Eurozone crisis threatens recovery

Stock markets tumble as debt fears spread across Continent

Stock markets across the world tumbled again yesterday as fears intensified that the fragile global economic recovery could be destabilised and the eurozone split by the deepening financial crisis in Spain, Greece and other "weak link" members of the European single currency.

Some £30bn has been wiped from the FTSE in recent days, and it lost a further 1 per cent of its value yesterday as European policymakers again failed to reassure markets that the "contagion" could be contained. The crisis could push Europe, including the UK, into a "double dip" recession. In foreign exchange markets, the euro slumped to its weakest level against the dollar since May, and its weakest level against the yen for more than a year.

Although Britain is not in the eurozone, a number of observers have pointed out that the UK's public finances are scarcely healthier than those of much-maligned Greece. Last week, the Tory leader, David Cameron, explicitly pointed to the parallels between Greece and the UK as justification for his plan to make an early, if modest, start on reducing the budget shortfall. The world's biggest bond fund, Pimco, last month warned that UK bonds were "resting on a bed of nitroglycerine".

And British banks face a near-£100bn exposure to these floundering European economies, threatening to tear another hole in their enfeebled balance sheets. Shares in banks throughout the European Union have been the hardest hit. Spain's Banco Santander, owner of Abbey, Bradford and Bingley and Alliance and Leicester, has lost 16 per cent of its value; Lloyds Group shed almost 5 per cent yesterday. Colin Ellis, of Daiwa Securities, said: "This week has seen the return of risk aversion, with a vengeance."

Greek government bonds and the Athens stock market have been mauled, and now attention has turned to Portugal and Spain. Demand for Portuguese government bonds was reportedly exceptionally weak yesterday, as the government's budget was defeated in parliament. Opposition MPs instead passed their own bill that will permit the country's autonomous regions to rack up even more debt.

The Spanish Prime Minister, Jose Zapatero, told reporters during a visit to President Barack Obama in Washington that Spain's economy is "fundamentally sound", words that usually act as cue for dealers to press the sell buttons. Mr Zapatero added: "This is not an easy moment; there are fundamental economic challenges of great magnitude for Spain and other countries."

The slide in confidence was triggered last Wednesday when the Spanish government revised its borrowing targets upwards, amid rumours that one of the leading ratings agencies would downgrade Spanish government debt. Spain, like Greece and Ireland, has announced austerity measures to cut the budget deficit, but, in all the nations, the policies are set on a collision course with the unions and other interest groups. Greek tax officials went on strike on Thursday.

The Greek Finance Minister, George Papaconstantinou, acknowledged the possibility that problems in some smaller economies could engulf the entire continental economy. This is why the Greek issue, despite its particular Greek characteristics, is also a eurozone issue. Markets have proved resistant to arguments from the Greek government that they are the victims of speculators with an "ulterior motive" to destroy the eurozone by picking on its "weak link". Greece has to raise a further €31bn (£27bn) over the next few weeks, a formidable challenge and the next crunch point.

The "domino effect", or contagion feared by analysts is now spreading rapidly through the so-called Pigs – Portugal, Ireland, Greece and Spain – the nations in the eurozone with the largest national debts and weakest public finances. They also suffer from distressingly high unemployment rates, up to 20 per cent in Spain, and long-term structural issues such as their ageing populations. Doubts persist that they will be able to service their huge budget deficits and the soaring interest burden on record-breaking national debts.

The possibility of default or, in an extreme scenario, a break-up of the eurozone is being openly discussed, though it is being resisted by all the governments concerned. Many doubt that the Pigs will be able to push through the tough economic and social reforms essential to restoring market confidence. The expectation is growing that Germany, France and other more solvent members of the currency bloc will be obliged to bail out the weaker links, and that the crisis will drag on until such a resolution is reached.

The panic is similar to the debt crisis of Dubai, which had to be rescued by its richer neighbour, Abu Dhabi. Since then, sovereign debt (securities and bonds issued by nation states) has been called "the new sub-prime", suggesting a rerun of the widespread damage that defaults on securities based on US mortgages caused in 2007. A similar downgrade and devaluation of European governments' bonds could also trigger a wider sell-off, and few believe UK gilts would be immune from the onslaught. That, in turn, would spell higher interest rates in Britain, adding hundreds of pounds a month to the average mortgage bill.

As with the original credit crunch, this second crunch would devalue bank balance sheets where they hold substantial stocks of government bonds, reducing the banks' ability to support lending into the real economy. That could lead to a "double dip" recession.

And signals are mixed about whether the German government would contemplate a bail-out of the Pigs. The German Economics Minister, Rainer Bruederle, told the Bundestag recently, to applause, that "some euro states are showing dangerous weakness ... This may have fatal effects on all states in the eurozone".

The EU has no formal process to deal with a national debt crisis, because it was never supposed to happen. The Maastricht Rules, framed in the 1993 treaty that laid the basis for the euro, were suspended early during the recession and have been widely flouted. The rules were also designed to reassure German voters who feared fiscal irresponsibility in some member states would leave them with huge bills for bail-outs. That now seems inevitable.

Joseph Stiglitz, the Columbia University professor and Nobel laureate, said: "The European Union should have a fund to help member nations in need of financial aid such as Greece. Deficit fetishism is a mistake."

PROMOTED VIDEO
News
ebookA unique anthology of reporting and analysis of a crucial period of history
Sport
Getty
News
Women have been desperate to possess dimples like Cheryl Cole's
people Cole has secretly married French boyfriend Jean-Bernard Fernandez-Versini after just three months.
Arts and Entertainment
AKB48 perform during one of their daily concerts at Tokyo’s Akihabara theatre
musicJapan's AKB48 are one of the world’s most-successful pop acts
News
Ian Thorpe has thanked his supporters after the athlete said in an interview that he is gay
people
News
The headstone of jazz great Miles Davis at Woodlawn Cemetery in New York
news
Arts and Entertainment
Brendan O'Carroll has brought out his female alter-ego Agnes Brown for Mrs Brown's Boys D'Movie
filmComedy holds its place at top of the UK box office
News
newsBear sweltering in zoo that reaches temperatures of 40 degrees
Arts and Entertainment
Professor Kathy Willis will showcase plants from the Royal Botanic Gardens at Kew
radioPlants: From Roots to Riches has been two years in the making
Extras
indybestThe tastiest creations for children’s parties this summer
Arts and Entertainment
TV The follow-up documentary that has got locals worried
Arts and Entertainment
Paolo Nutini performs at T in the Park
music
Independent
Travel Shop
the manor
Up to 70% off luxury travel
on city breaks Find out more
santorini
Up to 70% off luxury travel
on chic beach resorts Find out more
sardina foodie
Up to 70% off luxury travel
on country retreats Find out more
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs General

Programme Manager - Business Support Transformation, 1 year contract

£550 Per Day: Clearwater People Solutions Ltd: Our client based in Walthamstow...

ERP Business/ Implementation Analyst

£40000 - £45000 per annum + competitive: Progressive Recruitment: This is an e...

Demandware Developer

£45000 - £55000 per annum + competitive: Progressive Recruitment: My Client is...

Sap Data Migration Consultant

competitive: Progressive Recruitment: My client, a FTSE 100 organisation are u...

Day In a Page

Super Mario crushes the Messi dream as Germany win the 2014 World Cup in Brazil

Super Mario crushes the Messi dream

Germany win the 2014 World Cup in Brazil
Saharan remains may be evidence of the first race war, 13,000 years ago

The first race war, 13,000 years ago?

Saharan remains may be evidence of oldest large-scale armed conflict
Scientists find early warning system for Alzheimer’s

Scientists find early warning system for Alzheimer’s

Researchers hope eye tests can spot ‘biomarkers’ of the disease
Sex, controversy and schoolgirl schtick

Meet Japan's AKB48

Pop, sex and schoolgirl schtick make for controversial success
In pictures: Breathtaking results of this weekend's 'supermoon'

Weekend's 'supermoon' in pictures

The moon appeared bigger and brighter at the weekend
Iraq crisis: How Saudi Arabia helped Isis take over the north of the country

How Saudi Arabia helped Isis take over northern Iraq

A speech by an ex-MI6 boss hints at a plan going back over a decade. In some areas, being Shia is akin to being a Jew in Nazi Germany, says Patrick Cockburn
The evolution of Andy Serkis: First Gollum, then King Kong - now the actor is swinging through the trees in Dawn of the Planet of the Apes

The evolution of Andy Serkis

First Gollum, then King Kong - now the actor is swinging through the trees in Dawn of the Planet of the Apes
You thought 'Benefits Street' was controversial: Follow-up documentary 'Immigrant Street' has got locals worried

You thought 'Benefits Street' was controversial...

Follow-up documentary 'Immigrant Street' has got locals worried
Refugee children from Central America let down by Washington's high ideals

Refugee children let down by Washington's high ideals

Democrats and Republicans refuse to set aside their differences to cope with the influx of desperate Central Americas, says Rupert Cornwell
Children's books are too white, says Laureate

Children's books are too white, says Laureate

Malorie Blackman appeals for a better ethnic mix of authors and characters and the illustrator Quentin Blake comes to the rescue
Blackest is the new black: Scientists have developed a material so dark that you can't see it...

Blackest is the new black

Scientists have developed a material so dark that you can't see it...
Matthew Barzun: America's diplomatic dude

Matthew Barzun: America's diplomatic dude

The US Ambassador to London holds 'jeans and beer' gigs at his official residence – it's all part of the job, he tells Chris Green
Meet the Quantified Selfers: From heart rates to happiness, there is little this fast-growing, self-tracking community won't monitor

Meet the 'Quantified Selfers'

From heart rates to happiness, there is little this fast-growing, self-tracking community won't monitor
Madani Younis: Five-star reviews are just the opening act for British theatre's first non-white artistic director

Five-star reviews are just the opening act for British theatre's first non-white artistic director

Madani Younis wants the neighbourhood to follow his work as closely as his audiences do
Mrs Brown and her boys: are they having a laugh?

Mrs Brown and her boys: are they having a laugh?

When it comes to national stereotyping, the Irish – among others – know it can pay to play up to outsiders' expectations, says DJ Taylor