spotfxtrader

The business daily Handelsblatt writes:

“The problem (with the decision to peg the franc to the euro) is that its ultimate success is not, in the end, under the control of the Swiss National Bank. For a long time now, the franc’s exchange rate has had little to do with fundamental economic indicators and a lot to do with fear: the fear that the euro zone will not get its debt problems under control. Some investors have even been willing to accept negative interest for Swiss franc investments just so they could own francs.”

“But even the Swiss central bank would be powerless against a renewed wave of panic. Should doubt crop up once again as to Italy’s solvency — or even that of France — the franc exchange rate could no longer be controlled.”

“By pegging the franc to the euro, the Swiss central bank gave up independent control over monetary policy. Yet according to Swiss law, it can only do so for a limited amount of time. The markets know that too — and they likely have more patience in this game.”

On the Swiss move
Bruce Krasting

I have repeatedly said in these pages [zerohedge — your homepage ?] that for currency intervention to be successful it has to be done in conjunction with other big central banks. The Go it Alone policy has not worked over the past 20 years. I have no reason to expect that it will work this time either.

I think the most important press announcement this AM is not from the SNB; it is from the ECB. There is little doubt from this that the SNB is in this all alone:

The Governing Council of the European Central Bank has been informed by the Swiss National Bank about its decision to “no longer tolerate a EUR/CHF exchange rate below the minimum rate of CHF 1.20.”

The Governing Council takes note of this decision, which has been taken by the Swiss National Bank under its own responsibility.

I think that the SNB has just committed suicide. They did the one thing they should never have done. Draw a line in the sand.

Events far outside of the control of the SNB will determine the consequences of the policy to put a floor under the CHF. While I don’t doubt their short-term resolve to defend the 1.20 level for the EURCHF I am already questioning how long this can continue. Some thoughts on where this may go.

Stay away from the CHF. There is only one trade to make as of this morning. That would be long the EURCHF. To me that is like shorting gold. Don’t do it, is my advice.

This has been tried before by the SNB way back in the late 70’s. As a currency matter the policy was a success. The Franc stabilized against the weak German Mark. But three years later the Swiss were suffering a massive hangover. Inflation went from a negligible number to over 7%. There can be no doubt but that the same results will happen again. It’s just a matter of time.

Stay away from Swiss stocks for the time being. Yes, a cheaper Franc is good for translated earnings. So if you believe that multiples are the only driver of stock prices you might conclude that the move by the SNB makes the SMI (stock index) a buy. Think again. A government that falls back on currency controls as the only measure of policy options left, is a place that you don’t want to put your money. The big jump in Swiss stocks this AM is a logical knee jerk response. But the SNB move is also the kiss of death for the equity markets in Switzerland.

Europe is falling apart. That reality has not changed as a result of the SNB action. Over the next few weeks we will get more bad news from the EU. In the past the ‘go to’ response has been to buy the Yen and CHF as a safe haven knee jerk reaction. Now that trade is dead (both of them in my opinion). So where will the hot money go the next time the headlines scare capital? There is only one choice left now. That would be gold.

I believe that the amount of intervention required to drive the EURCHF from 1.14 to 1.20 this AM was quite small. The market immediately re-priced the currency to the level the SNB said it was prepared to defend. But that is not going to be the result at some time in the near future. At some point the SNB will be tested. I have no doubt but that they will step up and intervene like mad the next time the CHF is in demand. But at what cost? How many Euros will they be forced to absorb? E100b? E300b? Could it go as high as E1 trillion? There is no number that can’t be achieved. The question of, “How much can they do?” has not been asked or answered as yet. The market is going to both ask and answer that question. I think the time frame for this is before the end of this year.

Do the Swiss have the will to take this fight to the bitter end? There is nothing in history that says that they can or will. What if this begins to backfire sometime this fall? Does the SNB just stand there and print Francs? That is what they have said they will do. I wonder what they will be thinking when the money supply first doubles, then triples then just goes vertical. Are they really so stupid to think that the floor on the Franc has no risk attached to it?

In 2010 the SNB reported a loss of CHF 21b as a result of their failed interventions against the Euro that left them holding the bag. There was political hell to pay for these losses. The annual gains of the SNB are paid back to the Cantons. There will be no gains (only losses) as a result of the new policy. The Swiss exporters, farmers, tourist industry may hail the move today, but just wait till the policy fails. Before this is over the SNB will hold an extra 500b Euros. The losses could easily exceed E50b. This will sink the SNB forever.

What will the SNB do with all the Euros they have promised to buy? That’s easy to answer. Only German and French debt will be allowed. This will just result in a widening of credit spreads between the North and the South. As this happens more capital will seek a safe haven. What the Swiss have done will add to the instability within the EU. As a result, the ECB will hate the SNB.

To some extent the strong CHF was a dollar phenomenon. The CHF got stronger and stronger against the Euro. Through the markets this acted as a support for the Euro versus the dollar. What might it mean now that this relief valve has been broken? One possible response is that the dollar gets stronger in a significant way. That has not been the reaction so far this morning, but I consider this to be a reasonable outcome. Just a question for those who are looking at this from a global perspective:

What is the number one worst thing that could happen to the US economy over the next six months?

I would put a “too strong” dollar at the top of my list. Should the result of the SNB action be a 10-15% up move in the dollar versus Euro it will be the kiss of death for US GDP. I think there is a very good case for this to occur. Bernanke must be very upset this AM. What the Swiss have done runs very counter to his plan to “export” US deflation. The Swiss are now going to be the exporters of deflation. The bulk of this will stay in the EU, but some of it surely will come to our shores. If your odds for a USA double dip were 50-50 on Friday, they just went to 70-30.

How much intervention can the world absorb? Japan is doing it big time in both the currency and debt markets. China is manipulating its FX and interest rates. The USA is manipulating interest rates in an unprecedented way. Brazil, Russia, Korea are all doing the same. It won’t work folks. It will fail. The Central Banks are not omnipotent. The markets are.

I suppose there is a soft landing scenario to the steps taken today by the SNB. The liquidity problems in the credit markets of Europe could somehow magically stabilize. It’s possible that the debt woes of the PIIGS could also disappear from the market’s radar. It’s conceivable that US growth could perk up and a crisis is avoided.

I don’t see any of those things happening any time soon. I say the SNB move will fail at some point. If/when that happens it will be an important point in history. If we see the headline, “Swiss cave to market – Franc soars” that will be the day that marks the end game of “extend and pretend” policies and market manipulation. That will be the day that the Great Depression of the new millennium begins. What we went through in 2008 will be a walk in the park compared to that turning point.

I wrote about the prospects of a CHF Peg a few times in the past month or two. I think the steps taken today represent a huge gamble by the SNB. I said of the prospects for this to happen:
The Swiss like to “Double Down”

The SNB has, in fact, doubled down as of this morning. This is the biggest financial bet in the country’s long history. They are “All In” on this bet. Not only are they betting Switzerland’s economic future, they have also placed a bet for the other 7 billion people living on the planet. I would give a “zero’ possibility for this to work. Get your seat belts on. Volatility is about to take another monstrous leap.

just to realise how toxic the whole environment is…

Europe is falling apart. That reality has not changed as a result of the SNB action. Over the next few weeks we will get more bad news from the EU. In the past the ‘go to’ response has been to buy the Yen and CHF as a safe haven knee jerk reaction. Now that trade is dead (both of them in my opinion). So where will the hot money go the next time the headlines scare capital?

There is only one choice left now.

That would be gold.

There’s an anecdote in a book called “What They Teach You At Harvard Business School” by Philip Broughton about a speech given to the students concerning the little things that make a good leader.

He emphasised the difference between the victims at a company, those who blamed others and felt sorry for themselves, and those who tried to make things right. Identifying the victims, or ‘spectacle makers’, was vital, or else they would contaminate everything you did. To illustrate the polluting effect of a whiner, he said: ‘If I had my favourite bowl of ice cream over here and a bowl of shit over here, if I took one speck of shit and put it in the ice cream, would you eat the ice cream?’

In an interview given by Soros to Der Spiegel he argues that unless Germany agrees to fiscal union with the other eurozone members the Euro will break up and there will be a banking collapse. However, what he is advocating is stirring all the PIIGS shit into the ice cream.

Again from ZeroHedge
Submitted by Tyler Durden on 08/12/2011 08:43 -0400

One of the key catalysts for Wednesday’s market rout which originated in Europe came following news that Chinese banks had cut down on their credit lines to Europe, which highlighted the key threat to the European banking system: access to liquidity. The Chinese reaction is merely a symptom of a much deeper underlying ailment: the increasing lack of counterparty confidence across various funding markets, both traditional and shadow, which has continued to accelerate over the past week, a development summarized effectively by the latest report in the International Financing Review which uses some powerful words (of the type that European bureaucrats hate) to explain where Europe stands right now: “credit taps run dry for European lenders, setting scene for liquidity crisis.” For those strapped for time the take home message is that: “with bond markets shut and investors unwilling to buy asset-backed securities, the repo market – for some banks the sole remaining source of private funding – has become the most recent tap to run dry, with some investment banks pulling credit lines worth tens of billions of euros in recent weeks.” This is very disturbing as with liquidity windows shut, Europe’s bank have no recourse on how to roll the €4.8 trillion in wholesale and interbank funding which expires in the next two years. End result: the only recourse is the ECB, which unlike the Fed, is not suited to be a lender of last resort and has been morphing into that role over the past year kicking and screaming. And when that fails, there are the Fed’s liquidity swap lines. Too bad that the liabilities in the European banking system are orders of magnitude bigger than in the US, and should this liquidity crisis transform into its next and more virulent phase, even the Fed will find it does not have enough capital to prevent a worldwide short squeeze on the world’s carry trade funding currency (once known as the reserve currency).

First, IFR summarizes briefly how the last ditch liquidity conduit, repo, has now run out. The fact that even shadow banking system aggregates, or those entirely off the books, are being withheld, is very disturbing:

Bankers who once ran the now-defunct repo facilities for mid-sized European banks say the credit lines were withdrawn after risk managers became concerned about their own exposure to the enfolding sovereign debt crisis, leaving some clients now solely reliant on central banks for cash.

“Given what’s going on in the markets, there are big question marks surrounding some of these clients,” said one banker who has closed such lines. “The appetite from investment banks is fading. There is a great deal of concern about financing wrong-way collateral.”

“Many of the wholesale banks are starting to rethink these credit lines,” added the global markets chief of one European investment bank heavily present in the repo markets. “Things can turn pretty nasty if you get these things wrong.”

This is further distressing since the traditional venue of capital raising in Europe, covered bond issuance has ground to a halt, with not “a single publicly announced European covered bond deal since June.”

The culprit for the market freeze is quite simple to anyone who recalls the state of the markets in late 2008 and early 2009, when the Fed and the central bank cartel will had the option of backstopping the global financial system.

“Everyone has been cutting off their exposure,” said the head of another European investment bank. “It started with Greece, then Spain and now Italy. People don’t want to do business with these banks. Many of them have good underlying businesses but they are stuffed.”

At his point however, the global central bank intervention has not already occurred but is actively priced in at any given moment. There is no step function of additional liquidity that the central bankers can provide, which is why the status quo is scrambling so hard to avoid a quantum leap in the risk perception of European banks.

Another indication of the unwillingness to participate in the market is the complete elimination of crap collateral from tri-party repo lines:

The latest repo markets survey by the International Capital Market Association indeed shows a marked pick-up in the use of riskier assets in European tri-party repo deals. Though small as a proportion of the region’s entire €5.91trn repo market, the use of assets with a rating of below BBB– accounted for 5.1% of all transactions in December, up from 1.2% a year earlier.

That has now largely stopped, say bankers once heavily involved in such deals. Previously, they were able to hedge their exposures to such collateral – or repackage the collateral on behalf of clients to sell off in chunks to fund managers. But growing investor concern, and a rush towards safer assets, has meant that neither investment banks nor investors want to go near the stuff.

“We’ve attempted to do some trades with illiquid assets on behalf of peripheral banks, but we haven’t managed to syndicate deals,” said one senior banker that helped repackage some past deals. “Anything slightly peripheral-orientated is completely out of the question right now.”

What is, however, bad for banks, is perfectly good for the ECB, which will gladly hand over 100 cents on the dollar for the most worthless collateral it is stuffed with. There is one problem with this: Lehman did precisely this in the days and weeks before it filed. It did not help.

So with the ECB now happy to be Europe’s not-bad but thourughly toxic bank, how long until everyone realizes that the ECB is massively undercapitalized and its existence (yes, that includes its ability to print money), purely a factor of continued German good will.

Total use of the ECB’s main refinancing and long-term refinancing facilities – both part of the open market operations – are now close to €500bn, up from about €400bn in the spring.

According to Goldman Sachs, although such levels are well short of the almost €900bn used in 2009, the uptick is worrying. “This is a substantial figure, reflective of the strains in the banking system,” analysts wrote.

But banks’ use of the ECB open markets operations remains dependent upon them having ample quality assets on their books. Under the terms of the operations, the central bank will only provide liquidity against certain assets – generally those rated BBB– and above, with some exceptions.

If ECB eligible collateral runs out, banks will have little option but to sell off assets in a final fire sale, say bankers. That will depend on whether there are willing buyers for such assets, much of which were accumulated pre-2007 as retail, commercial and wholesale loans.

And as Germany has indicated, it is getting fed up with the ECB pledging what is effectively an ever increasing portion of its GDP either directly, by accepting worthless collateral, or indirectly, by funding an ever greater portion of the AAA-rating constrained EFSF. When does Germany find that the trade off between its sovereign risk and the fate of the EUR no longer makes practical sense.

So what is the conclusion:

“The financial wreckage at many of these banks is along the lines of World War Two,” added the global markets chief. “There is so much detritus. But a lot of them don’t want to sell at these current prices, they know there will be a capital hit if things are properly priced.”

Bottom line: 3 years after Lehman blew up we are in precisely the same position, only this time the culprits are European banks. This is to be expected as absolutely nothing has changed in that time period, and the end result, by implication, will be absolutely the same.

from zerohedge :

Submitted by Tyler Durden on 08/12/2011 – 07:28

BUNGA BUNGA: -25
SIESTA: -20
PORT: -90
YOGURT: unch
WAFFLES: -36
RIOTS: -11
GUINNESS: -45
F. FRIED: -21
ANSTALT: -10
GERM: -11.5

Predictions are hard to make, especially about the future, but following the latest piece from AEP in the telegraph, where he states :

“The Chinese central bank’s reserve manager SAFE is clearly buying euros on a large scale to hold down the yuan and safeguard export advantage in Europe, but it appears to be purchasing short-term debt of a one-year maturity or less and other liquid assets.”

also..

“The three-month euribor/OIS spread, the fear gauge of credit markets, reached the highest level in two years today, jumping 7 basis points to 40 in wild trading.

“Europe’s money markets are undoubtedly starting to freeze up,” said Marc Ostwald from Monument Securities.

“It’s not as dramatic as pre-Lehman but it is alarming and shows the pervasive degree of fear in the markets. People are again refusing to lend except on a secured basis.”

If those with demand for Euros can’t borrow any, short term rates will go up, even if the market is non functioning. This will put upward pressure on the currency…. Given that we’re sitting in the middle of the range formed since the low in May, and given the violence of the rejection of each new low seen during the last couple of days’ trading, a break to the upside of this range is now not inconceivable. The “negative” outlook for the eurozone probably means that the market is short, which to me warns of the possibility of a significant move higher.

1.51 is back in the frame.

Negated by a break back below 1.40.

June 27, 2011 by guidoromero
As I speculated some two years ago, it seems to me that if anyone should leave the Euro it is Germany. The rationale is that weak members need the union more than the union needs them. Conversely, the union needs strong members more than strong members need it.

Even assuming Greece should leave the union, I don’t see how other weak members could stay on. If Greece goes, borrowing costs will sky rocket for all other weak members thereby hastening their demise. This in turn brings about two dilemmas. First, if all weak members start falling off the wagon then how many members other than Germany might be left? Second, even assuming Greece should go, this will bring about the marking to market of Greece’s debt held by the ECB… which I think should bring about the marking to market of all other sovereign debt held there… in other words this would be the “poof!” moment for the ECB thus the dissolution of the EU…

In my view, the path of least complication is if Germany quits the Euro and the EU

There is actually a faint hope that with the bayonets of the German taxpayers pointed at their arses, the dumbf*ck German politicians might make the right choice. All is now crystal clear; It’s a race to become toilet paper between the Euro and the US Dollar now.

Sorry, second thoughts… Can politicians admit mistakes ?

Oh shit…

From Porter Stansberry in the S&A Digest

Porter Stansberry: The next stage of the crisis is starting now
Monday, June 20, 2011

We’re about to see a return to crisis-like conditions in the world’s credit markets. This will devastate financial stocks. It should also hit commodity prices and commodity-related stocks hard. In today’s Digest, I’ll show you why I believe this will happen.

As longtime readers know, I write Friday’s Digest personally. In general, I try my best to teach our subscribers something useful. I’ve always run my research company with a few simple principles in mind. Among them, I strive to provide you with the information I would expect if our roles were reversed. You should know… abiding by this principle often requires me to share information with you before I can be 100% certain it’s correct.

That’s the case with today’s Digest. I want to show you the warning signs as I see them, right now. I want to guide you through my thinking process. And while I’ll give you my predictions about what these things mean, I hope you’ll realize that, as Yogi Berra famously said, predictions are tough – especially about the future.

The next stage in the ongoing global financial crisis will feature the collapse of both the Spanish and the Italian economies. This should occur within the next six months. Concurrently, I believe the “Chinese miracle” will be unmasked as mostly a fraud powered by a huge increase in bad lending from state-controlled banks.

Ironically, the coming wave of financial trouble will probably force people back into U.S. dollars. Gold will also do well. In the currency markets, I believe the euro will collapse in the second half of this year, as will the Australian dollar, which serves as a proxy for the Chinese economy.

I expect this next “down leg” in the world’s markets to be more severe than the crisis of 2008, because the balance sheets of the Western democracies are now less prepared to manage the losses.

Finally, I believe the euro will simply cease to exist.

The first thing I want to show you is the share price of UniCredit. You have probably never heard of UniCredit, but it is a major European bank, with significant operations in eastern and southern Europe. UniCredit is based in Italy. I’ve been keeping my eye on UniCredit for years, for reasons I’ll explain below. UniCredit is the ultimate “canary in the coal mine” of the world’s global currency system.

Most people don’t know that UniCredit is the direct descendent of Oesterreichische Credit-Anstalt, the largest bank in Eastern Europe before World War II. Translated the name means: Imperial Royal Privileged Austrian Credit-Institute for Commerce and Industry. It was a Rothschild bank. The family founded it 1855, and it became one of the most important banks in Europe.

Credit-Anstalt held assets and took deposits from all over Europe. In 1931, the bank failed as a direct result of the U.S.’s Smoot-Hawley tariff. The act crippled Germany’s economy and led French investors to redeem all the capital they’d lent to the bank. The failure of Credit-Anstalt caused Austria to abandon the gold standard, which set off a series of economic dominoes. Germany left gold… then Great Britain… and finally, in 1933, so did America.

The failure of Credit-Anstalt is what really kicked off the Great Depression. I have long been convinced the failure of its successor bank – now called UniCredit – would presage the next global monetary collapse.

I first began warning investors about UniCredit’s likely collapse and its historic role in the world’s monetary history back in March 2010. Since then, the bank’s shares have grown weaker and weaker. And since March, the shares have fallen off a cliff, hitting lows not seen since March 2009.

The sudden weakness in UniCredit’s shares (down 21% in the last several weeks) indicates to me that big trouble is brewing in Europe. I don’t believe efforts to stop the crisis in Greece will work. The austerity measures undertaken in Ireland, Spain, Italy, and Greece have severely weakened these economies, causing loan losses to banks like UniCredit.

And if there’s a run on UniCredit (and I believe there will be), the losses will be too large for Italy to manage without a huge international bailout. UniCredit has borrowed $300 billion from other European banks. And Italy’s government already owes creditors more than 120% of GDP. There aren’t any easy solutions to this problem.

Another warning comes from a friend who is a senior executive at a major Wall Street bank. He sees more high-yield bond deals than just about anyone else in the world. He told our Atlas 400 group last weekend that credit markets around the world were suddenly shutting down. Yields were moving up. Spreads (the cost to borrow above the sovereign rate) were getting wider for the first time since March 2009.

Why? Because the market knows that the U.S. Federal Reserve is going to stop buying $85 billion-plus per month of U.S. Treasury debt. But the Treasury is going to continue to issue more debt. In total, 61% of the entire federal debt will mature within four years. That means roughly $10 trillion in U.S. Treasury bonds will have to be sold, plus whatever the total deficit adds up to over the next four years – maybe another $6 trillion.

It’s difficult to imagine this amount of Treasury issuance won’t have a big impact on the world’s credit markets because these bonds always sell first and at the lowest yields. As these yields “back up” because of the large issuance, they should drain liquidity away from other issues, causing other bond prices to fall. This will reduce liquidity and make issuing debt more expensive across the credit spectrum.

China’s boom since 2009 was fueled by massive domestic debt issuance, which was unsustainable and is reversing. In addition, one Chinese company after another is being revealed as a fraud – and then crashing. These are not isolated events. I have studied Chinese companies for more than a decade. Out of all the stocks I’ve analyzed closely, I’ve only seen a handful I didn’t believe were fraudulent.

So far, none of the major Chinese banks have come under serious scrutiny. But I believe they will… and I believe major fraud will be discovered. Take the recent weakness in the shares of China Life Insurance (LFC), for example. This isn’t a minor company. It’s a $90 billion life insurance company. As fraud allegations spread into major Chinese financials, the entire underpinning of the Chinese boom will fall apart. It has all been fueled by debt and fixed-asset investments (land, buildings, equipment, and machinery). Consider just a few of these facts…

Fixed-asset investment remains greater than 50% of GDP in China, for the 12th year in a row. No other country has ever had more than nine years of this kind of sustained fixed-asset investment.

In the first five months of 2011, fixed-asset investment grew by 25.8% according to China’s National Bureau of Statistics. That’s $1.39 trillion worth of investment.

Jim Chanos, the famed short seller, says China is currently building 30 billion square feet of commercial real estate. That is enough to provide every person in China with a five-square-foot cubicle.

Jeremy Grantham, one of the world’s most astute investors, points out that China has been purchasing gigantic quantities of raw materials. The scale of these purchases makes them impossible to sustain. China makes up 9.4% of the world’s economy, but it is currently consuming 53% of the world’s cement, 47% of the world’s iron ore, and 46.9% of its coal.

A massive increase in China’s domestic debt fueled this investment. In 2010, for example, Chinese banks extended $55 billion in loans – up 95% from the year before. Now, banking regulators are increasing reserve requirements, greatly reducing the amount of available credit. In May, lending was down 25% versus last year.

With Europe’s crisis heating back up, with credit tightening in the U.S. (thanks to the end of quantitative easing), and with China’s boom unraveling… it’s time to be extremely cautious. I don’t know when it will start… but we’re entering another period of soaring volatility, increasing interest rate spreads, and falling stock and bond prices. How the authorities deal with these problems will set the stage for what happens next. If they try to paper over these continuing crises again – with new money-printing programs from the Federal Reserve – you can expect a massive inflation and what I call The End of America.

Our best hope for more stability and a return to prosperity is for people to realize that bailing out banks doesn’t solve these problems. It only makes them worse. But… I’m not optimistic. In the June issue of my newsletter, Stansberry’s Investment Advisory, I detail my best two new ideas to profit from the next stage of this crisis.

IMF warns US, eurozone deficits a threat to stability

The International Monetary Fund warned that Washington and debt-ridden European countries are “playing with fire” unless they take drastic steps to reduce their budget deficits.

The warning came as the IMF cut its growth forecast for the US and said the risks facing the global economy have increased since April.

It said the euro area’s worsening crisis, signs of economic weakening in the US and overheating in the developing world all pose fresh threats to global stability.

“The global economy has turned the corner from the Great Recession. However, securing the transition from recovery to expansion will require a concerted effort at addressing diverse challenges,” the IMF said in its World Economic Outlook update.

World growth this year is expected to be 4.3pc, a downgrade from 4.4pc in April, prompted predominantly by a sharp reduction in America. US GDP is now forecast to grow at 2.5pc this year and 2.7pc in 2012, compared with its prediction in April of 2.8pc and 2.9pc respectively.

“For the US, it is critical to immediately address the debt ceiling and launch a deficit reduction plan that includes entitlement reform and revenue-raising tax reform,” it said.

Jose Vinals, director of the IMF’s monetary and capital markets department, added: “If you make a list of the countries in the world that have the biggest homework in restoring their public finances to a reasonable situation in terms of debt levels, you find four countries: Greece, Ireland, Japan and the United States.

“You cannot afford to have a world economy where these important decisions are postponed because you’re really playing with fire.”

The IMF had already downgraded its forecasts for UK growth to 1.5pc from 1.7pc in April, which was itself a downgrade from 2pc in November.

It added: “Downside risks due to heightened potential for spillovers from further deterioration in market confidence in the euro area periphery have risen since April. Market concerns about possible setbacks to the US recovery have also surfaced.

If these risks materialize, they will reverberate across the rest of the world–possibly seriously impairing funding conditions for banks and corporations in advanced economies and undercutting capital flows to emerging economies.”