Eurozone's growth has stalled, says EU

 

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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.

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Every country who wants to stay in the single currency needs to accept it's going to be a tighter, more intrusive club”

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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.

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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.

What are bonds and what can they tell us about the borrowers who issue them?

"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.

Bill Hubard is chief economist at Markets.com and he says "this is the worst I've ever seen it"

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.

 

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  • rate this
    +24

    Comment number 192.

    Imagine, everyone in your street has the same currency. So, on that basis, you agree to financial union. Then Mr Jones at No23 spends more than everyone else and also has less income. So you have to help him out, then Mr Smith buys a new car, but can't pay for it, so you help him out, and so on until ALL of you have no money left. MAD?
    Well, thats what he genius politicans of the EU have done!

  • rate this
    +2

    Comment number 191.

    Whatever happens the rich will not lose out. Start the printing presses please.

  • rate this
    +3

    Comment number 190.

    How many of us piped up over the years for workers rights in the Far East & Asia? Sure we're outraged when the BBC shows the odd documentary on sweat shops, but chances are we're all wearing something made in one right now. The tacit pact with the globalist elite was "let us get filthy rich off the back off poor people in other countries and you can have cheap goods & debt". Tables are turning.

  • rate this
    0

    Comment number 189.

    177.60022Mallard - 80% of debt inherited by the current Govt came from bailing out the banks, a move supported & encouraged by both Libs & Cons at the time......and despite that the bond markets still see UK Govt. bonds as a safe haven because they, the professionals, recognise that the UK Govt. is in LESS debt than the average mortgage holder in this country is........

  • rate this
    +6

    Comment number 188.

    The Italian bond thing is crazy. Why must they borrow new money at high rates to pay off old bonds on lower rates? Surely the thing to do is what any private citizen would do in the same position, tell the creditors that they will simply extend the term of the loan and continue to service it at the original rate. Alternatively the creditor faces a default on the loan. Take your choice Mr Creditor.

  • rate this
    +2

    Comment number 187.

    @178 - FTSE down 4 points and the other markets still up - what a crisis. More important than people being pulled out of the rubble in Turkey? The markets dropped 2% yesterday and this story didn't even feature.

  • rate this
    0

    Comment number 186.

    Christine Legrande pontificates about political will and conferences, but she is so committed to the Euro experiment that she will not tell Merkel and Sarcozy that their project is a failure and Greece , Italy , Spain, Ireland and Portugal must drop out of the Euro before their dream of European superstate destroys the whole world economy.

  • rate this
    +2

    Comment number 185.

    if everyone understood the banking system, there would be a revolution tomorrow........said henry ford

  • rate this
    -1

    Comment number 184.

    To all the people on here moaning about Gordon Brown. . .

    Ive said it before and no doubt i'll say it again. .

    Level of Uk debt before bank bail out: 65% of GDP

    After bank bail out: 120% of GDP

    What part of that can you not understand ?

  • rate this
    -3

    Comment number 183.

    "The problem is that EU in its current form is that it is based on the Establishment dream of ever-closer union, and we are witnessing the end of that dream. They should admit they got it wrong, not carry on on the same route."

    I think this is much more likely to push the Euro zone towards more integration than less. The US and it's poodle England have less ability to wreak it now.

  • rate this
    +1

    Comment number 182.

    Robert Preston should stand for election as Italy’s new president.
    He could then talk their economy up instead of the rest of the World down.
    Unfortunately this is a man who is only wise after the event, sooooooooooooooo there is nooooooooooooo chance of planning aaaaaaaaaaaaaaaaa brighter future here.

  • rate this
    0

    Comment number 181.

    Bring back the Bundesbank

    Inflation UK-style is in essence chronic default, so don't be critical of Italy without looking at the cost of default here.
    Italy still has industry and it is highly competitive.
    All Britain has left is overpriced, housing and a parasitical unproductive middle class.
    And that's what we have chosen - not had forced upon us.

  • rate this
    +20

    Comment number 180.

    The problem is not the euro or any european dream or fantasy. This is just another symptom (with its own messy details) of the economic and financial mess that became apparent four years ago. The tragedy is that no-one appears capable of willing of addressing the underlying structural problems. Business as usual? No. We cannot.

  • rate this
    +1

    Comment number 179.

    If a government is not above the law...
    Why can a government not be prosecuted for fraud?

  • rate this
    +3

    Comment number 178.

    @155 Maybe a rant about the BBC should also be followed by an apology if and when the markets slip back......oh and there it goes peaking at 10.15am.

    Of course I will also be wrong at some other time of the day too, but will acknowledge this fact rather than thinking I know it all.

  • rate this
    +3

    Comment number 177.

    163 feciko

    Gordon Brown built many schools and hospitals "off balance sheet" such that starting to pay for them now is making the disastrous state he left us with much worse than it could have been.

    Re the net extra 800,000 public sector workers "he " employed the least said the better. Increased input has not been matched by any increase in output in schools and little in the NHS

  • rate this
    +2

    Comment number 176.

    At what point did Italy become unable to service the interest on this debt ? When exactly, did it become necessary for Italy to pay off all of its debt in full ?
    I think the general public are being spun a big lie, and the US owned media is talking this up for their own ends.

  • rate this
    +25

    Comment number 175.

    The problem is that EU in its current form is that it is based on the Establishment dream of ever-closer union, and we are witnessing the end of that dream. They should admit they got it wrong, not carry on on the same route.

  • rate this
    -5

    Comment number 174.

    One way forward would be to richly reward our Members of Parliament.

    They get elected on the promises they make.
    If they keep their promise, they get paid; but if it was good for UK and her population... nice big bonuses.
    Likewise doing good gets really good pay if exceptional BIG BONUSES!

    If on reflection they have not done so well, pay is reduced.
    Done really badly hand back 5 years cash!

  • rate this
    +1

    Comment number 173.

    It may, or may not, be Gordon's fault (greater minds than mine think about such things), but WHERE IS HE?? How come we don't hear from him these days.

    Even Ed Balls (up) - who tends to have an opinion on everything and anything - has been amazingly quiet. Come on Eddie, tell the world what they are doing wrong

 

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