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FINANCIAL CHRONICLE™ » DAILY CHRONICLE™ » Euro crisis could erupt again this year

Euro crisis could erupt again this year

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1Euro crisis could erupt again this year Empty Euro crisis could erupt again this year Sat Jan 26, 2013 7:13 am

K.Haputantri

K.Haputantri
Co-Admin

Euro crisis could erupt again this year
* Top economist: Markets may lose patience with eurozone leaders’ slow problem-solving
January 25, 2013, 9:23 pm
The Island

DAVOS, Switzerland (AP) — Is the euro crisis over? A leading U.S. economist says not by a long shot.

Barry Eichengreen warns that the debt crisis that has shaken Europe to its core could easily erupt again this year unless European leaders move faster to solve their problems.

While European governments and markets have been breathing easier in recent months after years of turmoil, it’s no time for complacency, said Eichengreen, who has chronicled the Great Depression and explored the consequences of a breakup of the euro currency used by 17 nations.

"Nothing has been resolved in the eurozone, where markets have swung from undue pessimism to undue optimism," Eichengreen told The Associated Press in an interview at the World Economic Forum in Davos, Switzerland. "They said all the right things last year ... and they’ve been backtracking ever since."

He warns that the crisis over too much debt burdening governments and banks in the 17-country currency group "is going to heat up again in 2013."

He urged eurozone leaders follow up on its proposals to steady its banking system and keep failed banks from adding to government debt through expensive bailouts.

European leaders in Davos this week are seeking to reassure investors and corporate leaders that the continent is on the mend after its punishing debt crises.

Heavily indebted countries such as Spain and Italy faced alarmingly high borrowing costs on bond markets last year, as investors wondered whether they would be able to keep paying their debts. Those bond market rates fell after key steps by European leaders. One was the European Central Bank’s offer to purchase bonds issued by indebted countries if they promise to reduce their deficits. Another was a proposal to set up a so-called banking union that would keep failed banks from bankrupting any one country by transferring the supervision of bank behavior and finances to a single, central EU supervisor at the ECB.

The banking union decision was key. Meanwhile, Europe is in a recession that is putting added pressure on government finances.

"Europeans will be shocked out of their complacency, I think, soon enough," Eichengreen said. "There will be a relapse to the greater volatility of the first half of last year."

"None of the underlying problems have been solved. There is no economic growth in Europe. Germany itself is on the verge of recession. The banking union doesn’t exist. There’s less consensus on completing it than we thought last year, so the markets are going to lose patience at some point and the crisis will be back. "

Eichengreen, a professor at the University of California, Berkeley, studied the possibility of a eurozone breakup long before the crisis that started in late 2009 forced other people to consider what was once unthinkable. He concluded that leaving the euro would be disastrously expensive and cause widespread chaos for any country that tries it.

Political leaders are aware of those high costs, which means a country such as debt-strapped Greece leaving the eurozone "is off the table for the moment," he said.

2Euro crisis could erupt again this year Empty Draghi: Reforms needed for growth Sat Jan 26, 2013 7:15 am

K.Haputantri

K.Haputantri
Co-Admin

Draghi: Reforms needed for growth
January 25, 2013, 9:25 pm
The Island

DAVOS, Switzerland (AP) — The President of the European Central Bank admits the renewed calm in the euro area’s financial markets has yet to be reflected in the wider European economy.

Mario Draghi said Friday at the World Economic Forum that markets for stocks, bonds and bank credit have "a new, restored sense of tranquility."

But he added that "we don’t see this being transmitted into the real economy yet."

Draghi said governments need to move on structural reforms to make their economies grow faster, which will help reduce government debt.

He said that once that’s achieved, the stimulus from the ECB’s low interest rates and easy credit to banks "should find its way through to the economy and we will see a recovery in the second half of the year."

K.Haputantri

K.Haputantri
Co-Admin

UK closer to recession as economy contracts
January 25, 2013, 9:26 pm
The Island

LONDON (AP) — Britain’s economy contracted by a worse-than-expected 0.3 percent in the last three months of 2012, raising the possibility that it might fall back into recession for the third time since the global financial crisis.

The Office for National Statistics said Friday that there was no growth in the nation’s big services industry while output of production industries fell by 1.8 percent, including a 1.5 percent drop in manufacturing.

Britain emerged from a nine-month recession in the third quarter, when GDP grew by 0.9 percent. But if the economy shrinks again in the first quarter of 2013, it will be officially back in a technical recession, defined as two consecutive quarters of economic contraction.

"Today’s numbers have greatly increased the risk of a new recession and a downgrading of the U.K.’s AAA credit rating," said Chris Williamson, chief economist at financial data company Markit.

All three of the big rating agencies — Moody’s, Standard & Poor’s and Fitch — have placed Britain’s rating on negative watch.

The latest figure was worse than the market consensus of a contraction of 0.1 percent, and came just two days after the chief economist of the International Monetary Fund said it was time for the government to reassess its focus on spending cuts.

"Our early advice is still very much there," Olivier Blanchard said on Wednesday. "If things look bad at the beginning of 2013, there should be reassessment of fiscal policy. We still believe that."

Treasury chief George Osborne, however, said he was not minded "to abandon a credible deficit plan."

The GDP figure released Friday is subject to revision. It was the fourth quarter of negative growth out of the past five and leaves the economy 3.3 percent smaller than it was at the start of a steep 15-month recession in 2008-2009.

K.Haputantri

K.Haputantri
Co-Admin

German business confidence rises, beats forecasts
German business confidence rises more than expected in January on hopes economy turning corner
January 25, 2013, 9:26 pm
The Island

BERLIN (AP) — German business confidence has increased more than expected this month as hopes rise that Europe’s largest economy will quickly put behind it a weak patch and benefit from an easing in the continent’s financial turmoil, a closely watched survey showed Friday.

The Ifo institute’s confidence index, a key indicator of where the German economy is headed, rose to 104.2 points in January from 102.4 in December.

The third consecutive increase lifted the index to its highest level since last June and was better than the reading of 103 points economists had predicted. Managers’ view of their current situation improved somewhat and the outlook for the next half-year improved significantly.

In particular, Ifo said in a statement, "optimism is returning" in the important manufacturing sector. "The German economy made a promising start to the new year," it said.

The German economy grew a modest 0.7 percent last year, and officials estimate it shrank by around 0.5 percent in the fourth quarter compared with the previous three-month period. But the country’s central bank, the Bundesbank, said earlier this week that it’s already showing signs of picking up.

"The contraction in the fourth quarter of 2012 seems to be short-lived," with fears of a eurozone breakup receding and prospects improving for the U.S. and China, said Carsten Brzeski, an economist at ING in Brussels.

Ifo’s survey is based on responses from about 7,000 companies in various business sectors.

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