Mon, Feb 08, 2010 page11

• Deficits causing crisis in eurozone

  RESONATING In a vicious circle, the more fears over deficits and debts grow, the harder it becomes for some eurozone nations to borrow money to stay afloat

  • AFP
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  The swelling public deficits in Portugal, Spain and Greece have plunged the eurozone into the biggest crisis in its 11-year life, presaging years of belt-tightening, analysts warn.

  It is a vicious financial circle; the more fears over deficits and debts grow, the harder it becomes for the troubled eurozone nations to borrow money to stay afloat.

  With 16 EU nations now using the euro the problems are resonating throughout bloc. The euro fell below US$1.36 on Friday, its lowest level in more than eight months.

  One risk is the “freeloader” effect, said Patrick Artus, leading economist with Natixis.

  That happens when other countries are forced to come to the aid of an ailing eurozone member “to avoid a default risk that would be very dangerous for the eurozone as a whole.”

  On the other hand if financial markets are not convinced that countries facing problems will be bailed out, there will be a rise in risk premiums or worse.

  National governments are doing all they can to keep the financial vultures at bay.

  Spain and Portugal are particularly keen not to be tarred with the same brush as Greece, which has debts over 294 billion euros (US$412 billion) and a 12.7 percent deficit — far beyond the EU limit of 3 percent of output for eurozone members.

  But investors are jittery. The Ibex-35 index of most traded Spanish stocks closed down 1.35 percent on Friday after plunging nearly 6 percent on Thursday amid growing concerns over the state of the economy.

  Investors have no “objective” reason to worry about the state of Spanish public finances, Spanish Secretary of State for the Economy Jose Manuel Campa said.

  “Markets take decisions by evaluating perceived risk, which from a subjective point of view, are high. But from an objective point of view, there is no reason for this at the moment,” he said.

  Portuguese Finance Minister Fernando Teixeira dos Santos said his country had “nothing to do with Greece” and lashed out at investors targeting his country as “prey.”

  “Investors have an animal spirit,” he said. “There is something irrational in the way they behave.”

  Eurozone officials have also rushed to reinforce the assurances about the countries of southern Europe which are in the fiscal spotlight, nicknamed “Club Med” by Germany or, unhappily, PIGS if the fallen Celtic Tiger economy of Ireland is included — Portugal, Ireland, Greece and Spain.

  Luxembourg Prime Minister Jean-Claude Juncker, the head of the Eurogroup of finance ministers, stressed that Spain and Portugal pose no risk to eurozone stability.

  The EU last week approved Greek efforts to tame its debt crisis but placed Athens under unprecedented economic scrutiny.

  European Central Bank chief Jean-Claude Trichet did his best to support Greece, but could only manage to say that Athens’ plans to reduce the country’s growing deficit and debt “are steps in the right direction.”

  Athens most recently promised measures including a public salary freeze, an increase in gas taxes and a hike in the retirement age.

  However, the moves have upset unions more than they have assuaged market sentiment.

  Greek shares closed down 3.73 percent on Friday. Meanwhile, Greek credit default swaps — bought to cover losses in case of default on debt repayments — rose 19.5 basis points to 446.5.

  And while there seems very little possibility that Greece will be forced out of the euro, a move acceptable neither politically nor economically, the underlining question persists: Can the monetary union ride out the storm?

  The eurozone is “undergoing its first real test,” since its birth on Jan. 1, 1999, renowned US economist Nouriel Roubini said.

  Royal Bank of Scotland economists said the situation is such that mere words are not enough.

  That leaves Greece’s European partners under pressure to come up with a financial aid mechanism for Athens, perhaps via bilateral loans, a solution that would be politically less humiliating than a eurozone country going cap in hand to the IMF.

  IMF managing director Dominique Strauss-Kahn said the other eurozone nations must help Greece “in some form or another.”

  The Greek government agrees, suggesting some kind of euro-bonds issue and common loans from several nations to spread the risk.

  Those calls will be heard by EU heads of state and government when they meet in Brussels for a special summit on Thursday.
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