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Debt crisis demons rattle eurozone markets

17 October 2014, 17:05 CET
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(BRUSSELS) - Wild gyrations on the markets this week and the stalling European economy are stark reminders that the spectre of the eurozone debt crisis still looms over the global recovery.

Here is a reminder of factors that haunt Europe and the world economy two years after they nearly shattered the single-currency bloc.

GREECE

The country where all the problems began is once again in the headlines.

Before this week, the Greek economy seemed to have turned the corner: it was expected to return to growth this year, government borrowing costs had fallen and a painful EU-IMF bailout programme was reaching its end.

But then Greek Prime Minister Antonis Samaras pledged to leave the IMF part of the bailout early, under pressure from the extreme left on the rise in a country exhausted from austerity.

The gamble caught global markets off guard with strong doubts that Athens, still buried in debt, can go it alone.

DEBT AND DEFICITS

Markets are worried about France, the eurozone's second-biggest economy, where public debt now tops a staggering two trillion euros ($2.6 trillion).

Way off its debt-reduction targets, France risks having its budget plans for 2015 humiliatingly rejected by the European Commission, the EU's executive arm, which supervises member states' public spending.

The eurozone is deeply divided between countries where finances are largely in order, such as Germany and the Baltics, and those with high deficits and mountains of debt, like France.

Germany, the bloc's most powerful member, cherishes budgetary rigour and holds the most influence at the Commission.

But in an act of resistance, France and Italy have formed an anti-austerity front, arguing that the balanced budget rules passed at the heart of the crisis lack flexibility and are stifling growth.

GROWTH

Markets began their downward trajectory in August with news that the eurozone economy had ground to a halt in the second quarter of this year.

Feeling the pressure, the ECB cut interest rates to a record low level and pledged to pump hundreds of billions of euros into the economy.

But growth prospects remain dim. Germany, usually an economic engine, slashed its forecasts, including a big reduction for next year, from 2.0 percent to 1.3 percent.

The ECB has also cut its predictions for growth in the single-currency area, forecasting growth of just 0.9 percent in 2014.

DEFLATION

Inflation in the eurozone stood at 0.3 percent in September, the lowest level since 2009 and way off the European Central Bank's target of near 2.0 percent.

Low inflation raises the spectre that the eurozone is nearing full-blown deflation, a vicious cycle of falling prices that gripped Japan for two "lost" decades.

The phenomenon, a sign of dampened demand, paralyses an economy as consumers and investors delay spending in the anticipation that prices could fall even further, while it also increases the burden of debt.

The ECB has taken unprecedented action to fight the threat: taking rates into negative territory for the first time and providing cheap loans to banks with a promise to pump hundreds of billions of euros into the economy.

But the measures have failed so far and calls are now multiplying for full-blown quantitive easing -- effectively printing money to make massive purchases of sovereign debt, a policy adopted by central banks in the US and Britain during the global financial meltdown.

BANKS

Many analysts believe European banks are a eurozone weak spot.

After the global financial crisis, regulators in the US forced banks into a painful purge of bad loans and troubled assets that European lenders have so far avoided.

But these weaknesses may be exposed when the ECB later this month publishes results of new stress tests of eurozone banks, before it takes over as the region's banking supervisor.

These are expected to be far more rigorous than previous checks, which were sharply criticised for giving passing grades to fragile lenders, including several that later imploded.

But Europe's biggest banks said they have done what it takes to pass the tougher test, having bulked up their finances to defend against any new financial shocks, including a resurgence of the debt crisis.


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