Business

Eurozone's growth has stalled, says EU

  • 10 November 2011
  • From the section Business
  • comments

The European Union has drastically cut its growth forecast for the eurozone in 2012, from 1.8% down to just 0.5%.

"Growth has stalled in Europe and there is a risk of a new recession," said European Commissioner Olli Rehn.

The low growth makes it harder for Europe to escape its debt crisis, with Italy's position seen as unsustainable.

Italy raised 5bn euros from a new issue of bonds on Thursday, but had to pay an interest rate of 6.087% to borrow the money for one year.

The financial markets remained jittery on Thursday as worries persisted about the high cost of borrowing faced by Italy.

The Dow Jones share index gained 1% in New York, regaining some of its hefty losses from Wednesday. The FTSE 100 in London and the Cac40 in Paris both ended the day lower, which the Dax in Frankfurt posted a gain.

Earlier in the day, Japan's Nikkei share index had fallen by 2.9%, South Korea's Kospi shed 3.8% and Hong Kong's Hang Seng index dropped 5.3%.

Cost of borrowing

The interest rate on the one-year Italian bonds was up from 3.57% in October and was the highest for 14 years.

On Wednesday, yields on Italian 10-year bonds rose above 7%, to the highest rate seen since the eurozone began.

The rate implied that if Italy were to borrow money today, with the aim of paying it back in 10 years, it would have to pay an interest rate of more than 7%, a rate seen as unsustainable by most analysts.

On Thursday, the yield on Italy's 10-year bonds fell back to 6.89%.

Announcing its revised growth forecasts, the European Commission predicted that if there was no change in political policy, Italian public debt would remain unchanged at 120.5% of GDP next year, before falling to 118.7% in 2013.

The commission also forecast that next year, Greece would see its debt level rise to 198.3% of GDP.

Commenting on the current eurozone crisis, UK Prime Minister David Cameron said that eurozone leaders "must act now".

"The longer they delay, the greater the danger," he added.

The continuing problems in Europe also saw the International Energy Agency cut its forecast for oil demand.

"The ever-present threat of a far-reaching financial collapse from the worsening quagmire in Greece and Italy generated a raft of daily headlines that injected a high level of trading volatility," it said.

"Market attention has shifted to Italy where a weak financial reform package has triggered a dangerous rise in 10-year government bonds (yields).

"Oil markets are inextricably linked to the deterioration in the European debt situation given the impact on financial markets, the heightened risk of global recession, and the corresponding potential loss of oil demand."

'Radical solutions'

There were reports that the European Central Bank (ECB) had been buying Italian bonds on Thursday in order to bring their yields down.

"While the ECB intervention has proven effective in the short-term... the question is now whether the ECB can credibly protect yields from breaking again above 7%," said Sebastien Galy at Societe Generale.

Concerns remain that if the ECB does not do more to support Italy, there could be major problems to come.

"There is a real risk that a 'disorderly' default could take place, triggering even bigger write-downs for banks and the risk of further contagion," said John Higgins at Capital Economics.

"There could be a full-scale credit crunch as depositors shifted money out of Italian banks for fear of losing out from redenomination if Italy then left [the euro]."

Euro recovers

Last month, in an attempt to ease concerns about the Greek debt crisis, eurozone leaders asked banks to raise more capital to protect themselves against any losses resulting from future defaults by Greece.

At the same time, banks also accepted a 50% loss on the money they had lent to Greece.

The fear is that if Italy's debt crisis worsens, similar measures may have to be taken by banks that are exposed to its debt.

Meanwhile, the euro recovered some of its recent losses on Thursday, gaining a 0.6 cents against the US dollar and a third of a penny against the pound.