–Retransmitting Story Published 13:15 ET Friday

By Denny Gulino

WASHINGTON (MNI) – Within 13 exchanges and a few dozen dark pools,
the constant blizzard of high-frequency trades ricochet around the
stock markets, and increasingly other markets as well, in an unfettered
free-for-all that scares a lot of people in Washington — and now
Washington is returning the favor.

As the defenders of high frequency trading traipsed to Capitol Hill
this week to make their case, on the other side of town regulators
listened industry representatives report on progress in fashioning a
working definition of automated high-speed trading. It is that
definition that many high-speeders see eventually becoming the noose
around their collective necks, a key to regulation they could find
stifling.

Meanwhile, at the Labor Department, where a fever of speed-aversion
appears to have already taken hold, one familiar name — Nasdaq OMX —
has become the victim, cut off from breaking data.

“They haven’t told us this is going to be the forerunner of
regulation,” Larry Tabb, CEO of the Tabb Group capital markets
consultancy, told MNI of the discussions of definition. But, he added,
“It’s a CFTC subcommittee and the CFTC is a regulatory body.”

He is one of those participating in the CFTC’s advisory committees
on high-frequency trading and spoke from the Federation of European
Securities Exchanges convention under way in Istanbul. His firm is a
capital markets research and advisory consultancy with a special
expertise in the area of automated trading but which does no trading.

Amid the charges and countercharges about automated high-speed
trading, Tabb said there is increasingly a need to make an crucially
important distinction, one that makes clear the difference between speed
and manipulation.

“What I hope comes out of it, is that the focus becomes less about
‘fast’ and more about market abuse,” he said. “Because there are very
legitimate, proper trading strategies that employ speed, including
market making and index arbitrage, as well as other kinds of arbitrage.

“When machines do the trading, by definition everything is fast,”
he said, and yet, “We have to figure out what’s manipulated or not
manipulated, not whether we’re doing it fast or not.”

Some have complained that the working definition of high-speed
trading being developed at the CFTC is being written too broadly and
captures too much.

“Some folks have seen some of our documents and said they were
exceptionally broad,” Tabb said. “But if the definition’s too narrow, it
will be gamed. It is intentionally broad with the anticipation that we
and the other groups will define it further as we move forward.”

“Our goal, our express desire,” he said, “is to try to create
something that doesn’t taint all strategies that employ speed as bad,
that tries to get the world to understand high frequency trading is just
a fact of life, that we have to better understand the underlying
strategies, determine whether the underlying strategies are good or
bad.”

As reported by MNI Wednesday, the House Financial Services Capital
Markets subcommittee placed high-frequency trading under a spotlight.
Summoned to testify on the subject of “Market Structure: Ensuring
Orderly, Efficient, Innovative and Competitive Markets for Issuers and
Investors,” were executives from GETCO, Invesco, Rosenblatt Securities,
Knight Capital, Quantlab Financial and others.

Several put on the record their defense of high-frequency trading,
saying it is a valued way to improve market functioning for everyone.
Their testimonies are all available on the subcommittee’s Web site.

As Knight Chair Thomas Joyce said, “virtually every dimension of
U.S. equity market quality is now better than ever.”

Judging from their published comments afterward, as civil and
courteous was the questioning of the committee, the day was still a
scary one for many of those in the high-frequency and algorithmic space,
unaccustomed to the glare of close attention from Capitol Hill.

CFTC Chair Gary Gensler spelled it out Wednesday: “Regulators
cannot assume that the algorithms in the markets are well designed,
tested or supervised.”

Perhaps his most chilling words, for those with a stake in the
expensive pursuit of high-frequency execution of trades, were when he
said the CFTC “is reviewing a rule on the reporting of ownership and
control information for trading accounts. These rules would enhance the
Commission’s surveillance capabilities and increase the transparency of
trading to the Commission.”

A Labor Department official made explicit in testimony to the House
Government Oversight Committee June 6 that its data, like the monthly
jobs reports, are being traded on “through algorithms, which is not the
purpose of the (data) lockups.”

He was referring to “lockups” that are usually half-hour sessions
in which reporters view the data in advance and then simultaneously
release it to the public under close supervision at a set time.

Fearful that somehow automated trading operations could benefit
unfairly from data releases, the Department has been in the process of
imposing much higher security procedures on news firms that report the
data like MNI, the Associated Press, Reuters, Bloomberg and Dow Jones.

In that process, the Department has denied access to four other
firms to its data lockups, including jobs and inflation numbers. One of
those cut out is the 117-year old Bond Buyer newspaper and wire service
that serves the municipal securities industry, including the state,
county and local community treasurers who issue securities to finance
public infrastructure.

The Bond Buyer’s business partner, Nasdaq OMX, has been including
Labor’s numbers in its package of data feeds since late last year.

The Department has given no reason for the exclusions and a
spokesman did not comment when asked, nor have any of the explanations
for the changes to the lockups spelled out that algo providers were the
subject of the tightened security.

Others excluded were Need to Know News — a firm owned by MNI —
RTT and Thomson-IFR. Most are attempting to appeal the cutoffs,
effective July 5.

As the CFTC and the SEC only slowly erect their regulatory guard
rails around high-frequency trading, the exclusions of some news firms
from data lockups have focused new attention on the extent — if any —
to which government agencies should accommodate the information firms
that have such traders as customers.

As MNI reported last month, some high-frequency trading operations
unleash intense trading activity moments before major data are scheduled
to be made public, hoping to stir up premature volatility and trading
opportunities, but at the same time giving regulators the false
impression they have learned the key numbers ahead of time.

As MNI has also reported, some analysts have suggested that key
government data release times be made random within certain limits, to
make such pre-release trading more difficult.

** MNI Washington Bureau: 202-371-2121 **

[TOPICS: M$U$$$,MAUDS$]

• Greek PM Samaras to have eye surgery Saturday; Fin Min Rapanos admitted to hospital after fainting
• Canada CPI falls 0.1% in May, core rises 0.2%; lower than expected
• Russian central bank says has begun to buy AUD/USD for reserve account
• ECB announces expanded collateral rules; will now accept car loans as collateral
• Bundesbank critical of new collateral rules 
• Spain to apply for bank bailout Monday, amount will not yet be specifid
• Monti, Merkel, Hollande and Rajoy meet in Rome, announce agreement to seek stimulus package worth 1% of euro zone GDP (EUR 130 bln)
• Germany to balance budget by 2016
• Schaeuble: Greece has to meet conditions for second bailout cash
• Reuters: Companies cutting power exports to Greece for non-payment
• Portugal’s deficit widens on higher spending, lower receipts 
• France’s Hollande to meet Draghi on Monday
• Futures traders cut USD longs by 43%; EUR short cut by 27%

Erratic price action all day on Friday with the market gapping 40-50 pips at a time. Several attempts to overcome support at 1.2520 (50% of the 1.2288/1.2748 rally) were rebuffed and EUR/USD bounced to the mid-1.2580s before faltering ahead of 1.2590.

USD/JPY consolidated recent gains as the technical picture improved with a break and potential close above the 100 day moving average at 81.43 We trade at that level late in the day.

Equities and commodities recovered a fair bit of Thursday’s losses. The S&P ends up 0.75% on the day while oil recovered the $80.00 level.

Spanish yield plunged, closing at 6.35%, down 28 bp, but the euro was unable to take advantage, a worrisome sign for longs…US yields rose 5 bp as risk aversion eased.

Stunner! Samaras with a beautiful goal. Maybe he should be PM…

Net long dollar position  on the IMM  were trimmed by 43%, DJ reports, using the commitments of traders data.

EUR shorts cut by 27%.

Market a bit more back in balance.

Stocks continue to recover from yesterday’s rout (up 0.75%)  while US bonds give back all their gains, and then some, up 5 bp in yield to 1.67%. EUR/USD is at 1.2568. AUD at 1.0071 and USD/CAD at 1.0246.

AUD/USD and CAD are outperforming at the moment while EUR/USD takes a breather.

All things considered, not a very impressive week for EUR/USD. The Greek election played out as the market would have preferred, Spanish debt has rallied strongly and the US economy looked to have joined the global slowdown in earnest.

Look to the familiar 1.2520 and 1.290 parameters early in the new week to set the tone. Above 1.2590, we could have some short-covering ahead of the EU summit. Below 1.250, we may test the downside ahead of the summit in order pressure the EU into taking dramatic action toward fiscal union rather than the piecemeal approach it has taken until now.

 

If you believe this headline from Reuters….

FRANCE WANTS TO SEE EU SUMMIT AGREE ON MORE THAN JUST GROWTH PACKAGE TO RATIFY EU FISCAL PACT- FRENCH SOURCE

Stocks firm, yields firm, oil firm EUR, AUD, CAD firm.

So easy, even a caveman can do it.

EUR/USD edging up to 1.2570.

DJ reports that Greece will ask for two extra years, until 2016, to get its economic house in order.

Haven’t we been talking about this all week?

 

Wouldn’t expect any major breakthroughs.

Hollande will ask Draghi to ease and buy bonds.

Draghi will ask Hollande to work out fiscal and banking union…

 

–House, Senate Narrow Differences On Student Loan, Highway Bills
–But House, Senate Leaders Still Talk Past Each Other On Fiscal Cliff
–Congress Awaits Supreme Court Ruling on Health Care Law

By John Shaw

WASHINGTON (MNI) – This was a week of modest progress on Capitol
Hill, with signs of progress on long-stalled surface transportation and
student loan interest rate bills.

But Democratic and Republican leaders continued to talk past each
other regarding the best way to avert the coming fiscal cliff.

Sen. Chuck Schumer, the third ranking Senate Democrat, predicted
Thursday that “big picture negotiations (are) coming at the end of the
year.”

House Speaker John Boehner, House Majority Leader Eric Cantor, and
Senate Majority Leader Harry Reid offered positive assessments of
efforts to craft a surface transportation bill.

“Hopefully, we will have a bill to vote on next week,” Cantor said
Thursday.

A House-Senate conference committee has been working for weeks on
drafting a compromise highway bill.

The Senate passed a two-year $109 billion surface transportation
bill. House Republicans unveiled a five-year $260 billion plan, but
never presented it to the full House.

Boehner has said that if an agreement can’t be reached by the end
of this month on a surface transportation bill, he will push a stop-gap
bill to fund current transportation programs until after the November
elections.

The current authorization of surface transportation programs ends
next week. Reid has said that a good highway bill would save or create
2.8 million jobs.

Reid offered an upbeat assessment Thursday regarding the talks
on a compromise student loan interest rate bill.

“We have great hope we can get that done,” Reid said at a briefing
with the Senate Democratic leadership.

Reid said he is especially hopeful because both Boehner and Senate
Minority Leader Mitch McConnell seem interested in an agreement on the
matter.

“They are compromising as are we,” Reid said.

But GOP leaders have been more guarded about their assessment of
the student loan interest rate issue, declaring that an agreement could
have been reached weeks ago if President Obama and congressional
Democrats had wanted one.

McConnell said Thursday the GOP has offered “multiple” options to
resolve the funding issue for the package, but charged that Obama “has
yet to offer a concrete solution.”

Congress passed a bill in 2007 that was signed by President Bush to
temporarily reduce the interest rate on subsidized Stafford loans to
college undergraduates from 6.8% to 3.4%. That interest rate decrease is
set to expire July 1. Extending the interest rate reduction would cost
$6 billion for one year.

Obama supports legislation extending the interest rate reduction to
3.4 percent.

House Republicans passed legislation that extends the student loan
interest rate reduction for another year and pays for the $6 billion
cost by tapping funds from prevention and public health services that
were established by the 2010 health care law.

Reid has said that extending the student loan interest rate
reduction is critical to seven million students and should be paid for
by ending a tax break for S corporations.

As the scheduled interest rate increase on July 1 nears, lawmakers
from both parties are actively exploring compromise proposals to fund
the package.

If there were signs of progress on Capitol Hill on several issues,
Democratic and Republican leaders continue to show little interest in
resolving the fiscal cliff challenge before the November elections.

The fiscal cliff refers to the convergence of three coming fiscal
events: across-the-board spending cuts that are scheduled to begin in
January, the expiration’s of Bush era tax cuts at the end of the year,
and the need to increase the statutory debt ceiling at the end of this
year or early next year.

Reid and other Democratic leaders held a press conference Thursday
to hammer congressional Republican leaders for signing an anti-tax
pledge which they say impede wide-ranging fiscal negotiations.

Senate Majority Whip Richard Durbin said “both sides have to be
willing to give” in the coming budget talks, adding the GOP has to be
flexible in securing additional revenues.

But Boehner at a Thursday briefing showed no signs of compromise.
He repeated his pledge that the House will vote in July to renew Bush
era tax cuts.

“Raising taxes in this economy is the wrong thing to do,” Boehner
said at a briefing.

“I’m not interested in raising taxes,” he added.

Boehner said the U.S. should begin to confront budget deficits
immediately through reforms on the spending side of the ledger. “We have
to have controls on spending. We have an entitlement crisis,” Boehner
said.

Boehner also said the Senate should follow the lead of the House
and pass legislation to replace the scheduled across-the-board spending
cuts next year with a different package of spending savings.

Republicans have passed in the House a plan to replace the $110
billion in across-the-board spending cuts in FY’13 with a package of
more than $300 billion in ten year spending savings.

Congressional Democrats have said the across-the-board spending
cuts should be replaced by a “balanced approach” to deficit reduction
that includes spending savings and additional revenues.

About $1.2 trillion in across-the-board spending cuts over nine
years are mandated by the sequestration process which was triggered by
the failure of Congress’s Super Committee last fall.

For the 2013 fiscal year, $110 billion in spending cuts are
required by the sequestration process. Of this sum, $55 billion would
come from defense programs and the rest from domestic programs,
primarily from the discretionary portion of the federal budget.

Several Senate Republicans introduced an amendment to the farm bill
that would require the Department of Defense to report to Congress by
August on how these looming defense spending cuts would affect national
security.

Democratic senators offered a different amendment that would
require the White House budget office to describe in detail how the
sequestration process would impact all government agencies and programs.

The Senate ultimately approved an amendment that requires the White
House budget office to spell out how across-the-board spending cuts in
FY’13 would affect both domestic and defense programs.

Finally, lawmakers from both parties are waiting for the expected
Supreme Court decision on the constitutionality of the 2010 health care
law. That ruling is expected next week.

** MNI Washington Bureau: 202-371-2121 **

[TOPICS: M$U$$$,MFU$$$,MCU$$$]

FXDD is holding a webinar to introduce its Swordfish platform, which has ForexLive built right in.

Register here.

• Deficit widens to EUR 1.25 bln in first 5 months of 2012
• Spending up 3.4%, revenues fall 0.8%

 

Looks like we’ll whip between 1.2520 and 1.2590 the balance of the session…

By Yali N’Diaye

WASHINGTON (MNI) – Moody’s concluded its review of global financial
firms by downgrading major names, but its lead analyst for the United
States said Friday that the firm’s action does not directly impact the
U.S. sovereign rating.

“The downgrade of the banks does not directly affect our rating of
the U.S. government,” Steven Hess told MNI.

That being said, “for all our sovereign ratings, the contingent
liability from the banking system is something we assess,” he continued.

And on that front, “Actions taken by many governments during the
last global financial crisis to support their banking systems
demonstrated that this contingent liability can end up affecting
government finance,” he said.

Thursday, Moody’s cut the ratings of banking heavyweights such as
Bank of America, Citigroup, Goldman Sachs, Morgan Stanley, and JPMorgan
Chase.

Thursday’s downgrades reflect the credit implications of capital
markets operations, Moody’s said Thursday. But not only.

“They also reflect (i) the size and stability of earnings from
non-capital markets activities of each firm, (ii) capitalization, (iii)
liquidity buffers, and (iv) other considerations, including, as
applicable, exposure to the operating environment in Europe, any record
of risk management problems, and risks from exposure to U.S. residential
mortgages, commercial real estate or legacy portfolios,” the report
added.

Given the negative outlooks, Moody’s signaled the bottom might
still be ahead.

** MNI Washington Bureau: 202-371-2121 **

[TOPICS: M$U$$$,MFU$$$,MR$$$$,MK$$$$,MT$$$$]

LUXEMBOURG (MNI) – Spain should submit a formal bid for aid soon
and will probably do so, German Finance Minister Wolfgang Schaeuble said
Friday.

Briefing the press following a meeting of European finance
ministers, Schaeuble stressed that he and his colleagues had advised
Spain “to make the request quickly.”

“We expect a request from Spain in the next days,” he said.

If the permanent European Stability Mechanism is not yet in force
when Spain does so, then its temporary precursor, the European Financial
Stability Facility, will be responsible for providing the assistance, he
said.

“It’s not a matter of a preference” for the ESM or the EFSF versus
the other, he said.

Investors are worried that if Spain submits its request to the ESM,
which in contrast to the EFSF has preferred creditor status, then loans
made by the Eurozone to Madrid would have priority over private
creditors in the event of a default.

Schaeuble reaffirmed that Ireland and Portugal are on the right
track. Cyprus, hit hard in the wake of Greek turmoil, will soon make a
decision as to possible financial help, Schaeuble reported having been
told by his Cypriot counterpart.

He refused to address the issues being raised simultaneously in
Rome, where the leaders of the four largest Eurozone economies met
today, saying there was “no sense … in interpreting in any way or
commenting” on possible differences of opinion there.

He called again for “more Europe as a reaction to the crisis of
confidence,” cautioning that this “can’t be done in the short term.”

“If we initiate credible measures for the medium term and in the
short term exhaust the room to maneuver that we have according to the
existing treaties,” then we are on the right path, he said.

As the brand new Greek government was not fully represented here,
Schaeuble had little to say about that country other than to remind
again that “Greece has to fulfill its obligations” while conceding that
Athens has “a difficult task, no question about it.”

The top financial sector jobs still to be filled in Europe were not
on the agenda here, he said.

– MNI Frankfurt bureau: +49 69 720 142. Email: frankfurt@marketnews.com

[TOPICS: M$X$$$,MT$$$$,M$$CR$,M$S$$$,M$I$$$,M$G$$$,MGX$$$]

–Corrects Figure of Growth Plan in story title to E130 billion

By Alina Trabattoni

ROME (MNI) – Leaders of the four largest Eurozone economies agreed
on the need to push through a growth package for the 17-nation bloc
worth 130 billion euros, or 1% of euro area gross domestic product, at
their upcoming summit meeting June 28-29, they said at a joint press
conference here.

Italian Prime Minister Mario Monti, who spoke first, said the four
leaders also agreed that the single currency project was “irreversible.”

Even so, a well-known divergence of views was in evidence as German
Chancellor Angela Merkel publicly turned down a plan championed by the
French, Spanish and Italian leaders to use European bailout funds to
purchase sovereign debt and curb soaring bond yields in Spain and Italy.

Their proposal, not a new one, was floated again last week as
uncertainty and high tension continued to grip financial markets,
torturing Madrid and Rome with sharply rising sovereign borrowing costs.
But Germany has insisted that if the bailout fund is to buy sovereign
debt, it can only be within the context of a formal country program with
policy conditions attached.

“Each country wants to help another country that is in trouble, but
for the taxpayers, I must have the guarantee that there is control,”
Merkel said here. “Responsibility and control go hand in hand.”

Today’s four-way summit, hosted by Monti, follows closely on the
heels of the Eurozone finance ministers’ meeting on Thursday night in
Luxembourg, at which they discussed a plan to provide up to E100 billion
worth of recapitalization aid to Spanish banks.

At next week’s summit, EU leaders are expected to discuss long-term
plans for a fiscal and banking union.

“What has been done to date is not enough,” Monti said. “On June
28, we will introduce growth, employment and single market initiatives.”

In a report issued on Thursday, the International Monetary Fund
said the euro crisis had reached a “critical stage,” and it urged
leaders to make a “strong commitment” to solve the underlying issues
that are eroding confidence in the region.

One of the solutions could be the issuance of common debt, the
report said. The IMF also called for a banking union and increased
fiscal integration.

So far, European leaders have failed to produce durable solutions
to the sovereign debt and banking crisis that is enveloping the region
and undermining its economic growth.

Germany’s IFO business sentiment declined in June for the second
month in a row to the lowest level in more than two years, according to
data released today. Italian consumer confidence also dropped to a
record low this month. Earlier this week, preliminary purchasing manager
(PMI) reports for June showed the Eurozone economy is still in retreat,
with worrying weakness in Germany’s manufacturing sector.

“After we have intensively dealt with budget consolidation in the
form of the fiscal pact we have to deal with growth and employment,”
Merkel said. “It is now necessary for the next summit to set a clear
mark and I absolutely agree on the use of 1% of the GDP of the [euro]
area for additional growth. That is the right signal that we need.”

Monti is battling to keep Italy from becoming the next victim of
the euro crisis, with the nation thrust back into the debt crisis
debacle despite a E35 billion austerity package introduced earlier this
year.

The prime minister, appointed together with a technocrat government
last November to replace the outgoing Silvio Berlusconi and his cabinet,
has so far failed to muster market confidence in his ability to slash
Italy’s massive public debt — at 120% of GDP, the second largest in the
Eurozone — or to limit the contagion effects of the Spanish banking
crisis and the chaos in Greece, which are feeding through into Italian
borrowing costs.

Spanish yields, which flirted with dangerously high levels above 7%
earlier this week, have eased considerably to around 6.5% today. The
lower yield is largely a result of market reassurance after two Spanish
auctions garnered healthy demand this week, and a response to news that
the European Central Bank was planning to ease collateral rules on
mortgage-backed assets, which will be of particular benefit to Spanish
banks. The ECB officially announced the collateral changes Friday
afternoon.

Italy’s 10-year yield, largely coupled with Spain’s of late, has
also eased from a high of 6.2% on June 14 to around 5.65% today.

Markets have been increasingly nervous about waning public
confidence in Italy’s Prime Minister Mario Monti, his seeming inability
to implement some of the larger structural reforms, and the potential
for early elections, hinted at by political leaders in the coalition
that supports his government – most recently by Silvio Berlusconi, who
strongly suggested in a recent interview that he was displeased with
some of Monti’s policies.

In fact, today’s meeting comes in the wake of mounting concern on
international markets that Italy, the Eurozone’s third largest economy,
may suffer a fate similar to Spain’s, Greece’s, Portugal’s and
Ireland’s. Italy is the Eurozone’s third-largest economy and the second
biggest manufacturer, after Germany, and the recent spike in its
borrowing costs has heightened pressure on European leaders to introduce
concrete measures to combat the crisis.

Spanish Prime Minister Mariano Rajoy, who also attended the press
conference, said the four leaders had agreed on the need for measures to
reduce deficits and debt, as well as for plans to boost growth and
competitiveness. He called for structural reforms, as well as for a
banking, fiscal and cultural union.

“Today we have all agreed to use mechanisms that can be conducive
to greater integration,” Rajoy said. “The rest of the world understands
where we are heading.”

Meanwhile, Greece’s new government said this week it would seek a
softening of the EU bailout terms the country has accepted. Prime
Minister Antonis Samaras declared his intention to do everything
possible to keep Greece in the Eurozone.

Samaras was appointed earlier this week following the
closely-watched June 17 elections, which in effect were seen as a
referendum on Greece’s euro membership. While Samaras’ conservative New
Democracy party received the most support of all the parties vying in
the elections, it didn’t secure a majority of the seats in parliament
and was forced to form a coalition with the Socialist (Pasok) Party, its
old nemesis, and with the smaller Democratic Left party.

The support that Monti’s proposal has received from Spain and
France reflects shifting alliances within Europe. Prior to Hollande’s
recent election, Merkel usually could count on the support – at least in
public – of now-former President Nicolas Sarkozy.

“We need to move closer together politically, especially in the
euro area,” Merkel said. “If you have a joint currency you also need to
make coherent policies, and we will work jointly…towards a stronger
political union.”

The German Chancellor added: “I’m happy that all four of us could
say today that they support the introduction of a financial transaction
tax.”

[TOPICS: M$S$$$,M$G$$$,M$F$$$,M$X$$$,M$I$$$,MGX$$$,M$$CR$]

• Took substantive step with extension of Twist
• Needs to push forward guidance for first rate hike into future
• Needs additional asset purchases
• Lower employment and inflation will be the catalyst
• Big drop in stocks could be a catalyst as it would signify tighter financial conditions
• Monetary policy paying diminishing returns, fiscal side must be dealt with. May be more important than monetary policy

US DATA: OCC report says top 4 banks had concentration of about 93.2% of
all derivatives. See http://www.occ.gov/topics/capital-markets/financial
-markets/trading/derivatives/dq112.pdf

By Alina Trabattoni

ROME (MNI) – Leaders of the four largest Eurozone economies agreed
on the need to push through a growth package for the 17-nation bloc
worth 130 billion euros, or 1% of euro area gross domestic product, at
their upcoming summit meeting June 28-29, they said at a joint press
conference here.

Italian Prime Minister Mario Monti, who spoke first, said the four
leaders also agreed that the single currency project was “irreversible.”

Even so, a well-known divergence of views was in evidence as German
Chancellor Angela Merkel publicly turned down a plan championed by the
French, Spanish and Italian leaders to use European bailout funds to
purchase sovereign debt and curb soaring bond yields in Spain and Italy.

Their proposal, not a new one, was floated again last week as
uncertainty and high tension continued to grip financial markets,
torturing Madrid and Rome with sharply rising sovereign borrowing costs.
But Germany has insisted that if the bailout fund is to buy sovereign
debt, it can only be within the context of a formal country program with
policy conditions attached.

“Each country wants to help another country that is in trouble, but
for the taxpayers, I must have the guarantee that there is control,”
Merkel said here. “Responsibility and control go hand in hand.”

Today’s four-way summit, hosted by Monti, follows closely on the
heels of the Eurozone finance ministers’ meeting on Thursday night in
Luxembourg, at which they discussed a plan to provide up to E100 billion
worth of recapitalization aid to Spanish banks.

At next week’s summit, EU leaders are expected to discuss long-term
plans for a fiscal and banking union.

“What has been done to date is not enough,” Monti said. “On June
28, we will introduce growth, employment and single market initiatives.”

In a report issued on Thursday, the International Monetary Fund
said the euro crisis had reached a “critical stage,” and it urged
leaders to make a “strong commitment” to solve the underlying issues
that are eroding confidence in the region.

One of the solutions could be the issuance of common debt, the
report said. The IMF also called for a banking union and increased
fiscal integration.

So far, European leaders have failed to produce durable solutions
to the sovereign debt and banking crisis that is enveloping the region
and undermining its economic growth.

Germany’s IFO business sentiment declined in June for the second
month in a row to the lowest level in more than two years, according to
data released today. Italian consumer confidence also dropped to a
record low this month. Earlier this week, preliminary purchasing manager
(PMI) reports for June showed the Eurozone economy is still in retreat,
with worrying weakness in Germany’s manufacturing sector.

“After we have intensively dealt with budget consolidation in the
form of the fiscal pact we have to deal with growth and employment,”
Merkel said. “It is now necessary for the next summit to set a clear
mark and I absolutely agree on the use of 1% of the GDP of the [euro]
area for additional growth. That is the right signal that we need.”

Monti is battling to keep Italy from becoming the next victim of
the euro crisis, with the nation thrust back into the debt crisis
debacle despite a E35 billion austerity package introduced earlier this
year.

The prime minister, appointed together with a technocrat government
last November to replace the outgoing Silvio Berlusconi and his cabinet,
has so far failed to muster market confidence in his ability to slash
Italy’s massive public debt — at 120% of GDP, the second largest in the
Eurozone — or to limit the contagion effects of the Spanish banking
crisis and the chaos in Greece, which are feeding through into Italian
borrowing costs.

Spanish yields, which flirted with dangerously high levels above 7%
earlier this week, have eased considerably to around 6.5% today. The
lower yield is largely a result of market reassurance after two Spanish
auctions garnered healthy demand this week, and a response to news that
the European Central Bank was planning to ease collateral rules on
mortgage-backed assets, which will be of particular benefit to Spanish
banks. The ECB officially announced the collateral changes Friday
afternoon.

Italy’s 10-year yield, largely coupled with Spain’s of late, has
also eased from a high of 6.2% on June 14 to around 5.65% today.

Markets have been increasingly nervous about waning public
confidence in Italy’s Prime Minister Mario Monti, his seeming inability
to implement some of the larger structural reforms, and the potential
for early elections, hinted at by political leaders in the coalition
that supports his government – most recently by Silvio Berlusconi, who
strongly suggested in a recent interview that he was displeased with
some of Monti’s policies.

In fact, today’s meeting comes in the wake of mounting concern on
international markets that Italy, the Eurozone’s third largest economy,
may suffer a fate similar to Spain’s, Greece’s, Portugal’s and
Ireland’s. Italy is the Eurozone’s third-largest economy and the second
biggest manufacturer, after Germany, and the recent spike in its
borrowing costs has heightened pressure on European leaders to introduce
concrete measures to combat the crisis.

Spanish Prime Minister Mariano Rajoy, who also attended the press
conference, said the four leaders had agreed on the need for measures to
reduce deficits and debt, as well as for plans to boost growth and
competitiveness. He called for structural reforms, as well as for a
banking, fiscal and cultural union.

“Today we have all agreed to use mechanisms that can be conducive
to greater integration,” Rajoy said. “The rest of the world understands
where we are heading.”

Meanwhile, Greece’s new government said this week it would seek a
softening of the EU bailout terms the country has accepted. Prime
Minister Antonis Samaras declared his intention to do everything
possible to keep Greece in the Eurozone.

Samaras was appointed earlier this week following the
closely-watched June 17 elections, which in effect were seen as a
referendum on Greece’s euro membership. While Samaras’ conservative New
Democracy party received the most support of all the parties vying in
the elections, it didn’t secure a majority of the seats in parliament
and was forced to form a coalition with the Socialist (Pasok) Party, its
old nemesis, and with the smaller Democratic Left party.

The support that Monti’s proposal has received from Spain and
France reflects shifting alliances within Europe. Prior to Hollande’s
recent election, Merkel usually could count on the support – at least in
public – of now-former President Nicolas Sarkozy.

“We need to move closer together politically, especially in the
euro area,” Merkel said. “If you have a joint currency you also need to
make coherent policies, and we will work jointly…towards a stronger
political union.”

The German Chancellor added: “I’m happy that all four of us could
say today that they support the introduction of a financial transaction
tax.”

[TOPICS: M$S$$$,M$G$$$,M$F$$$,M$X$$$,M$I$$$,MGX$$$,M$$CR$]

US DATA: OCC says the notional amount of derivatives held by
insured U.S. commercial banks and savings associations fell by $3.0
trillion (or 1.2 percent) from the fourth quarter to $228 trillion. The
notional amount of derivatives contracts has fallen for three
consecutive quarters, due to ongoing trade compression activities.
Interest rate contracts fell $3.8 trillion (two percent) to $184
trillion, while FX contracts rose five percent to $26.8 trillion.