Eurozone faces major 2010 debt crisis
Pastor Dale Morgan
Eurozone faces major 2010 debt crisis*
WILLIAM ICKES
January 3, 2010 - 2:49PM
The eurozone's new year heralds a debt crisis that has alarm bells
ringing and markets tracking government plans to tame the growing shortfall.
Officials have borrowed heavily to pull the 16-nation zone out of its
first recession, and debt levels are set to smash a huge hole in the
ceiling set by the European Union in its Stability and Growth Pact.
Soaring budget deficits, low growth and banking sector support "are
feeding into significantly higher public debt levels," the European
Commission has warned.
Average eurozone "public debt could reach 84 percent of GDP (gross
domestic product) by 2010, an increase of 18 percentage points from
2007," it said, far above the pact's limit of 60 percent.
Government debt ratings have been downgraded in Greece by all three
major international agencies, and by some of them in Ireland and Spain
as well.
The Fitch agency has urged all governments with top ratings to tame
debt, mentioning in particular Britain, which is not a eurozone member,
along with France and Spain, which are.
Germany, long considered the cornerstone of eurozone fiscal discipline,
forecasts public debt at around 78 percent of GDP this year, while in
France, the second biggest eurozone economy, public debt jumped to a
record 75.8 percent in the third quarter of 2009.
Greece says its shortfall come to 120 percent of output in 2010.
Debt is raising the cost of borrowing for many countries and adding to
the weight of reimbursing obligations on future budgets.
With unemployment rising and weak growth expected in 2010, officials
cannot count on increased tax revenues for much help in paying down
debt, a lot of which is owed abroad.
"The (economic) crisis is weighing on the sustainability of public
finances and potential growth," the EU commission has warned as
economists leave open the possibility of a "double dip" recession this year.
Finances will be undermined further by an ageing population that will
need expensive health care in the years to come.
But tightening the financial screws, as many capitals have pledged to
do, could choke off an economic recovery if officials act too soon,
analysts warn.
Natixis economist Patrick Artus said that in the near term, "it will not
be possible to return to less expansionary monetary policies, at the
risk of creating huge problems" as money pumped out to boost activity
has begun to generate fresh problems of its own.
They include new speculative bubbles in emerging economy assets,
commodities and possibly even real-estate, a key factor in the mid-2007
financial meltdown.
Failing to act on deficits and debt however will spark a reaction at
some point from financial markets which will demand higher interest
payments on loans, especially from highly exposed countries like Greece.
On Friday, the yield, or interest on 10-year Greek bonds was a hefty
2.36 percentage points higher than that for benchmark German bonds.
Before the financial crisis erupted in August 2007, the spread was just
0.29 points, and in early December, Greek Prime Minister George
Papandreou warned: "Either we eradicate the debt, or the debt will
eliminate the country."
The Greek debt debacle constitutes one of the eurozone's biggest tests
ever as Europe's single currency begins its 12th year in existence.
That has weighed on the euro, which traded for 1.44 US dollars on
Thursday ahead of the New Year holiday.
Markets want to know if solidarity will prevail within the 16-nation
bloc, as most analysts expect, or whether it will plunge into an
existential crisis.
European Central Bank governing council member Ewald Nowotny has
underscored a "no bail-out" principle contained in EU treaties, while
German Chancellor Angela Merkel, head of Europe's biggest economy, has
suggested otherwise.
Merkel said last month that "we all share a common responsibility," for
Greece.