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EU debt crisis specter re-emerges

Jan. 6, 2012 - 20:21 By Korea Herald
Deep concerns over the eurozone debt crisis resurfaced with a vengeance Thursday, driving the euro to 16-month dollar lows as Italy and Spain came under intense pressure on the markets.

The euro sank below $1.28 to levels last seen in September 2010 as Spain said it banks would need 50 billion euros, more than first expected, to cover bad loan losses while Italian Prime Minister Mario Monti rattled nerves with an unannounced visit to Brussels.

Monti, who meets French President Nicolas Sarkozy on Friday in Paris, was making only a private visit, diplomatic sources in Brussels said later.

The European Commission said no talks were planned with EU head Jose Manuel Barroso, European Commissioner Olli Rehn or EU President Herman Van Rompuy.

Already under pressure as the economy buckles and debt mounts, Italian stocks slumped 3.65 percent as floundering UniCredit spooked investors by pricing a planned share sale at 43 percent below current market levels.

Madrid fared only a little better, falling 2.94 percent as investors ignored strong U.S. jobs data which otherwise helped Wall Street where stocks recovered from opening losses. London fell 0.78 percent, Paris 1.53 percent while Frankfurt limited its drop to just 0.25 percent.

U.S. payrolls firm ADP said the U.S. private sector ramped up hiring in December to the highest level in a year, with 325,000 jobs created in the month, much more than the 180,000 forecast by analysts.

New claims for U.S. unemployment benefits meanwhile fell 15,000 to 372,000 in the week to December 31, the data combined suggesting the world’s biggest economy could be turning for the better.

Ian Shepherdson, chief U.S. economist at High Frequency Economics, called the ADP report “spectacular.”

“It fits our view that the economy is in better shape than is generally believed but we have to be cautious,” he said, adding however that the figures can be volatile.
A giant euro banner, featuring an image of a euro coin and promoting stronger European economic governance, is illuminated at night as it hangs on the side of the headquarters of the European Union commission at the Berlaymont Building, in Brussels. (Bloomberg)

The U.S. data only added to the euro’s problems, with the bloc’s economic prospects clouded as governments slash spending and hike taxes in hope of stabilising their strained public finances.

“The pressure on the euro is unrelenting, following the better-than-expected U.S. jobs data we have just (gone) ... below $1.28 for the first time since September 2010,” said Spread Co analyst Ian O’Sullivan.

“The debt crisis fears are just not going away and if anything are intensifying,” he warned, with $1.27 and $1.25 now realistic targets.

“Since May last year, the single currency has been on a downward spiral,” said City Index analyst Joshua Raymond.

“The uncertainty over the sovereign debt situation remains, alongside fears that key nations such as France could soon lose their “AAA” credit rating is a constant drag on the euro’s prospects.”

He noted that a “French bond auction this morning saw decent demand but rising yields showed a deterioration in investor confidence in France’s ability to maintain its top notch credit rating.”

France raised 7.96 billion euros in long-term bonds, with the sale seen as satisfactory if not inspiring given the gloomy backdrop.

“It is likely that volatility (in the markets) will persist as further bond auctions are scheduled for Spain and Italy next week,” said Kathleen Brooks, an analyst at trading group

Spanish Economy Minister Luis de Guindos’ estimate of the banks’ bad loans was higher than many private forecasts and sat awkwardly with a European Banking Authority finding that Spain’s five biggest banks require 26 billion euros in fresh capital.

Spain’s new right-leaning government meanwhile warned the country’s social security fund’s accounts are worse than had been feared, with a 2011 deficit of 668 million euros ($856 million) instead of a surplus, adding to the problems. (AFP)

The eurozone debt crisis claimed Greece as its first victim in May 2010, with Ireland and then Portugal also needing massive EU and International Monetary Fund bailouts.

As the crisis drags on, speculation has grown that Italy and Spain could be the next member states to need a costly bailout but it is far from clear whether the resources currently available would be enough.

An EU summit last month came up with yet another series of measures to tame the crisis but implementation takes time, with the markets piling on the pressure and showing no patience as Brussels tries to hold the line.

Standard & Poor’s has threatened to downgrade most of the eurozone if it judges the measures aimed at strengthening fiscal discipline are insufficient to help resolve the debt crisis.

Such a downgrade would only make the bloc’s funding more difficult and costly, compounding the problems unless the economy can start to grow much faster quickly, a distant prospect at the moment.