could easily spread," he said.

Mr Soros said it was almost inevitable that one or more eurozone country would exit the single currency.

Britain's "big four" banks - Lloyds , Barclays, Royal Bank of Scotland and HSBC - have a relatively small exposure to Greece.

They have a larger exposure to other struggling eurozone economies, particularly Ireland and Spain.

France's banks hold around 15bn euros in Greek government debt.

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