Tuesday, July 10, 2012

Around the horn in Europe - Tuesday July 10th..... ESM analysis and also a look at the German Constitution Court - Zero Hedge

http://www.spiegel.de/international/europe/german-court-may-take-longer-to-rule-on-euro-measures-a-843560.html


The German Federal Constitutional Court may take longer than expected to decide on a request by plaintiffs that it issue a temporary injunction blocking Germany from signing up to Europe's permanent bailout fund and the fiscal pact.
Court President Andreas Vosskuhle announced at a public hearing on Tuesday that the court would undertake a "constitutionally sensible assessment" of the legal complaints that may go beyond normal procedures in weighing temporary injunctions. People who took part in the hearing said it could now take the court up to three months just to decide on whether to issue the injunction. It would then take considerably longer than that for it to reach its verdict on the substance of the complaint -- whether Germany is handing over too much sovereignty to European authorities.
The slower-than-usual injunction procedure means a further delay in launching the €500 billion ($613 billion) European Stability Mechanism (ESM), which was to have gone into operation on July 1 but has been stalled by the legal complaints in Germany. Uncertainty about the court's verdict has raised doubts about whether Europe will get the extra firepower it needs to combat the debt crisis.
The German parliament ratified the treaties to launch the ESM and the fiscal pact on debt limits on June 29. But President Joachim Gauck has refrained from signing them into law while the court hears objections from politicians and academics who argue that the measures will infringe on the constitutional role of parliament to decide how taxpayers' money is spent.
Germany is not the only country that has yet to approve the ESM treaty. The fund will become operational as soon as member countries representing 90 percent of the fund's capital commitments have ratified it. Germany is the largest contributor, at 27 percent of the total, so the fund can't be launched without German ratification.

Schäuble Warns of Market Turmoil
German Finance Minister Wolfgang Schäuble told the country's top court on Tuesday that any significant delay in approving the EU's permanent bailout fund could fuel financial market turbulence.
"A considerable postponement of the ESM (the European Stability Mechanism bailout fund) which was foreseen for July of this year could cause considerable further uncertainty on markets beyond Germany and a considerable loss of trust in the euro zone's ability to make necessary decisions in an appropriate timeframe," Schäuble said."
"Doubts about the constitutional possibility or the readiness of Germany to stem dangers for the financial stability of the euro zone could lead to the current crisis symptoms being exacerbated considerably," Schäuble warned. "Some member states of the euro zone would end up having further big problems financing themselves, which could raise questions over the stability of the euro zone as a whole."
Several complaints were filed with the court on June 29 after the ESM and the fiscal pact were approved by Germany's parliament, the Bundestag, and its upper legislative chamber, the Bundesrat.
Among the plaintiffs are the parliamentary group of the left-wing Left Party, the conservative Bavarian politician Peter Gauweiler and an association called "More Democracy," which has 12,000 co-plaintiffs.

and.....


















http://www.zerohedge.com/news/will-german-constitutional-court-esm-delay-today-cripple-euphoria


Will A German Constitutional Court Delay Today Cripple The EUphoria?

Tyler Durden's picture
Submitted by Tyler Durden on 07/10/2012 07:06 -0400




While early news are still abuzz with last night's largely irrelevant FinMin meeting, which came up with nothing new, but merely regurgitated the June 28 summit decisions in a way to send Peripheral bonds modestly higher, however briefly, the real news this morning will be out of Karlruhe, where the German Constitutional Court - which holds the fate of the European bailout mechanism -  has already said there will be no final decision on the constitutionality issue. The question now is whether the Court will issue a temporary injunction, which however, the court itself admits "will be interpreted by the foreign press as ‘euro-rescue is halted." Instead, what will likely take place is a two step process. As Market News reports, "Judges during the hearing suggested a two-part decision was likely, first on the injunction in about three weeks, and then in early 2013 on the broader constitutional question." Obviously, the court is not in any rush to come up with a definitive judgment. The problem is that Spain is. As is Italy: unless the ESM is able to promptly roll out its rescue functionality, the entire bailout mechanism will be halted and all the "progress" achieved so far will be for nothing. Sure enough, "a delay could have “serious economic consequences” for the Eurozone as well as Germany, and in turn would risk placing the entire euro project “in question,” Schaeuble warned." Yet not even the German FinMin will dare to tell German's constitutional arbiters to hurry up. Which is why keep a close eye on those Red flashing headlines out of Germany: they can make or break both the Euro, the PIIGS bonds, and broadly risk, if there is indeed a major delay, and certainly, if the court does order an injunction.

From Market News:

Judges of Germany’s Constitutional Court showed concern Tuesday over finding the right balance between making a quick decision on the European Stability Mechanism and taking the necessary time for proper evaluation of the ESM’s constitutionality.

What they did make clear is that there will be no final decisions today on the constitutionality of the ESM and Fiscal Compact approved by European leaders and passed with a two-thirds majority by Germany’s parliament last month.
But judges also acknowledged that granting even a temporary injunction could be interpreted as a sign that they were leaning against approving the ESM’s constitutionality.
An injunction “will be interpreted by the foreign press as ‘euro-rescue is halted’” said Constitutional Court President Andreas Vosskuhle, during a hearing into the injunctions sought by opponents of European rescue fund.

Opening the hearing earlier Tuesday, Vosskuhle said he recognized that it was “not easy” for the court to decide whether to grant a temporary injunction — which would prevent the ESM from taking immediate effect — or allow the treaty to take effect at the risk that it can no longer be halted if ruled unconstitutional at a later date.

Vosskuhle emphasized that the court could only hold a hearing over the injunction itself Tuesday, and would not discuss the broad constitutional questions stemming from the ESM and Fiscal Compact, which were both approved last month by Germany’s parliament.

“It is clear that this constitutional court cannot hold a full substantive, but rather a summary examination, given the tight time constraints” of the temporary injunction requests, Vosskuhle said. “That means that a final decision can not be taken in this hearing today about the constitutionality of the ESM, the Fiscal Pact and its accompanying laws.”

Judges during the hearing suggested a two-part decision was likely, first on the injunction in about three weeks, and then in early 2013 on the broader constitutional question.

But Vosskuhle and others on the court suggested uncertainty over just how far even a decision over the temporary injunction should go, and pressed Germany’s government representatives over exactly how much time the court has to reach a ruling.

German Finance Minister Wolfgang Schaeuble told the court that a long delay before the ESM takes effect would have serious consequences for market confidence and the Eurozone’s fragile economies.
Schaeuble said the ESM was a more “lasting, dependable instrument” than the temporary EFSF fund and had put Europe on the path toward regaining confidence.
“A considerable delay … would have serious consequences far beyond Germany,” Schaeuble said. It would entail “dangers for financial stability” and cause a “clear strengthening” of the Eurozone crisis, which could once again lead some European countries to have serious refinancing problems.

A delay could have “serious economic consequences” for the Eurozone as well as Germany, and in turn would risk placing the entire euro project “in question,” Schaeuble warned.

Opposition demands for an injunction have already stopped the ESM from taking effect on July 1 as originally planned. The Constitutional Court had earlier asked Germany’s president not to sign the ESM and Fiscal Compact into law until it could rule on the injunctions.

Opponents argue the ESM and Fiscal Compact will permanently curb the German parliament’s budgetary powers, and would therefore require a change of the constitution to be approved. They also argued an injunction would not be especially damaging, given the existence of the EFSF.


and.....

http://www.zerohedge.com/news/answering-open-questions-europes-bailout-fund


Answering The Open Questions On Europe's Bailout Fund

Tyler Durden's picture
Submitted by Tyler Durden on 07/10/2012 06:51 -0400




Despite the ongoing barrage of pronouncements out of Europe on a weekly if not daily basis, discussing the imminent launch and even more imminent success of the ESM, the reality is that many questions remain: such as will Germany just say nein again today, in the constitutional court's verdict, especially after the President asked Merkel over the weekend why it is that Germany has to keep bailing out Europe, a proposition which no longer impresses about 54% of the German public. More importantly, even though the debate over the explicit subordination of the ESM may be resolved (it never will be as the bailout funding will always be implicitly senior to general bondholders no matter how many pieces of paper are signed), a bigger debate now emerging is just who will guarantee the bank losses. Below, we answer that question, and virtually every other outstanding one, courtesy of this DB analysis, which removes most of the lack of clarity surrounding the European bailout mechanism. Yet the main axis of inquiry in our opinion is different: what is the timetable of funding rollout. Because as DB explains, "It follows that from July to October, the ESM can only lend about EUR 100bn. If that is committed to Spain, there is nothing left in the ESM until October. Any other intervention before October would have to be under the EFSF." In other words, assuming a smooth acceptance of the ESM today by the German court, and no further glitches, the best case scenario is one which provides for funding to Spain... and there is no other cash until virtually the end of the year under the ESM, whose implementation is staggered as the chart below shows.


And another key question:

What happens if a member state is downgraded? The impact on the ESM would probably differ from that on the EFSF as the former does have cash – i.e. paid in capital. Furthermore, the ESM does not have to be rated AAA from a legal point of view. True, a lower rating would lead to higher borrowing costs which would have to be passed on to the borrowing country thus increasing the challenges of the adjustment process. In the worst case scenario, one could argue that if one or more AAA countries were to be downgraded by several notches, the maximum amount that the EFSF would be able to raise on the market would decrease.

For every other open item, read below.

1) When will the ESM be operational?

The ratification of the ESM treaty requires the approval by ESM members (euro area countries) whose initial contributions represent no less than 90% of the paid in capital. The paid in capital is based on the capital keys/contribution at the ECB (for example Germany has an ESM key of 27.1%, France 20.4% and so on). Thus larger countries have a greater vote in the ESM.
There is the possibility that the ratification process will not be concluded by July, as originally planned. Indeed, the following euro-area countries have not ratified the ESM yet: Estonia, Italy and Germany.
Estonia is waiting for the ruling of the Constitutional Court on 12 July then the parliament will very likely approve the ESM.
Unsurprisingly, constitutional complaints were filed right after the German Bundestag and Bundesrat approved the ESM and Fiscal Compact last Friday (see accompanying article in this issue of Focus Europe).

In anticipation of the constitutional complaints, both chambers of the German Parliament agreed to set the ratification standard of the ESM laws higher than required – from a simple majority to a qualified majority of two-thirds – in order to ensure constitutionality. In the end, three-quarters of the MPs ratified the ESM and approved the respective financing law.

With this broad ratification in parliament and the fact that parliamentary involvement is already widely given, the possibility of the Court’s obstructing ratification altogether seems unlikely.

Italy does not yet have a binding timeline on its ratification process. The Foreign Senate Commission has ratified both the Fiscal compact and the ESM but both houses have a very busy agenda hence there is the possibility that ratification of the ESM will be moved to the first week of August.

To make a complex process more complicated, the ESM ratification also requires the modification of Article 136 in the Treaty on the Function of the European Union. This requires all 27 EU countries to approve the modification. EA countries have or will vote on the modification of Article 136 of the TFEU together with the ESM (apart from Belgium where the former has not been formallyapproved). As of 4 July the UK and Bulgaria have not approved the modifications to Article 136 yet. Hopefully this is not a sign that these countries are aiming at extracting concessions in exchange for their approvals.The first installment of the capital has to be paid by each ESM member within 15 days of the ESM treaty entering into force.

So if Italy is the last euro-area country to approve the ESM and UK as well as Bulgaria do not slow down the process, the ESM will not be in a position to lend money until the last 10 days of August.

2) What is the EFSF/ESM lending capacity?

At the end of 2010 EU leaders agreed to create a permanent crisis management institution in a new stability architecture for the euro area. It was announced that the EFSF (European Financial Stability Facility) activities would be taken over by the ESM (European Stability Mechanism) starting this summer even if the former closes in July 2013. The ESM will also take over the activities of the EFSM (European Financial Stabilisation Mechanism).

With the accelerated entry into force, the ESM will now operate alongside the EFSF for 12 months. The ESM will have a subscribed capital of EUR 700 billion in the form of EUR 80 billion as paid in capital and the rest as callable. The theoretical ESM lending capacity is of EUR 500bn.

On 30 March the euro-area finance ministers made two significant decisions (see Eurostress article in Focus Europe on 30 March):
  • The total ESM-EFSF liability ceiling was raised from E500bn to E700bn. Thus that total theoretical new lending is now E500bn.
    • The ESM E80bn paid-in capital will be made available by end June 2014 rather than mid 2017. This is important because it will build up the available capacity faster since the ESM paid-in capital cannot fall below 15% of ESM’s outstanding loans
    The theoretical firepower of the ESM is EUR 500bn (EUR 80bn of paid-in capital divided by the above 15% threshold). But besides ESM-EFSF liability ceiling of E700bn, other constraints should be taken into consideration: ability to raise funds on the market and timing.
    Market constraints
    The actual firepower of the ESM will depend on the ability to raise funds in the market, which is difficult to predict. A reasonable approach, in our view, is to include the entire subscribed capital – callable and paid-in capital – of AAA countries (including France) and only the paid-in capital of the other countries. Note that the new Greek programme includes a contribution for Greece’s paid-in capital. Similarly the EC report on the Portuguese programme third review requires Portugal to include the ESM paid-in capital contribution in the March supplementary budget.

    This approach leads to an effective ESM firepower of around EUR 440bn (with a capital ratio of 18% – see the broken line in Figure 12). The underlying assumption in the previous bullet point is that even if Italy and Spain need to tap the ESM, their rescue programmes would take into account their ESM paid-in capital contributions as for Greece and Portugal.

    This is important as without their capital contribution the ESM could not lend more than EUR 374bn without breaking the 15% capital lower bound (bottom line in Figure 1).

    Timing
    As we mentioned above the ESM paid in capital cannot fall below 15% of ESM’s outstanding loans. Hence, the ESM will reach its maximum capacity only in June 2014.
    Two tranches of capital will be paid in 2012, the first one in July – bringing the ESM firepower to EUR 107bn – and the second one by October – increasing the ESM firepower to EUR 213bn. Another two tranches will be paid in 2013 and a final tranche in the first half of 2014.


    That said, in line with the ESM Treaty, the payment of the capital can be accelerated if needed to maintain a 15% ratio between the paid-in capital and the outstanding amount of ESM issuances.

    In any case, the actual firepower of the euro-area rescue mechanisms can also count on the EFSF up to July 2013 (there are also about EUR 12bn left in the EFSM). The EFSF uncommitted lending capacity of around EUR 248bn (see page 8 in Focus Europe on 13 April). So we think that the total combined lending capacity after the ESM enters into force will be above EUR 360bn until October 2012 and at least EUR 440bn thereafter.


    It follows that from July to October, the ESM can only lend about EUR 100bn. If that is committed to Spain, there is nothing left in the ESM until October. Any other intervention before October would have to be under the EFSF.

    Other events limiting ESM’s capacity
    What happens if a member state is downgraded? The impact on the ESM would probably differ from that on the EFSF as the former does have cash – i.e. paid in capital.

    Furthermore, the ESM does not have to be rated AAA from a legal point of view. True, a lower rating would lead to higher borrowing costs which would have to be passed on to the borrowing country thus increasing the challenges of the adjustment process.

    In the worst case scenario, one could argue that if one or more AAA countries were to be downgraded by several notches, the maximum amount that the EFSF would be able to raise on the market would decrease.

    Investors have other questions on the basic structure of the ESM. The ESM Treaty does not appear to address a scenario in which a member state does not pay its paid-in capital on time (if, for example, this were a problem for Italy or Spain). It covers only the eventuality when an EMU country does not satisfy immediately the call for extra capital by the ESM board of governors to cover losses.
    Only in this case, the other member states make up the difference (Art 25). We think this clause does not cover the payment of initial paid-in capital; hence any delay would constrain ESM lending capacity.

    3) What are the decision-making rules of the ESM?

    The ESM can use five disbursement options:

    1. Loans to a sovereign,
    2. Bank recapitalisation
    3. Precautionary financial assistance
    4. Purchase of government bonds in the primary market
    5. Purchase of government bonds in the secondary market
    All five options are covered by a "mutual agreement" decision. That is, every member of the ESM Governor Board has a veto right:
    “The adoption of a decision by mutual agreement requires the unanimity of the members participating in the vote. Abstentions do not prevent the adoption of a decision by mutual agreement.” (Article 3, paragraph 3)

    However, there is an "emergency" decision procedure. This applies when "the Commission and ECB both conclude that a failure to  urgently adopt a decision to grant or implement financial assistance would threaten the economic and financial sustainability of the euro  area" (Art. 3, p. 4). Under this rule, ESM members covering 85% of the capital can approve the financial aid. Note, Finland, Slovakia and Netherlands only amount to 8.3% of the capital. Even adding, for example, Austria only boosts this to 11.1%.

    4) Will direct bank recapitalisation require a Treaty change?

    Article 3 setting the purpose of the ESM is to some extent ambiguous:
    “The purpose of the ESM shall be to mobilise funding and provide stability support under strict conditionality, appropriate to the financial assistance instrument chosen, to the benefit of ESM Members which are experiencing, or are threatened by, severe financing problems, if indispensable to safeguard the financial stability of the euro area as a whole and of its Member States. For this purpose, the ESM shall be  entitled to raise funds by issuing financial instruments or by entering into financial or other agreements or arrangements with ESM Members, financial institutions or other third parties.

    So Article 3 does not states that the financial aid has to be directed to the ESM member, i.e. the sovereign, but rather to its benefit. A direct bank recapitalisation would ‘benefit’ Spain, for example.

    However, Article 15 on the financial assistance for the recapitalisation of financial institutions of an ESM member states that “The Board of Governors may decide to grant financial assistance through loans to an ESM Member for the specific purpose of re-capitalising the financial institutions of that ESM Member”. Here the room of maneuver is less evident, although one could argue that the Article does not explicitly state that loans to an ESM member are the “only” option. Though this narrow opening, Article 5 could provide a possible means to avoid treaty change:

    “The Board of Governors shall take the following decisions by mutual agreement… to change the list of financial assistance instruments that may be used by the ESM…” (Article 5, paragraph 6i).

    Similarly Article 19, referring also to the above Article 15, states that “The Board of Governors may review the list of financial assistance instruments provided for in Articles 14 to 18 and decide to make changes to it.”

    So technically, one could argue that direct capitalization could be introduced via a unanimous decision by the ESM Board. However, the political hurdles will be very high (see also question 7 for cases of disagreement among ESM members).

    Much will probably depend on what is meant by "direct bank recapitalisation". If it is what the market defines as "direct" recapitalisation -- no recourse to the sovereign and not a senior loan -- it will likely necessitate a Treaty revision.
    Alternatively, the solution could be a “hybrid” direct recapitalisation where Spain provides a form of guarantee to the ESM which would not affect Spanish debt/GDP as measured by Eurostat. That may be disappointing from the market perspective but it may represent a  realistic compromise. Such a solution has some parallels with how NAMA is accounted for in Ireland.

    5) Will removing the presumption of seniority require a Treaty change?

    As we have stated in Focus Europe several times, ESM seniority is not in the legal clauses of the ESM Treaty, but in the political preamble (Bullet 13). This means that it takes only a statement from the Eurogroup to remove the presumption of seniority.


    This is what happened at the 28-29 European Council meeting. In their statement, the euro-area leaders affirmed that in the context of Spain:

    “We reaffirm that the financial assistance will be provided by the EFSF until the ESM becomes available, and that it will then be transferred to the ESM, without gaining seniority status.”

    In our view the above statement provides a precedent that is likely to be repeated for other countries’ rescue programmes. This does not mean that there is no opposition.As widely reported by the press, the Finnish Government said it expects collateral in exchange for any aid commitments that strips the ESM’s preferred creditor status.
    So although last Friday’s removal of the automatic seniority presumption was a positive, investors’ uncertainty has not been fully removed.

    6) What conditionality is applied to ESM?

    Article 3 states that: “The purpose of the ESM shall be to mobilise funding and provide stability support under strict conditionality, appropriate to the financial assistance instrument chosen…”

    So conditionality is an integral component of ESM’s intervention. Indeed ECB President Mario Draghi in the Q&A session on 5 July said that conditionality is what gives credibility to the ESM.
    Bank recapitalisation
    The first question is under what conditions the ESM will lend for bank recapitalisation. More specifically we do not know yet what precise conditions will be applied, for example how much dilution of existing equity will there be? Will the FROB/Spanish government gain effective
    control?
    Last week, our understanding was that on 9 July we would receive some answers by the planned Eurogroup meeting as it was expected to formally approve the MoU on Spanish bank recapitalisation aid. However, according to Reuters the signing of the MoU will be delayed  until a new Eurogroup meeting on 20 July.

    Secondary market intervention

    The euro leaders’ statement on 29 June did nothing except remind us of the minimal conditionality on EFSF/ESM primary and secondary market intervention.

    There were no evident concessions. A secondary market intervention requires a MoU. We think that this is not a negative feature. For example, it could give investors more confidence that the beneficiary sovereign will carry out the necessary structural reforms. In other words it decreases the moral hazard associated with external help.
    While we are not too concerned about the potential stigma associated with signing a MoU, we do recognize that the ESM suffers from a potential credibility issue in terms of secondary market intervention. There are three problems (i) seniority (ii) liquidity and (iii) size.
    The first can be dealt with as discussed above. Given that the ESM bank license idea was rejected by the ECB on legal grounds, the  liquidity issue could be removed by combining the ESM and the ECB’s SMP. But Draghi seems to have closed also this door at Thursday’s press conference.

    Even if the liquidity problem is overcome, the current size of the ESM is not large enough to provide a fully convincing deterrent. True, if fully credible, it could help the adjustment process of countries such as Spain and Italy. But its limited size reminds us of those exchange rate crises where a central bank was unsuccessfully trying to support the exchange rate while depleting its limited foreign reserves.

    7) What if there is disagreement about the interpretation of the treaty among ESM members?

    Article 37, second paragraph, states that “The Board of Governors shall decide on any dispute arising between an ESM Member and the ESM, or between ESM Members, in connection with the interpretation and application of this Treaty, including any dispute about the  compatibility of the decisions adopted by the ESM with this Treaty. The votes of the member(s) of the Board of Governors of the ESM Member(s) concerned shall be suspended when the Board of Governors votes on such decision and the voting threshold needed for the adoption of that decision shall be recalculated accordingly.”

    Does this mean that the opposition of a country can be easily over come? Not quite, indeed the third paragraph of Article 37 that if an ESM Member contests the decision referred to in paragraph 2, the dispute shall be submitted to the Court of Justice of the European  Union. The ruling of the Court of Justice is final.


and.....



http://www.guardian.co.uk/business/2012/jul/10/eurozone-crisis-spain-banks-bailout


1.25pm: After a bright start, the euro has been sliding against the dollar. It just hit $1.227 (from $1.231 overnight).
1.17pm: From Madrid, my colleauge Giles Tremlett reports that the promise of €30bn of aid to Spain's banks comes at an "obvious price" despite finance minister Luis de Guindos' continued insistence that this is not a bail-out with conditions beyond the banking sector.
Giles writes:
Yesterday budget minister Cristóbal Montoro performed the first part of what looks like a U-turn on sales tax, which is now set to be hiked – despite his earlier insistence that this would plunge Spain further into recession and that it punished the poor.
The key phrase was this: "I cannot say it more clearly, the government will comply with the European Commission's recommendations."
Those recommendations (online here) currently include increasing sales tax, accelerating a move to retirement at 68 and ditching tax cuts for house-buyers.

Spain, in other words, will be getting bank bailout money and a relaxed deficit target (reportedly from 5.3 percent of GDP to 6.3 percent) in return for obeying Brussels.
Dutch finance minister Jan Kees de Jager's statement that the bank bailout total "will likely be €100bn" is way above the €60bn level suggested by the recent independent stress tests of the banking system.

1.05pm: Portugal's central bank has revised its economic forecasts higher, but it still expects a severe downturn this year.
The Bank of Portugal announced that it expects GDP to fall by 3.0% this year, up from a previous forecast of a 3.4% decline. It still expects the economy to be flat in 2013.
The Bank also indicated that Portugal may need extra austerity to hit the targets imposed under its bailout, saying it sees the "possible need for additional measures to meet fiscal targets".




11.06am: Spanish bond yields have dropped back this morning, in a sign that the financial markets have been reassured by the agreement reached last night.
The Spanish 10-year bond (the benchmark of investor confidence) is now yielding 6.88%, sharply lower than the 7.17% it opened at. This means that the value of the bond has risen, pulling yields back out of the 'danger zone'.
10.59am: Gerard Lyons, chief economist of Standard Chartered bank, has dismissed the news that Spain's banks will be offered €30bn in emergency loans this month, warning that the country's people will still suffer as its austerity programme continues.
Prime minister Mariano Rajoy is expected to announce new austerity measures soon – possibly within a few days. Reports from Spain suggest the government could cut public sector wages and unemployment benefits, lay off some public workers.
10.12am: Beyond the positive headlines, the real picture at the eurogroup is that the key players are still divided over crucial questions.
Ian Traynor, our Europe Editor, warns that the question of sovereign liability (see 8.01am) is still unresolved.
From Brussels, Ian writes:
The headlines are of another middle-of-the-night breakthrough in the eurozone (isn't there a better way of doing crisis management?!) with agreement on a Spanish banking bailout worth 100 billion euros, with €30bn being released within a few weeks and Madrid given an extra year to get its budget deficit down to 3%.
But acute differences remain behind the scenes, it appears, with top eurozone figures seeking to paper over the cracks.
The key question is who is ultimately liable for the bailout funds once the eurozone takes out piles of equity in bad Spanish banks. The issue matters hugely because all the talk of direct bank recapitalisation, without further burdening the sovereign host state, will be seized on by Ireland and Greece seeking similar treatment.

Last week senior eurozone officials insisted the sovereign would in the end have to carry the risk for the bailout fund taking equity in Spanish banks and reimburse any eventual losses. On Monday there were contradictory signals on the issue.
Following the eurogroup meeting, Olli Rehn and Jean-Claude Juncker, the competent European commissioner and temporarily reinstated head of the Eurogroup, insisted that Spain would not have to guarantee the bank loans. Wolfgang Schaeuble, the German foreign minister, said it would.
The agreement on Spain was merely an outline "political understanding" with the fine print still to be done within 10 days. It appears that the issue of last-resort liability and guarantees has yet to be resolved.

9.39am: The German constitutional court has just begun hearing the eagerly watched case into whether the European Stability Mechanism (the permanent bailout fund for the eurozone) is legal.

At the start of the case, the court said that it was important to respect the German parliament's decision to approve the ESM (with a large majority) at the end of June. It added that it will not make any final decision today.

The court has been asked to rule on whether the ESM violates German law by restricting how taxpayer money is spent.
9.05am: Another twist in Cyprus's banking crisis this morning – the chief executive of the Bank of Cyprus (the country's largest lender).
Andreas Eliades criticised the country's approach to the crisis, saying there had been a lack of "joint mobilisation" to the situation (which has now seen officials from the IMF poring over its books). The banks alone could need a €10bn cash injection, or more than half Cyprus's annual GDP.




8.46am: Looking at France briefly, where the latest industrial output data is much weaker than expected.
Production across the French industrial sector slid by a worse-than-expected 3.5% in May, compared to the previous year, and was 1.9% down month-on-month.
The figures show that that French economy is suffering badly from the weakening eurozone economy. Steve Collins, global head of dealing at London & Capital Asset Management, described them as "grim".
8.31am: Spain's economy minister Luis de Guindos has described the terms of the Spanish bank aid deal as "very positive".
According to de Guindos, the loans will made at a "low" interest rate, going on to suggest it could be below 4%. He added that they would be of long maturity (up to 15 years, I think).
8.19am: Spanish government bonds have strengthened a little in early trading, as financial markets give a very cautious welcome to this morning's news.
On my Reuters box, the yield on the Spanish 10-year bond has dropped to 7.025%, from 7.17% overnight.
8.01am: One important issue surrounding the aid for Spain's banks is whether the Spanish government will be liable for the loans. This still remains murky.
Jean-Claude Juncker said that the eurogroup's long-term aim is to convert them into direct cash injections, but only once a single European banking supervisor has been created.
It appears that once that happens, a country such as Spain would not need to give a sovereign guarantee. But creating the banking supervisor could take until next year. So what happens to loans made in the meantime? Well, according to German finance minister Wolfgang Schäuble, the Spanish government would be liable intitially.
French finance minister Pierre Moscovici said his government wants to remove any sovereign guarantees in future, saying he would "argue for the retroactivity" . But, as Bloomberg says, "political hurdles remain" on how this retrofitting would be handled.
Update: the Wall Street Journal just launched a good story about this issue, here. It explains:
Germany's finance minister said that even once the euro zone's bailout fund has been authorized to directly recapitalize struggling banks, the lenders' host government should retain final liability for any losses.
Wolfgang Schäuble's statement early Tuesday indicated disagreements on how far the currency union needs to go to protect countries from expensive bank failures. His declaration, which followed more than nine hours of talks between euro-zone finance ministers here, clashed with those of other officials, who insisted that banks' host states wouldn't have to guarantee any support from the bailout fund.
In the meantime, last night's conclusions will be submitted later Tuesday to a meeting of ministers from all 27 EU countries. I did hear that the UK is sending City minister Mark Hoban rather than chancellor George Osborne.
7.52am: Here's a round-up of this morning's early news stories on the eurogroup meeting.
7.47am: European ministers took two main decisions overnight:
1) to offer €30bn to Spain's banks in immediate loans, as part of a package that could reach €100bn. Ministers also said they are still committed to eventually using the euro-area bailout fund to recapitalize banks directly.
2) to relax Spain's deficit targets, giving the country another year to get its borrowing below 3% of GDP. Under the plan (recently proposed by the European Commission), Madrid would run a deficit of 6.3% of economic output in 2012 (up from 5.8%), and 4.5% for 2013. It would then drop to 2.8% in 2014.
There will be specific conditions for specific banks, and the supervision of the financial sector overall will be strengthened, Juncker said.
"We are convinced that this conditionality will succeed in addressing the remaining weakness in the Spanish banking sector," he said.
The Dutch finance minister, Jan Kees de Jager, said the agreement should be finalised soon.
"We have a tentative deal on the bailout conditions for a bailout of Spanish banks," De Jager said. "The total will likely be €100bn. Some countries like the Netherlands, Germany and Finland need to get parliamentary approval. We hope this can be wrapped up within a week.
Jean-Claude Juncker, head of the eurogroup, told reporters that the €30 of immediate loans will be made available before the end of the month "in case of urgent needs in the Spanish banking sector". Juncker claimed that the progamme will "will succeed in addressing the remaining weakness in the Spanish banking sector."

There are more details in our news story here
7.35am: Good morning, and welcome to our rollling coverage of the eurozone crisis.
The big news overnight is that eurozone finance ministers have agreed to speed up the recapitalisation of the Spanish banking sector. €30bn of loans will be made available to Spanish banks this month, if needed.
The eurogroup also agreed to give Spain more time to lower its bailout, in an effortt to ease the pressure on the country.
The decisions were taken in the early hours of this morning, following another long session of negotiations in Brussels. We'll have more details and reaction shortly.
Also coming up today: talks will continue in Brussels, with ministers from all 27 members of the European Union.
Meanwhile in Germany, the Constitutional Court will begin considering whether the European bailout mechanism is legal.
On the economics front, new industrial data will show how the eurozone's manufacturing arm fared last month. And we also get new UK trade data this morning.

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