Europe Debt Crisis
Prime Minister Marian Rajoy said on Monday the government was ready to step in to save banks, starting with Spain’s fourth largest, Bankia, which was first in line for state aid. REUTERS

1540 BST: Steady to the close

European headline risk is dissapating as markets wheeze to the finish a very "risk off" kind of day. The soothing words of Ollie Rehn and the lifelines thrown to the Spanish (and Greek?) economies haven't been enough to offset the sagging US housing market and an overall sense that a globally co-ordinated policy response is ultimately going to be required if the ship doesn't steady itself.

The FTSE 100 is set for a 85 point fall, taking around 1.6 percent from the index in a session more defined by developments in Asia than headlines from Europe. We're also seeing 1.5 percent declines in Spain and Germany and a full 2 percent drop in the Greece-exposed CAC-40.

The single currency is falling faster than stocks, however, dipping below 1.24 against the US dollar after a late poll from Greece (Pluse - commisssioned by the Pontiki newspaper) showed the anti-bailout Syriza party in an effective dead-heat with pro-European rivals New Democracy with 24.5 percent support.

1505 BST: Safe Havens and Houses

European stocks are extending losses after a dismal reading of pending home sales in the United States for the month of April has kept downward pressure on stocks. The National Association of Realtors April PHS Index fell 5.5 percent to 95.5, well past the 0.1 percent increase analysts had forecast. The figures cast some doubt on the pace of the US recovery and will likely ignite calls for further monetary stimulus from the US Federal Reserve, particularly if this Friday's Employment Report from the US Department of Labor shows a disappointing addition to non-farm payrolls in April.

The FTSE Eurofirst 300 is now down 14 points, or 1.5 percent on the day to 976.53.

1445 BST: Bear attack

There's very little optimism in global financial markets are US stocks fall quickly, the single currency limps to a two-year low against the US dollar and gold continues its worst run in at least a decade. Gold is now 1 percent lower on the day at $1,538.79, helped by a surge in the US dollar as investors flee risky assets all around the world.

In Europe, the Euro is testing 1.24 against the greenback (it's down 0.6 percent in the last 24 hours) while yields on the benchmark 2-year German schatz are now trading at an effective "zero" rate.

1430 BST: US opens weak

Watch out for European stocks accelerating declines into the close after full 1 percent falls at the open for the S&P 500 and the Nasdaq. Dow is off around 66 points, or 0.52 percent, to 12, 515.3.

1345 BST: Breaking records

A quick list of all-time low bond yields that were set today:

Germany: 2s (0.019 percent) 10s (1.34 percent) 30s (1.89 percent)

UK: 5s (0.705 percent) 10s (1.72 percent)

Finland: 10s (1.626 percent)

Netherlands: 10s (1.751 percent)

United States: 10s (1.671 percent)

Australia: 10s (3.057 percent)

1330 BST: Sweet relief

Olli Rehn, the European Union's monetary affairs commissioner, says EU prepared to extend Spain's deadline to meet EU budget targets by one year, giving them until March 2013.

UPDATE: the "if" in this flexibility depends on Spain presenting a credible budget plan out to 2014. Given bank recaps and regional refinancing commitments (not to mention relative borrowing costs that are 5 percent dearer than Germany's) that seems like a tough ask.

1320 BST: Carlo Pietro Giovanni Guglielmo Tebaldo Ponzi

Riddle me this: at this stage, if the permanent ESM bailout fund were to a) get approval of the 90 percent of its capital providers and b) receive permission to directly recapitalize certain Eurozone banks, how would we square this circle: Italy, Spain, Greece, Portugal and Ireland collectively provide 36.7 percent of its base capital. Which would then be use to recapitalize banks in ... Italy, Spain, Greece ... and very likely Portugal and Ireland.

And the market saw this as *bullish"?

1205 BST: Going rogue

The European Commission has well and truly thrown the cat among the pigeons with its view that the Eurozone should move towards a full banking union and that the permanent bailout fund could be used as a vehicle form which Europe's ailing banks could be rescued.

"Recent reforms have helped to speed up restructuring of the banking sector, which should continue. However, ensuring the stability of the financial sector is still a challenge," the Commission said. "Given the risk of bank-funding stress, it is necessary to continue to strengthen the banks' capital base."

The Commission also says joint debt issuance (ie, Euro Bonds or Euro Debentures) would help Eurozone budget discipline and solidarity once pre-conditions are met.

The comments - which will surely further isolate German Chancellor Angela Merkel and her posItion on unified European debts - come as the Commission released its annual strategy paper for Eurozone growth in the coming year.

1150 BST: One of many apple carts

Dutch radio is reporting that a court in The Hague will rule of Freedom Party Leader Geert Wilders' challenge to Hollands' participation in the EU's permanent bailout fund, the European Stability Mechanism (ESM). Given the rapidly rising probability that Spain will need access to this at some stage before the end of the year, this would seem to be a fairly important "under the radar" headline risk. The Dutch parliament last week voted to approve ESM funding over the objections of Wilders who says the dissolution of government in April should mean that the ESM funding decision be made after new elections are held on 12 September.

1130 BST: Once more beyond the breach

Spain's benchmark borrowing costs touched a Eurozone high of 6.72 percent this morning while two-year yields have surged to 5.1 percent. Spain's IBEX 35 is now down 2.2 percent and facing a slide into 10-year low territory, but that's not nearly as important as the creep towards the 7 percent 10-year yield threshold that triggered previous European bailouts.

1105 BST: Groucho Marx is smiling ... somewhere

The European Central Bank said Wednesday that none of the eight countries currently under review for single currency membership are meeting the required standards.

"In none of the eight countries examined, the legal framework is fully compatible with all requirements from the adoption of the euro as laid down in the Treaties and the Statute of the European System of Central Banks and of the ECB," the ECB said.

The nations under review are: Latvia, Bulgaria, Czech Republic, Lithuania, Hungary, Poland Romania and Sweden.

1050 BST: Recapitalization-gate

Doesn't really trip off the tongue, but it's turning into an amusing story nonetheless. The FT report (see link below) that the ECB "rejected" Spain's plan to recapitalize state-owned Bankia with government debt was summarily denied by the ECB though, of course, the medium of Twitter:

Contrary to media reports published today, the European Central Bank (ECB) has not been consulted and has not expressed a position on plans by the Spanish authorities to recapitalise a major Spanish bank. The ECB stands ready to give advice on the development of such plans.

Spain's now-emboldened Economy Minister, Luis De Guindos, told lobby reporters at Spain's parliament that Bankia's (not insignificant) capital needs will be met through bonds sales by the FROB (Fund for Orderly Bank Restructuring) which has, at present, around €4bn - or €15bn shy of the minimum requirement for Bankia's solvency.

1020 BST: Very weak Italian bond auction

This is very troubling news. Italy's planned €6.25bn (max) auction of 5 and 10-year debt was miserable. The Italian Treasury only managed to find buyers for €5.73bn and costs surged to 2012 highs as a result.

The 10-year sale priced to yield 6.03 percent (up 19 basis points from April) while the 5-year sale carried a yield to maturity of 5.66 percent (up 80 basis points from April). Demand for both sales was poor at around €1.35/€1.39 bid for every €1 on offer.

On-the-run (ie, actively traded) Italian 10-year bonds are now trading at 6.15 percent following the auction while Spain's benchmark 10-years are slipping even further in active trading, taking its yield to 6.68 percent.

1005 BST: Eurozone confidential

Economic sentiment across the Eurozone falls to 90.6 in May from a revised 92.9 in April, according to the European Commission. Sub-indices inside the poll suggest a further declines in business climate (-0.77 from -0.51) and a marginal improvement in consumer sentiment (-19.3 from -19.9). Both the industrial climate (-11.3) and services (-4.9) were much weaker than the April figures.

0950 BST: No denial

Spain's Economy Minister Luis De Guindos says the ECB did *not* reject the country's plan to recapitalize Bankia with Spanish government bonds, although it doesn't feel as though the market is prepared to believe him.

Spain's five-year government bond yields are now trading above 6 percent for the first time since late November.

UPDATE: De Guindos might have a good point.

0925 BST: More than three centuries

UK 10-year government bond yields touched 1.743 percent today - the lowest in 318 years of active capital markets activity.

0905 BST: Stocks still sliding

FTSE Eurofirst 300 now down a full 1 percent to 981.01. IBEX slippage has been arrested at 1.7 percent, but Bankia shares continue to tumble, having fallen a further 14 percent to dip under €1 per share (€0.975). The shares have collapsed 62 percent since the beginning of the month.

More troubling, perhaps, are unconfirmed figures regarding Spain's relative borrowing costs. A spread over bunds north of 500 basis points trigged bailouts in Greece after 16 days, Ireland after 24 days and Portugal after 34 days. Today is the third day that Spain's relative borrowing costs have traded above 500 basis points from 10-year German bunds.

0835 BST: More bond data

Credit default swaps on Spanish debt have hit an all-time high of 580 basis points, according to data provider Markit. The costs equate to an investor paying €580,000 each year for five years to insure €10m in government bonds against default.

In Ireland, data provider Tradeweb show an "inversion" in Irish government bond yields. Two year yields (7.447 percent) are now higher than 10-year yields (7.435 percent) indicating a deeper contraction for the struggling Irish economy.

Ireland will vote tomorrow in a national referendum on Europe's Fiscal Pact. Polls show growing support for a government-led "yes" vote although the number of undecided voters is uncomfortably high

Nobel Prize-winning economist Paul Krugman, one of the most outspoken proponents of a government-led stimulus to solve Europe's debt crisis, told BBC's Radio 4 progamme that he would counsel Irish voters to reject the pact.

0820 BST: Debt markets wobble

Italian government bonds yields have breached 6 percent at just the wrong time: the goverment faces a €6bn five and 10-year auction in about two hours's time. German bunds are hitting all time lows for 10-year debt (1.34 percent) and 30-year debt (1.903 percent)

Saftely flights are lifting the US dollar and the Japanese Yen, with the latter trading at a four-month high of 98.81 against the Euro. Sterlig hits a four-month low 1.5578 against the greenback. The dollar index is now at a 20-month high of 82.663.

0810 BST: Early pressure

Bankia, the state-rescued Spanish lender, is down 7 percent in early trading after reports that the government's debt recapitalization plan was rejected by the European Central Bank. Spanish government bonds are weakending further, with 10-year yields touching 6.52 percent while the spread to German bunds (ie, the premium investors demand to lend money to Spain as opposed to Germany) is now at a record high 517 basis points.

German bund futures have gained 32 ticks on the day to yet another record high 144.62.

0805 BST: Rough start

Bookmakers calls looked a bit conservative this morning as the FTSE 100 dips 0.8 percent, or 44 points, in immediate trading.

The broader FTSE Eurofirst 300 slips 0.4 percent to 987.47 while we see similar declines for the DAX and the FTSE MIB.

Standout decliners are in Spain, as you might expect, with a 1.1 percent fall in the IBEX 35 and France, where the CAC-40 (and its Spanish-exposed banks) are down 1.1 percent.

0750 BST: Good Morning!

I'm sincerely hoping that technical failures won't keep me from blogging all day today because it's going to be a fascinating session.

Asian shares slumped to a two-year low last night with the MSIC Asia Pacific Index falling 0.8 percent as investors backed away from risky bets in the face of the worsening crisis in Spain and a reluctance from China to embark on large-scale stimulus to promote economic growth.

The Euro took a pounding on overnight foreign exchange markets, falling to a near two-year low 1.2457 after a report in the Financial Times that suggested the European Central Bank had rejected plans by Spain to re-capitalise its state-rescued lender, Bankia, with government bonds that could then be used as collateral to borrow cash from the central bank.

Investors' nerves were also shaken by news that Spain's top central banker, Miguel Angel Fernandez Ordonez, would be leaving his job at the Central Bank a month ahead of schedule.

European share markets are called to open weaker as we close out the month, with financial bookmakers pointing to a 20 points slide for the FTSE 100, and 18 point drop in the DAX and a 12 point dip for the CAC-40.

Bond markets are already up and trading, with benchmark 10-year Italian government bond yields rising 6 basis points to 5.84 percent ahead of a €6bn bond auction later this morning. Spain's 10-year bonds are also weaker, trading at 6.5 percent.

Economic data on tap for the morning includes money supply figures from the European Central Bank and the Bank of England as well and European figures on consumer and industrial confidence. The EU will also give a report card on budget deficit reduction measures from its indebted members, with Spanish media reporting plans to allow the country another year to address its finances and come in-line with EU mandated targets.

China FTSE Bank of England European Central Bank