Posted by Graeme Wearden Tuesday 20 September 2011 17.30 BST
• International Monetary Fund warns that the world economy is in a "dangerous place"
• IMF cuts UK growth forecast to 1.1% this year
• Standard and Poor's questions Italy's ability to cut state spending and strengthen its finances
• Silvio Berlusconi accuses S&P of being misled by political opponents and the media
• Greece to hold further talks with the IMF today
Standard & Poor's believes Silvio Berlusconi's government will struggle to achieve its fiscal targets. Photograph: Reuters
With the European markets closed, and the IMF's Washington briefing concluded (for now), we're going to bang the lid on this blog.
Here's the key points:
• Europe's debt crisis worsened today as Standard& Poor's cut Italy's credit rating by one notch to A, with a negative outlook.
• Silvio Berlusconi claimed the move was politically motivated, but Italy's business leaders demanded widespread changes
• Greece is expected to rush forward austerity measures, and lay off thousands more public sector workers, in return for the €8bn loan needed to keep the country running
• The IMF has cut its forecasts for the world economy, and warned that Britain may need to change course if growth is even slower than expected
• European stock markets closer higher, on hopes of new stimulus measures from the Federal Reserve on Wednesday.
The early predictions that the financial markets would be spooked by the Italian downgrade proved wide of the mark. The FTSE 100 index closed 104 points higher at 5363.71, a rise of nearly 2%.
Strong gains in Europe too, where Germany's DAX closed 2.8% higher, the French CAC gained 1.5%, and the FTSE MIB jumped 1.9%.
However, the gains probably won't last, according to Giles Watts, head of equities at City Index. As Watts explains, there was little in today's news to justify a solid rally.
Today we have the FTSE 100 rallying more than 2%, on a day when Italy's credit rating was downgraded, the Troika remains in talks with Greece over the next tranche of loans and we have an FOMC decision to come tomorrow. There are not immediately visible bullish factors in the market therefore to warrant a 2% increase in Indices as so as such, we can relate today's rally to low volumes and short covering.
Watts adds that traders could be disappointed if Ben Bernanke does not announce Operation Twist tomorrow night.
Shadow chancellor Ed Balls has warned that the IMF's World Economic Outlook contains "deeply concerning" forecasts, both for the UK and the global economy:
Our Chancellor and political leaders in Europe need to wake up to the scale of the problem and finally realise that we need economic growth and more people in work to really get deficits down.
As the Standard and Poor's statement makes clear, Italy's credit rating has been downgraded because of weakening growth, with austerity measures being one of the reasons they say is behind this, and a lack of political agreement in parliament.
As Balls admits, the IMF did not say that Osborne should alter his plans right now - but that prolonged weak growth would require a change of direction.
The IMF is saying very clearly that if slow growth continues in the UK the Government should change course and adopt steadier deficit plans. But since this is now the third time this year the IMF has downgraded its forecasts we can't afford to just sit back and wait for things to get worse.
Greek officials have been working around-the-clock on a new round of austerity measures including more job losses in Greece's private sector, our correspondent in Athens, Helena Smith tells me.
The Greek government is racing to get its numbers right, by the time finance minister Evangelos Venizelos holds a second round of emergency talks with representatives of the EU, IMF and ECB this evening (at 6pm BST).
More from Helena:
Next year's budget, which the government has brought forward to early October, has been concentrating minds as officials flesh out details of how they will hit a budget deficit target of 6.5 percent of GDP.
Sources close to the "troika" of creditors say the lenders want cast-iron guarantees that Greece won't miss any budget targets this time round – after a €2bn budget shortfall was presented earlier this month.
The horse-trading is expected to be fierce when Venizelos, one of Greece's finest orators, takes the teleconference call at 8pm Greek time. Mass redundancies in the public sector, along with other measures to shrink the bloated state, will likely be the focus of talks.
But Athens also knows there is little move for manoeuvre and that, as things stand, beggars can't be choosers. "It's a tele-massacre" screamed the leftist daily Eleftherotypia summing up the mood.
The IMF has been asked whether George Osborne should relax his deficit reduction plan. Fund economist Jorg Decressin said there were 'pros and cons' in such a move, but on balance Osborne should not change course.
Decressin said the advantage of a softer approach would be that the Government would support activity in the UK, while the disadvantage would be the loss of credibility from a U-turn.
He said policy in the UK should only be loosened if "growth threatens to slowdown substantially relative to what we are forecasting".
So growth of 1.1% this year, and 1.6% in 2012, would not sink Plan A - but any lower, and the Treasury might have to swallow hard and do the politically unpalatable.
The IMF isn't pulling its punches out in Washington, where economic counsellor Olivier Blanchard has warned that Europe "needs to get its act together". For a start, it should get the new European Financial Stability Fund up and running as a matter of urgency. "The Euro zone is a major source of worry. This is a call to arms." Blanchard said.
More from Larry Elliott at the Washington DC press conference:
Blanchard said the Fund was cutting its growth forecasts because the two balancing acts needed to ensure recovery from the recession of 2008-09 have stalled. Governments were cutting budget deficits but the private sector was failing to make up for the lost demand.
Meanwhile, the global imbalances between deficit countries such as the US and surplus countries such as China looked like getting worse rather than better.
"Markets have become more sceptical about the ability of governments to stabilise their public debt. Worries have spread from countries on the periphery of Europe to countries in the core, and to others, including Japan and the US, Blanchard said.
He added that there was a risk of low growth, fiscal, and financial weaknesses could easily feed on each other.
"Lower growth makes fiscal consolidation harder. And fiscal consolidation may lead to even lower growth. Lower growth weakens banks. And weaker banks lead to tighter bank lending and lower growth". As a result, there were "clear downside risks" to the Fund's new forecasts.
Standard & Poor's is discussing its decision to downgrade Italy's credit rating on a media conference call.Among the highlights, the agency acknowledged that Italy's borrowing costs are likely to remain higher than it would like (partly because certain people keep cutting its credit rating?), and also warns that it can't exclude the possibility of some Italian debt auctions failing. However, S&P also said that an Italian default remains an "extremely remote possibility".
More bad news for Italy - the IMF has slashed its Italian growth forecasts to 0.6% in 2011 (down from 1%). The picture is even worse for next year, when the IMF expects growth of only 0.3 percent (down from 1.3%).
This reinforces S&P's argument when it cut the Italian credit rating, that the country is unlikely to achieve Berlusconi's growth targets.
The IMF has also cut its growth forecast for the UK this year, to 1.1%. That's down from a previous prediction of 1.5%, and well below the government's current forecast of 1.7% (this was already expected to be cut in this autumn).
Worryingly for chancellor George Osborne, the IMF said the UK is one of three big developed economies at risk of a double-dip recession.
Larry Elliott explains:
George Osborne received a fresh blow on Tuesday when the International Monetary Fund cut its growth forecasts for the UK economy and advised the chancellor to ease the pace of deficit reduction in the event of any further downturn in activity.
If the IMF's forecasts prove accurate, the UK is on course for a weaker performance than in 2010 and less rapid growth than the 1.7% forecast by Osborne in his March budget.
Again, there's more from Larry here.
The IMF is holding a press conference to discuss its latest World Economic Outlook report now.....
Breaking news from the International Monetary Fund. It has cut its forecasts for world economic growth and warned that the global economy has entered "a dangerous place".
My colleague Larry Elliott, in Washington DC for the IMF's annual meeting, has more details:
The IMF forecast of a slow, bumpy recovery would be jeopardised by a deepening of Europe's sovereign debt crisis or over-hasty attempts to rein in America's budget deficit.
"Global activity has weakened and become more uneven, confidence has fallen sharply recently, and downside risks are growing," the IMF said as it cut its global growth forecast for both 2011 and 2012.
The IMF also cut its growth forecasts for the UK economy and advised George Osborne to ease the pace of deficit reduction in the event of any further downturn in activity.
The IMF's World Economic Outlook cited the Japanese tsunami and the rise in oil prices prompted by the unrest in north Africa and the Middle East as two of a "barrage" of shocks to hit the international economy in 2011. It said it now expected the global economy to expand by 4% in both 2011 and 2012, cuts of 0.3 points and 0.5 points since it last published forecasts three months ago.
Larry's full story is here.
Stock markets remain higher today, despite the Italian downgrade, with the FTSE 100 now up 70 points at 5392.
The reason, City traders say, is speculation that the US Federal Reserve will announce new measures to stimulate the flagging American economy on Wednesday night.