Time to wrap things up. Here's an evening summary.

• Christine Lagarde has warned that the world could slip into a repeat of the Great Depression. The IMF urged global leaders to work together to address the crisis, or face protectionism and isolation

• France's top central banker claimed that Britain should lose its AAA rating first. In a remarkable statement, Christian Noyer claimed that the UK economy was in worse shape than its Gallic rival. In response, Downing Street said it had a responsible plan to solve the crisis.

• The rescue plan agreed by EU leaders (excluding David Cameron) last week appeared to unravel. Hungary and the Czech Republic both voiced opposition to any attempts to harmonise tax regimes across the EU.

• Fitch downgraded eight of the world's biggest banks. It warned that Bank of America, Barclays, Goldman Sachs, Deutsche Bank, BNP Paribas, Credit Suisse, Morgan Stanley and Societe Generale all faced tough times as the financial crisis worsens.

• Spain held a successful bond auction. The yield at the sale of €6bn of Spanish debt dropped. The UK also sold some gilts today, but saw a fall in demand.

We'll be back tomorrow. Thanks, and good night!

Christine Lagarde's warning today dominates the front page of tomorrow's Guardian. Here's a flavour:

The world risks sliding into a 1930s-style slump unless countries settle their differences and work together to tackle Europe's deepening debt crisis, the head of the International Monetary Fund has warned. On a day that saw an escalation in the tit-for-tat trade battle between China and the United States and a deepening of the diplomatic rift between Britain and France, Christine Lagarde issued her strongest warning yet about the health of the global economy and said if the international community failed to co-operate the risk was of "retraction, rising protectionism, isolation". She added: "This is exactly the description of what happened in the '30s and what followed is not something we are looking forward to."

Eight of the world's biggest banks have just been downgraded by Fitch.

Bank of America, Barclays, Goldman Sachs, Deutsche Bank, BNP Paribas, Credit Suisse, Morgan Stanley and Societe Generale all saw their "Viability Ratings" (a measure of credit worthiness) cut.

The first six banks also saw their Issuer Default Ratings (another measure of default probability) cut.

All eight of the global trading and universal (GTUB) banks are seen as "systemically important". In other words - too big to fail. Out of the group, only UBS had its ratings affirmed.

Fitch said that the downgrades "reflected challenges faced by the sector as a whole, rather than negative developments in idiosyncratic fundamental creditworthiness."

It warned that the banks all face difficult economic conditions:

These challenges result from both economic developments as well as a myriad of regulatory changes. Fitch incorporated the significant progress it sees the banks have made in building up capital and liquidity buffers to resist market challenges, which has kept the VR downgrades to one or two notches. Nonetheless, Fitch continues to be of the opinion that, however well-managed, the structural aspects of their funding, earnings, and leverage, predispose GTUBs to vulnerability to market sentiment and confidence, particularly during periods of exogenous financial stress. Furthermore, the complexity of their business models and exposure to fat tail risk make it more difficult to assess the size of loss that could emerge rapidly from unexpected events.Over time market conditions are likely to ease, but Fitch expects market volatility to remain above historical averages and economic growth in developed markets to remain subdued for a prolonged period. This makes many business lines in securities operations more difficult, due to lower activity and higher funding costs.

We reported (very) late last night that the International Monetary Fund had decided to hand Ireland the next tranche of its rescue package, worth €3.9bn. Well, the IMF has just released the full details.

In a statement David Lipton, First Deputy Managing Director of the IMF, congratulated Ireland for keeping pace with the terms of its bailout:

The Irish authorities have maintained strong program implementation despite the strained external environment.

However...

Growth turned positive in the first half of the year and Irish bond spreads have declined significantly since the summer, but Ireland faces risks from the turmoil in the euro area and the weakened growth prospects of trading partners.

Our own Nils Pratley has joined in the criticism of France's Christian Noyer tonight:

Noyer is a central bank governor and a member of the governing council of the European Central Bank. What is he doing talking in public about another country's credit rating? It is a massive breach of central banking etiquette. Imagine if Sir Mervyn King offered the opinion that S&P shouldn't mess about and should whack the French with the threatened double downgrade. There would be uproar. We know, of course, that our own chancellor, George Osborne, put his foot in it when he said last month that "markets are even asking questions about France", a comment that caused a stink across the Channel. David Cameron's use of the veto at last week's EU summit has clearly inflamed tensions further. But central bank governors should not be lashing out. He makes the ECB, not just France, look seriously rattled.

In a similar vein, the Financial Times argues that Noyer should "behave like a central banker".

Todd Buchholz, the former White House advisor who now runs the Tiger hedge fund, was rather dismissive tonight of France's attack on Britain's AAA rating.

Buchholz told the Jeff Randall Live show on Sky News that:

It is incomprehensible and irrational that France ever had a AAA rating and the US was downgraded.

Clearly in impish mood, Buchholz offered some sympathy to Christian Noyer over his attack on the credit ratings industry (Noyer accused them of being distracted by political issues, not economic ones):

Who works for the ratings agency? The people who weren't bright enough to work for Goldman Sachs and JP Morgan

Sounds like the Irish people won't get a chance to vote on the new EU Treaty. Reuters is reporting that finance minister Michael Noonan has said his "hunch" is that the new fiscal pact will not require a referendum in the Republic.

Yesterday, Noonan indicated that any such referendum would effectively be a vote on Ireland's membership of the eurozone.

Legally, a referendum would be required if the Treaty involved changes to the Irish constitution. Given the austerity measures underway in Ireland, it is unclear whether the "yes" vote would win in a referendum -- so the Dublin government is thought to be keen to limit the scope of the new Treaty.

It is also unclear whether Ireland could support tax harmonisation, given its low corporation tax rate - something Noonan described as an "absolute commitment".

After a bright start, stock markets came off the boil today after Christine Lagarde's warning.

The FTSE 100 didn't claw back much of yesterdy's losses, finishing just 34 points higher at 5,400. Traders were also troubled by the news that Hungary and the Czech Republic wouldn't support a new EU treaty that contained tax harmonisation powers.

David Jones of IG Index said:

Once again it is news from Europe that has pulled the rug out from under today's recovery. It appears that Sweden, the Czech Republic and Hungary are still unhappy with the terms of last week's discussion and the risk is yet again that progress will be delayed at best.

In New York, the Dow Jones index is up by 81 points, or 0.6%. Investors on Wall Street hope that America's economy can resist the turmoil in Europe.

Paul Nolte, managing director at Dearborn Partners, argued that:

It looks as though there is a decoupling between the United States and Europe.

The European Union may be opening its arms to Britain again.... The Financial Times reports tonight that that the UK has been offered "observer status" at future negotiations over a new European treaty to resolve the Eurozone debt crisis.

From the piece, by Peter Spiegel and George Parker:

Although the invitation will probably allow Britain to sit in only as an observer in the formal negotiations, which are to begin next week, it will allow London to keep close tabs on one of the most sensitive issues involved in the talks: whether the European Union's institutions can be used to monitor and enforce the new pact even though it is being negotiated outside the normal EU treaties. A British official said, however, that the invitation would allow the UK to directly participate in the discussions.

Those discussions could be lively, given the refusal today by Hungary and the Czech Republic to support tax harmonisation plans.

Returning to France's claim today that Britain's AAA rating should be cut...Economist Andrew Lilico has written an interesting piece arguing that the French financial position is rather more precarious than Christian Noyer, its central bank governor, claimed.

Lilico argued that France's exposure to peripheral eurozone states, and the potential chaos that would be sparked ith the euro collapse, suggest it cannot justify a AAA rating. Here's a flavour:

What places the French sovereign in particular distress is its commitments to the banks. Whereas in the UK the Coalition government has taken significant steps to disentangling the government from the banking sector, such as the Vickers proposals and the treatment of the Southsea Mortgage and Investment Bank, the French government is more entangled with the banks than ever. Furthermore, there is a material risk of the euro collapsing entirely, with the consequence that the French repay their debts in New Francs or something – a currency that might well be devalued relative to the euro (because of the loss of Germany).

The punchline? France shouldn't ask whether its credit rating should be lower than Britain's. It should ask why it's higher than Italy's.

More here.

The most important part of Christine Lagarde's speech appears to be the part where she warns that the European debt crisis will only be fixed by "all countries, all regions, all categories of countries actually taking part".

Is that a call for major world economies to provide the funding for a "big bazooka" to tackle Europe's debt mountain? If so, Lagarde's call may fall on unfertile ground.

US politicans have been voicing opposition in recent days to the concept of bailing out Europe. The fear is that either Italy or Spain will turn to the IMF, in which case a large chunk of the bill would land on Washington.

Senator Jim DeMint outlined the Republican position late last week:

Members of the Obama administration must focus all of their efforts on strengthening the U.S. economy and balancing our budget, rather than on continuing to borrow from China to pay for Europe's out-of-control debts.

We've got more details of Christine Lagarde's speech in Washington (where she "dropped the D-Word" by warning of a return to the Great Depression).

During the speech, the head of the IMF flagged up that financial markets are demanding swift solutions, which democratic governments find hard to deliver. Lagarde argued that this tension between market expectations and political reality must be resolved.

It is really that Gordian Knot that needs to be cracked, that needs to be addressed as collectively as possible, starting with those at the center but with the support of the international community probably channeled through the IMF.

A cynic might suggest that Europe is already trying to resolve this issue, through unelected technocratic governments (see Greece, and Italy).

Is Christine Lagarde being too pessimistic by warning that the world risks a return to the 1930s? Not according to some financial experts.

Michael Platt, founder of hedge fund BlueCrest Capital, told Bloomberg TV today that 2012 will be a pretty dire year for Europe. Platt claimed that Germany's approach to the crisis is destroying growth:

We're not going to have any euro bonds, we're not going to have a full political and fiscal union where [wealth] transfers will take place. It seems what we're going to have is an attempt to control the European situation through continued austerity, which is pro-cyclical. As the economy slows down, we end up with more austerity which creates more slowdown....There's basically nowhere I can see where we can get any growth from.

Platt also argued that many European banks are effectively "insolvent", given the amount of sovereign debt from troubled countries on their books:

We're going into 2012, and in our opinion, it's only going to get worse.



If banks were hedge funds, and you mark them to market properly, I would say that probably most of them are insolvent.

Christine Lagarde, head of the International Monetary Fund, has urged countries across the globe to work together to fix the European debt crisis, and stimulate economic growth, urgently stimulate economic growth or risk a return to the Great Depression.

In a stark warning, Lagarde said the global economic climate was "quite gloomy", and that no country or region was immune to the dangers posed by the situation in Europe.

There is no economy in the world, whether low-income countries, emerging markets, middle-income countries or super-advanced economies that will be immune to the crisis that we see not only unfolding but escalating.

She said the Eurozone crisis was "not only unfolding, but escalating", adding that:

It is not a crisis that will be resolved by one group of countries taking action. It is going to be hopefully resolved by all countries, all regions, all categories of countries actually taking action.

The most alarming part of the speech -- made at the US State Department in Washington - are where Lagarde warns of the consequences of failure. They include:

Protectionism, isolation, and other elements reminiscent of the 1930s Depression.

The warning has hit the euro, knocking the single currency back below the $1.30 mark against the US dollar.

I wonder how Lagarde's comments would be viewed in Greece, where the tough austerity measures imposed as part of the IMF-EU bailout have helped to cause a recession that will probably last four years.....

Hungary and the Czech Republic appear to have thrown a spanner into Europe's plans for a new Treaty to tackle the debt crisis.

The leaders of both countries indicated today that they would not sign the new treaty unless plans for "tax harmonisation" were dropped.

Czech prime minister Peter Necas told reporters in Budapest that a common EU tax policy "would not mean anything good for us". Viktor Orban, his Hungarian counterpart, agreed that Hungary would not join a treaty that included harmonised taxes.

Unifying tax regimes across Europe is one element of the closer fiscal union which Angela Merkel and Nicolas Sarkozy are pushing for (although the details remain unclear). Necas and Orban's comments suggest that that 'gang of 26' may not be as unified as it first appeared.

Like Sweden, the Czech Republic and Hungary have both referred the issue of the new treaty to their national parliaments. Orban insisted that Hungary would not be rushed. In what is a clear candidate for quote of the day, he said:

What we need is not the fire of Hungarian schnapps, but the coolness of Czech beer.

Like the UK, Hungary and the Czech Republic are members of the EU but not the eurozone, but are committed to joining the single currency at some point in the future.

Joshua Raymond of City Index reckons that the intervention is a blow to France and Germany's plans, tweeting:

@Josh_CityIndex Czech mate Merkozy?

The claim from French central bank governor Christian Noyer that Britain should lose its AAA credit rating before France is dominating the headlines today.

Officially, the UK government is being quite restrained. Here's the response from David Cameron's official spokesman:

We have put in place a credible plan for dealing with our deficit and the credibility of that plan can be seen in what has happened to bond yields in this country.

Looking at the Reuters terminal, UK ten-year government bonds are trading at a yield (effectively the interest rate) of 2.119%. France's 10-year bonds are changing hands for around 3.07%. That implies that the French government would have to agree to significantly higher repayments when selling its debt.

Sticking with America briefly, the latest economic data has shown some of the perils of globalisation.

Industrial output fell by 0.2% last month, according to figures released in the last hour, confounding expectations for a 0.2% rise. Is that a sign that the US economy is slowing down? Apparently not -- the surprise fall in output is being blamed on floods in Thailand.

Paul Ashworth of Capital Economics explains:

We already knew that some autos manufacturers, particularly Honda and Toyota, were forced to reduce production last month because of parts shortages stemming from the Thai flooding. The computer industry has also been hit because Thailand accounts for more than half of the world's hard drive production.

For example, Intel, which posted a surprise profits warning on Monday.

So will US industrial output simply bounce back? Probably not, Ashworth warned:

The good news is that those disruptions will mostly be short-lived, with production resuming in December or early next year. While we believe that the Thai disaster explains most of the decline in November specifically, US manufacturers are facing some difficult times, with global demand weakening sharply and the growth rate of domestic business investment slowing as well. Conditions will only deteriorate further in 2012.

Afternoon all. Wall Street opened for business in the last few minutes, and the mood is cheery. The Dow Jones industrial average jumped by 139 points to 11,963, with readers reassured by the decent US economic data that Julia wrote about earlier (manufacturing data and jobless claims).

So America has, for a moment, stopped worrying about the eurozone crisis and focused on its own prospects for 2012 (which don't look too shabby).

As Michael Strauss, the chief investment strategist of Commonfund, told Bloomberg:

Today we're focusing on the positives and that's that we do have better economic numbers coming through in the U.S....Macroeconomic news domestically is more important to company valuations than what's going on internationally.

I am now handing over to Graeme Wearden. Thankyou for all your great comments and keep them coming! Back tomorrow.

The Guardian's Europe editor Ian Traynor reports that the eurozone's begging bowl is tinkling with proffered cash.

At an EU-Russia summit in Brussels, President Dmitry Medvedev said he wanted to help - to the tune perhaps of 20 billion dollars in additional loans to the IMF. The US and UK are balking at the plan hatched last week for an extra 200 bn euros to the IMF from the EU if others also step up to the plate. The Bundesbank says it could cough up the €43bn expected from Germany, but only if non-EU countries also take part. So far Washington and London are less than persuaded. But the Kremlin said it would forego the return of $10 bn due it from 2009 and might also throw in another $10bn depending on how the scheme shapes up. Herman Van Rompuy, chairing all these emergency Brussels summits, said he was convening another one at the end of next month. He also reiterated that the EU had pledged to beef up the IMF firewall, though that may be wishful thinking. Van Rompuy, despite the Great British veto, made plain that the UK was welcome at the new emergency summit. "With 27, with 27," he interjected, referring to all EU states. As for the Kremlin, it is not quite Russia rescues the euro, but still...

UPDATE: More from Ian:





Van Rompuy said the new summit, end of January or beginning of February - he wrote to EU leaders today - had to get to grips with "implementing" what the same leaders had already decided last week as well as at another summit at the end of October. An EU working group is already beavering over the fine print of the "fiscal compact", the new save-the-euro international treaty being drawn up by governments because David Cameron decided it could not be anchored in a revised EU Lisbon Treaty unless Britain was exempted from single market financial regulation. The word in Brussels is that a first draft of the compact could be ready by early next week.

Paul Ashworth, chief US economist at Capital Economics, says today's economic figures are "consistent with the US economy not only shrugging off the downturns in Europe and China, but actually strengthening a little".

The Empire State manufacturing index improved to a seven-month high of 9.5 in December, from 0.6, while initial jobless claims fell to a three-and-a-half-year low of 366,000 last week, from 385,000. The Empire State survey also showed strong improvements in the new orders, shipments and employment indices, while the Labor Department said that there were no unusual factors behind the drop in claims. And the current account deficit narrowed to $110.3bn, or 2.9% of GDP, in the third quarter from $124.7bn, or 3.3% of GDP, in the second. The decline was mainly due to a price-related decline in the cost of imported energy.

In France, Crédit Agricole said it would quit commodities trading and cut down on commodities trade financing. The eurozone debt crisis has forced the bank to reassess its exposure to risk, even though commodities are a lucrative business.

A senior commodities trader told Reuters:



What is happening with Crédit Agricole is certainly a major trend across banking where the entire commodities trading business is shrinking. It is happening because of regulations, as proprietary trading is not allowed any more and because people have overspeculated in the past years and got badly burnt.

European shares have bounced back from their losses earlier this week in thin pre-holiday trade, as bargain hunters were out in force. The FTSE is now trading nearly 50 points higher, up 0.9% at 5415. The Dax in Frankfurt is 60 points, or 1%, higher, at 5735, and the CAC in Paris has added nearly 24 points, or 0.8%, to 3000.

Our Wall Street correspondent Dominic Rushe reports:

US stock markets look like they will react positively to today's more cheery news from Europe. Futures are up ahead of the opening and there's more good economic news at home. The latest figures for jobless claims fell 19,000 last week. Maybe we will see and end to what has been another miserable three days for US investors. Yesterday the Dow closed down 131.46 points, or 1.10%, at 11823.48, the third consecutive day of falls. The Dow is down 2.96%, over the three-day period.

It's been a busy day in Athens, the capital where Europe's debt drama began, our correspondent Helena Smith reports. The second anniversary of Greece's debt crisis has come and gone but in the capital that shocked the world exposing the sheer magnitude of its deficit, things have only got worse.

In central Athens thousands of pensioners, pushed into poverty by belt-tightening, took to the streets in a fiery display of defiance. With many surviving on €500 a month, they not only want to be made exempt from a barrage of tax increases (at last count more than 15 new levies) but want previous cutbacks to be reinstated. At all levels despair is deepening. An inspection tour headed by Poul Thomsen, the IMF's chief monitor, has only served to reinforce the collective sense that debt-stricken Greece is going nowhere. After coming closer than ever to conceding that the deficitl-reducing remedies meted out to the country by the IMF/EU have all but failed, the Dane has now taken Greeks by storm demanding that officials push ahead with mass redundancies in the public sector. If Greece is to bring down its budget deficit from 10% of gross domestic product, it had to

move "more aggressively in closing down redundant state enterprises and ... accept redundancies. I can't see how Greece can tackle fiscal problems without addressing these taboos," he announced late Wednesday. Without foreign investment, growth or development, and with the economy set to contract for the fifth year running, recession-hit Greeks say further austerity is only going to aggravate the hole they are in. Predictably, the media has gone mad with, NIKI, one populist daily, screaming "they want us to fail" from its front page. Now that it is almost certain that Athens is going to miss 2011 fiscal targets (to meet them on time officials say it needs to find an extra €7 bn by the end of the year), Lucas Papademos, the technocratic economist installed last month at the helm of an interim coalition government, has alluded as never before to yet more cost-cutting measures. "We will implement all the measures that have been agreed and if it emerges that targets have been missed, it is self-evident that we will do whatever is necessary so that the country meets its obligations," he said. The new PM has called an emergency cabinet meeting for later this afternoon – presumably to discuss the measures that almost no politician is willing or happy to impose on a populace that has reached boiling point.

Our man in Rome, Tom Kington, has this:

He stood up to the ambitions of Microsoft when he was EU competition commissioner, but Italian prime minister Mario Monti appears to have found his match in Italy's taxi drivers, who have long resisted moves to liberalise their profession, as anyone who has tried to find a cab in Rome or Milan when it rains will testify. Against expectations, Monti has failed to insert measures to add more taxi licenses into his austerity budget, which faces a confidence vote in the lower house on Friday, raising doubts over his will to free up Italy's closed shop brand of capitalism. That is a problem for Monti since one of the reasons Silvio Berlusconi lost all credibility with the EU was his utter failure to tackle Italy 's powerful trade lobbies. After Democratic Party leader Pierluigi Bersani said he was "stupefied" by the lack of liberalisation measures, Italy 's trade minister Corrado Passera promised on Thursday that the government would continue to tackle the issue , but admitted "It is a very difficult world, where resistance is insane." The Northern League party is meanwhile doing its part to hold up Monti's program of tax hikes and pension cuts. After waving banners against taxes at Monti in the Senate yesterday, two League MPs were ordered out of the lower house today after insults flew.

The view from Berlin: Britain is on its way out from the EU, believes Frank-Walter Steinmeier, the parliamentary leader of Germany's opposition Social Democrats. After Cameron's EU summit veto last Friday, Steinmeier opined: "I fear that this is the crucial step for a withdrawal of Britain from the EU."

The falling value of the euro dominates the financial press, along with news that US investors are withdrawing billions from European, including a large number of German, banks.

The financial daily Handelsblatt has an interview with Hans Redeker, chief currency strategist at Morgan Stanley, who predicts a difficult future for the euro, and explains why its value will drop to $ 1.20 by the summer as investors pile into dollars. It dipped below $1.30 this week after the ECB lowered interest rates for the second time this year. But Redeker thinks that a break-up of the eurozone is "very unlikely" for political and economic reasons.

More UK data: manufacturers saw the biggest drop in factory orders in more than a year, mainly due to weaker exports. The CBI's industrial trends survey showed the orders balance fell to -23 this month from -12 in November, the lowest reading since October last year. The export orders measure worsened to -32 from -31, the weakest since January 2010.

CBI chief economic adviser Ian McCafferty said:

Conditions in the UK manufacturing sector remain difficult. The weaker export performance no doubt reflects ongoing instability in the euro area, our biggest export market, and its knock-on impact on prospects for the real economy. A clear and orderly resolution to the [eurozone] crisis remains essential to prevent further adverse effedcts on both UK manufacturing and the wider economy.

Following the Spanish bond auction, which went quite well, the UK sold £4bn of 1.75% gilts maturing in 2017 but demand wasn't as good. The Debt Management Office only got 1.27 times cover - well below the 1.66 cover ratio achieved at the last bond sale in October, and the lowest in any gilt auction since May.

March gilt futures extended losses by more than 20 basis points after the auction.

Amid speculation that Standard & Poor's is gearing up for a downgrade of France's top credit rating, the head of the Bank of France Christian Noyer said today there is no justification for that. Controversially, he suggested that Britain's AAA rating should be downgraded first.

In an interview with local newspaper Le Telegramme de Brest, Noyer, a member of the ECB's governing council, also questioned whether the use of ratings agencies to guide investors was still valid.

In the arguments they [ratings agencies] present, there are more political arguments than economic ones. The downgrade does not appear to me to be justified when considering economic fundamentals. Otherwise, they should start by downgrading Britain which has more deficits, as much debt, more inflation, less growth than us and where credit is slumping.

Noyer was also unhappy about critical comments from ratings agencies following last week's EU summit in Brussels. He said such comments had weakened positive sentiment in the markets following the agreement to draft a new treaty for deeper integration in the euro zone.

Frankly, the agencies have become incomprehensible and irrational. They threaten even when states have taken strong and positive decisions. One could think that the use of agencies to guide investors is no longer valid.

Spain has sold just over €6bn of bonds maturing in 2016, 2020 and 2021. The average yield, or interest rate, on the 2016 bond fell to 4% compared with 5.27% at the previous auction on 1 December. But the yields on the 2020 and 2021 debt have risen, to 5.2% and 5.5% respectively.

Spain saw solid demand for the bonds, paying over 2 percentage points less to issue a 5-year bond than Italy yesterday. It far exceeded its target of selling €3.5bn bonds. It seems that investors have been reassured by Madrid's cost cutting.

Michael Derks, chief strategist at FxPro, believes that while this year Europe has dominated the headspace of investors and traders, next year China will absorb much of the focus.

Europe may be terrifying, but equally frightening are the signs that China's booming economy is rapidly unravelling. Recent surveys of manufacturing suggest that growth in the sector is actually contracting, money supply growth last month was the slowest for more than a decade and export growth has slowed markedly, especially to Europe. Property prices are declining and quite quickly in some major cities. For instance, one survey of new home prices in Beijing claimed that they fell by more than one-third in November alone. Developers, squeezed by lending restrictions and higher rates, have invariably been forced into a fire-sale of new developments at a time of huge oversupply. In many cities, property valuations had become completely unsustainable in terms of price/income ratios. As is so often the case, excess leverage is amplifying China's slide. According to the IMF, the value of loans as a percentage of GDP has doubled in the country since 2006. Justifiably, there is growing concern that bad debts at financial institutions could grow quite swiftly next year. China will soon discover just how difficult it is to manage the combination of widespread deleveraging and a large debt mountain. At the same time, it must be said that China has a fair degree of policy flexibility available. Bank reserve ratios must be lowered as a matter of urgency, and by a significant percentage; fiscal policy needs to be loosened and the currency needs to be allowed to depreciate, especially with dollar demand so strong. The latter may be controversial, and would certainly attract enormous ire in Washington (especially during an election year), but would be defensible, especially if China slipped back into recording trade deficits. Offshore investors have been fleeing China over recent months in any event – witness the 30% decline in the Shanghai Composite over the past six months, the recent pressure on the yuan and the decline in China's massive foreign exchange reserves in recent months.

Britons' satisfaction with the Bank of England has fallen to a record low although inflation expectations eased from a three-year high, a quarterly survey from the central bank found.

More on the Office for National Statistics' latest retail sales figures. While they were down 0.4% last month, broadly in line with City forecasts, monthly increases in September and October were both revised higher, leaving retail sales 0.7% higher in the three months to November.

Samuel Tombs, UK economist at Capital Economics, says:

Today's official UK retail sales figures confirm that November was a bad month for retailers and will raise concerns that spending will be soft over the crucial festive period. Both food and non-food sales fell sharply. What's more, the drop in sales volumes may have been greater had retailers not resorted to another month of discounting. Granted, consumers might just be putting off their Christmas shopping until the last minute. But anecdotal evidence from retailers and recent surveys suggesting that shopper numbers are still down on their levels a year ago indicate that such a surge has not come through yet. Moreover, a splurge by consumers in the final weeks before Christmas will only mean that retail spending in early 2012 is even weaker than currently seems likely.

Retail sales in Britain fell in November as consumer cut back spending on computers, mobile phones, watches and jewellery. Official figures showed sales volumes including fuel dropped 0.4% from the previous month, and were down 0.7% excluding fuel.

Let's take another look at the markets. European stock markets have bounced back from heavy losses in recent days. The FTSE is up nearly 20 points at 5385, a 0.36% rise while Germany's Dax has climbed less than 50 points, or 0.8%, to 5722 and France's CAC is up 23 points, or 0.8% at 2999. Spain's Ibex has risen 0.5% and Italy's FTSE MIB is up 1%.

On bond markets, ten-year Italian bond yields have hit 7.26% while Spanish yields are steady at 5.73% ahead of a bond auction of €3.5bn of 2016, 2020 and 2021 bonds - the last eurozone debt sale before the Christmas break.

Spain is likely to get decent demand today - but at the cost of paying record interest rates, according to WestLB's eurozone rates strategist Michael Leister.

Manoj Ladwa, senior trader at ETX Capital, says:

Global markets are staging something of a recovery this morning as traders edge back into assets that suffered the brunt of yesterday's selling. Equities, gold and crude oil are all attracting interest as opportunistic traders pile in for a rebound. But the initial euphoria may be short-lived as Chinese and European manufacturing figures continue to show signs of contraction, further confirming the global economic weakness.

Reaction to the eurozone PMI surveys is slowly trickling in. Analysts have been slow to react... (it's not Christmas yet!)

Martin van Vliet at ING says the readings suggest the "eurozone economy is slipping into a 'mild' recession rather than falling off a cliff".

The pick-up in the composite PMI was primarily driven by a further improvement in the services component, tentatively suggesting that domestic demand in the large "core" countries is not crumbling in the face of fiscal austerity and the financial market turmoil. The manufacturing PMI also bounced up, as we had expected, but at 46.9 it remains very subdued. Looking at the available country data, the German composite output index rose back into expansion territory (to 51.3), and the French equivalent also saw an improvement (rising from 48.8 to 49.8). A flash estimate for the other eurozone countries is not available, but the average for this group remained in deep contraction territory – which is the most troubling aspect of today's report. Indeed, ongoing economic contraction in the peripheral countries will compound their debt problems. All in all, despite the further pick-up in December, the PMI data still suggest that eurozone real GDP saw a marked contraction in the fourth quarter (of around 0.4% quarter-on-quarter). Moreover, the subdued forward looking new orders component of the survey points to the possibility of a relapse over the next few months. That said, for now, the PMI data are consistent with a "mild" recession scenario rather than the deep recession we experienced after the Lehman collapse.

More bad news on China. Foreign investment in the country dropped nearly 10% in November.

With the EU — China's largest export market — in the doldrums, China's commerce ministry spokesman Shen Danyang described trade prospects as "grim."

"The impact of the global economic climate means the foreign trade environment is very severe," Shen said. He said China would focus on faster growing regions such as Russia and other emerging economies.

Turning to the euro, which dipped to $1.2991 this morning, Michael Derks, chief strategist at FXPro, has these musings about the strength of the dollar:

Although the euro's decline below $1.30 is attracting much of the attention in FX markets, it is actually the continuing surge in the dollar which ought to be generating just as much interest. The dollar index jumped to 80.5 yesterday, not that far from the high for the year recorded in the first few days of January. Since the end of October, the dollar index is up by more than 7%, a very significant move for the world's major reserve currency. Dollar demand over the past couple of months has been very pronounced for a number of different reasons. First, both investors and traders have been rushing to divert some of their euro exposure into the greenback, fearing Europe's sovereign debt and banking crisis could actually result in the demise of the single currency and/or many of Europe's largest banks. Second, financial markets in Europe have completely seized up, making it exceedingly difficult for banks and companies to obtain funding. As a result, they have been forced to get funding in other currencies, principally the dollar. Third, the US dollar is benefitting from the improving economic fortunes being enjoyed in America, which contrast sharply with those of Europe where most economies are either already in or are directly heading for recession, and in Asia where growth is also slowing. On Tuesday, the Fed actually upgraded its economic forecast. To be clear, the dollar is not just benefitting from euro abandonment. The gold price has collapsed by another $150 this week as investors reduce their safe-haven bets on the precious metal in favour of the greenback. High-beta currencies such as the Aussie and the Indian rupee are suffering as well. It is little wonder the dollar is in such high demand. As we have been suggesting recently, these themes supporting the dollar could run on for some time to come.

The eurozone continues to contract, but at a slightly slower pace. The overall PMI survey edged up to 47.9 this month from 47 in November, with services at 48.1 (November: 47.5) and manufacturing at 46.9 (November: 46.4).

The latest German PMI surveys are out: Both manufacturing and services have improved slightly. The manufacturing index rose to 48.1 in December from 47.9 in November, still indicating contraction. The services PMI hit 52.7, up from 50.3. The composite survey, which comprises both sectors, hit a four-month high of 51.3 against 49.4 in November.

Survey compiler Markit tweeted:

Markit Economics

Germany on course to avoid GDP contraction in Q4…but it's touch and go

The European Central Bank fears that higher bank capital requirements could push the economy into a recession as they would hold back bank lending, news agency Market News International reported, quoting anonymous sources.

The European Banking Authority has decreed that banks should have core Tier 1 capital of at least 9% of risk-weighted assets, exceeding the 7% minimum world leadres agreed to phase in from 2013. It estimates that European banks would need an extra €114.7bn of cpapital.

Doubts about the limit are growing, with the ECB concerned that banks could sell assets and tighten lending criteria to hit the new capital targets.

A eurozone central banker told MNI:

If you combine [asset] disposals with an agressive fiscal tightening, you are creating the conditions for a sharp contraction.

Get your shotguns ready. Britain's defence chiefs are taking the eurozone crisis so seriously they've begun to draw up plans to cope with the potential military fallout, the Daily Telegraph reports.

Gen Richards, the Chief of the Defence Staff, said economic issues present the biggest threat to Britain and its interests in the world. He told the Royal United Services Institute:

I am clear that the single biggest strategic risk facing the UK today is economic rather than military. Over time, a thriving economy must be the central ingredient in any UK Grand Strategy. This is why the eurozone crisis is of such huge importance not just to the City of London but rightly to the whole country and to military planners like me.

The Armed Forces are facing painful cuts and the loss of tens of thousands of personnel.

London's leading shares have opened slightly higher, trading up 16 points at 5383, a 0.3% gain. Germany's Dax is up 0.45% while France's CAC edged 0.15% higher.

Good morning. Welcome back to the live blog. We'll be bringing you the latest news and developments on the eurozone debt crisis and world economy.

Asian stocks have entered bear market territory and the euro and commodities like silver are nursing losses amid a flight to less risky investments such as the dollar. Spot silver lost more than 2% to $28.26, the lowest since the end of September as investors retreated from metals. The euro is hovering near an 11-month low of $1.2945.

Italy was forced to pay an eye-watering 6.47% on 5-year bonds yesterday, a record borrowing cost for the euro era, after last week's EU summit failed to deliver a lasting solution to the eurozone crisis.

A private sector survey indicating China's factory output will shrink again in December added to the gloomy mood today. The HSBC PMI for manufacturing rose slightly in December but stayed in negative territory. It hit 49 compared with 47.7 in November, still indicating contraction.

And big Japanese manufacturers turned pessimistic this quarter, the Bank of Japan's latest Tankan survey showed, a sign the stubbornly strong yen, Europe's debt crisis and slowing global growth are taking their toll on the export-reliant economy.

Michael Hewson market analyst at CMC Markets says:



With cracks starting to appear in Friday's fiscal compact the agreement could not be more badly named because it is anything but. This has seen investors finally lose confidence and seen the single currency break below $1.30. With ratings agency Fitch downgrading a host of European banks last night, the prognosis continues to go from bad to worse, with Credit Agricole downgraded one notch to "A+".

European markets are set to continue their week-long sell-off, with Germany's Dax and France's CAC poised to open 0.3% to 0.4% lower. Wall Street is also expected to make a weaker start.