The European Commission (EC) said it would allow Spain an extra year until 2014 to cuts budget deficit to the EU-specified limit of 3% if Madrid implements a strict budget for the two years to 2014. It also proposed direct aid from the region’s financial rescue fund, the European Stability Mechanism (ESM), to recapitalise its troubled banks.

The European Central Bank (ECB) rejected Spain’s proposal to recapitalise Bankia by offering sovereign bonds worth €19bn, saying the move could breach the EU’s ban on ‘monetary financing’. Madrid’s unorthodox idea would have enabled Bankia to avail ECB funds at the central bank’s refinancing window by swapping these bonds for cash.

The spread on Spain’s 10-year bonds (compared to German 10-year bunds) hit a euro-era high yesterday, closing at 511 basis points after the government proposed bailing out the struggling lender Bankia with sovereign debt. The government could inject another €19bn in rescue funds into Bankia’s parent company, BFA, over and above the €4.5bn already pumped in. Prime Minister Mariano Rajoy blamed uncertainty about the Eurozone’s future for the rising bond yields while reiterating his stance that Spain should not turn to external aid to revive the ailing banking sector.

In April, Chinese industrial companies’ profits declined 2.2% as against a 4.5% gain in March, said the National Bureau of Statistics. Recently, most of the data, including PMI and FDI, has been signalling the weakening of the Chinese economy.

Some of the biggest banks in China could undershoot this year’s lending targets as demand for credit shrinks amidst cooling economic activity, three bank officials in the know said today. Demand for new loans was lower in April and May, and officials estimate banks could miss the government’s ¥8-8.5tn target by about ¥1tn.

The preliminary reading of the Chinese manufacturing purchasing managers’ index stood at 48.7 for May compared to the final reading of 49.3 in April. This is its longest run of sub-50 reading since the global crisis, HSBC/Markit said today.

EU leaders meet today in Brussels to discuss ways to stimulate the region’s economy and speed up job creation. However, the question of Eurobonds and their utility in combating the crisis is likely to dominate, setting the stage for a showdown between France and Germany. Though both favour growth, France advocates the use of EU funds, while Germany prefers austerity and structural reforms. France’s President Francois Hollande would push for mutually underwritten Eurobonds, whereas Germany’s Chancellor Angela Merkel thinks the bonds should be issued only after a closer fiscal union. Italy, Spain and the European Commission support the France, while the Netherlands, Finland, Austria and some other smaller members back Germany.

France’s president Francois Hollande will propose issuing common Eurobonds at the informal meet of EU leaders in Brussels tomorrow. Some analysts think this to be the best method to restore market confidence. Germany, which stands to bear the largest chunk of the bill, vehemently opposes the idea, but is increasingly isolated as Italy, Spain and the European Commission support Hollande’s proposal.

In the latest sign of a slowdown in China and its influence on global raw material prices, Chinese consumer are deferring and defaulting on shipment contracts of iron ore and coal causing downward pressure on prices of these raw materials.

Ratings agency Moody’s cut the credit rating on sixteen Spanish banks, including Banco Santander and Banco Bilbao Vizcaya Argentaria, citing ballooning losses on loans, the recession and the government’s diminished ability to bailout banks. Separately, a newspaper reported large withdrawals of deposits from Bankia, triggering a sharp sell-off of the bank’s shares.

The ECB said that it would temporarily stop lending to some of the Greek banks to curb risk and that undercapitalised banks were referred to the ELA (Emergency Liquidity Assistance) instead. ECB chief Mario Draghi talked tough saying that he would not compromise on key principles to keep Greece in the 17-nation euro area. Separately, George Provopoulos, Chief of central bank of Greece, informed that €700m had been withdrawn from the system since 7th May 2012.

Greece’s political parties rejected President Karolos Papoulias’ proposal to form a technocrat government after the election on 6th May proved inconclusive. This has pushed Athens into fresh election that is expected to be held in mid-June.

Leaders in Greece meet President Papoulias today to discuss his proposal for a government of technocrats after no political party won a clear majority during the elections on 6th May. However, the leftists, who believe they can win a majority in the re-election, have rejected the proposal. They have opposed the EU/IMF’s bailout and terms, fuelling speculation about Greece’s exit from the Eurozone. Meanwhile, Eurozone ministers have dismissed talks of Greece’s ouster, but stressed that Athens would have to abide by the terms of the bailout.

The Peoples Bank of China cut the reserve requirement ratio, freeing an estimated ¥400bn (US$63.5bn) into the system. The move to loosen monetary policy was prompted by slower economic growth of 8.1% in Q1 2012. Recent inflation data gave policymakers the confidence to take the step.

JP Morgan incurred a loss of US$2bn in derivatives trading during the last six weeks. The company could possibly report another US$1bn in trading losses. CEO Jamie Dimon said the losses were due to flawed and poorly executed and monitored synthetic hedge. The revelation came after the market close.

The government has taken a 45% stake in Bankia, the country’s third biggest bank in terms of assets. With this, the government is not just trying to shore up the trodden financial sector, but is also dispelling concerns the country would require a bailout.

Greece’s leftist leader, Alexis Tsipras, is expected to meet mainstream parties today to garner support for the formation of a coalition government. His primary condition is nullifying the bailout deal with the EU/IMF. However, Tsipras’ chances of succeeding are slim as his pre-condition was rejected by Greece’s New Democracy party leader, Antonis Samaras, who stressed the nullification could force Greece to exit the Eurozone. His disagreement further increases the probability of the country facing another election in the next 3–4 weeks, raising questions about the next bailout tranche.

The Confederation of British Industry (CBI) revised its 2012 growth estimate for the UK to 0.6% from 0.9% in February amid rising oil prices and the turmoil in the Eurozone. It expects the economy to stall in Q2 2012 before rebounding 0.7% in Q3 2012. CBI maintains that the underlying conditions are buoyant, and expects the economy to grow in 2013.

HSBC’s purchasing managers’ index edged up to 49.3 in April from 48.3 in March, but continued to contract for the sixth consecutive month. However, this reading is better than the flash reading of 49.1. The survey, which focuses on smaller private firms, highlighted the differences between the conditions of these companies and large state-owned corporations, which are considered while compiling the official PMI index. The official index released yesterday showed manufacturing rose to a 13-month high in April.

China’s official PMI rose to a 13-month high of 53.3 in April from 51.3 in March, the National Bureau of Statistics reported today. Though the increase is lower than the expected 53.6, the upturn in industrial activity suggests the economy could be recovering after posting 8.1% growth, the slowest pace in three years, in Q1 2012. The index for production rose to 57.2 in April from 55.2 the previous month, while the new export orders index moved up to 52.2 from 51.9. However, the overall new orders index declined to 54.5 from 55.1, indicating continued weakness in domestic demand.