Wednesday, February 10, 2010

ZURICH | As Greece’s deficit and debt crises take a big turn for the worse, Zurich economists and bankers agree that several eurozone countries are mired in difficult times with no easy solutions.

Already, Greece is in the frying pan and so-called “weak sisters” — Spain, Portugal, Italy and Ireland — are on a potential-disaster list. The main advice is to cut borrowing and get budgets under control. That’s no easy task in an outlook that remains uncertain and calls for continuing economic contraction in 2010 for Greece, Spain and Ireland.

However, a collapse of the euro monetary system is not a danger, according to a Swiss-based economist who declined to be named while commenting on the euro’s sustainability.

“They will somehow muddle through,” he predicted.

RELATED STORY: Greek unions strike against debt-crisis cutbacks

Greece’s budget deficit jumped last year to 12.7 percent of its annual economic output, or gross domestic product (GDP). That turned out to be about triple the level Greek officials were telling other euro members to expect. Worse, it was more than four times the 3 percent deficit limit to which the 16 members of the eurozone should adhere, according to the group’s so-called stability and growth pact.

With its national debt soaring above 110 percent of GDP, or nearly double the euro members’ prescribed limit of 60 percent, Greece is in danger of default. Analysts fear a Greek default would become contagious for other shaky euro members, including Spain, which is already confronting a nearly 20 percent unemployment rate.

The socialist government of newly elected Greek Prime Minister George Papandreou has pledged to reach the 3 percent deficit limit by 2012.

“Now we expect and are confident that the Greek government will take all the decisions that will permit it to reach that goal,” said Jean-Claude Trichet, governor of the European Central Bank (ECB), at the weekend meeting in Canada of the Group of Seven leading industrial democracies. The ECB is prohibited from bailing out wayward members with direct loans.

“The European authorities gave us a very comprehensive review of the program now in place to address the challenges faced by the Greek economy,” said U.S. Treasury Secretary Timothy F. Geithner at the G-7 meeting. “I just want to underscore they made it clear to us, they the European authorities, that they will manage this with great care.”

But investors are skeptical, to say the least. In recent months, the bond market has forced interest rates of Greek government debt to jump to more than 3.5 percentage points above rates for German public debt.

The Greek government’s austerity plan, which includes big spending cuts, a wage freeze for public workers, an increase in the fuel tax and the introduction of new taxes, faces stiff opposition. Civil servants have called a nationwide strike for Wednesday, and the umbrella group for private-sector unions has announced a 24-hour walkout for Feb. 24.

The advice from Mr. Trichet to “behave properly when you share a common currency” has been ignored by several others in the troubled eurozone. Italy’s national debt, measured as a percent of GDP, is higher than Greece’s. Spain’s budget deficit hit 11.8 percent last year, and Ireland’s was 12 percent.

By comparison, the U.S. budget deficit in fiscal 2009 was 9.9 percent of GDP; it is projected to rise to 10.6 percent in fiscal 2010, which ends Sept. 30. The U.S. national debt of $12.3 trillion, which includes trillions of dollars owed to the Social Security and Medicare trust funds, is 85 percent of GDP — and rising quickly.

Germany, France, the Netherlands and possibly a few others might find it necessary to organize drastic “bailouts” that would be very unpopular with their own citizens, who are facing hard times themselves. Options include bilateral loans or loan guarantees. The International Monetary Fund could also help in rescue plans, but eurozone members fear the need for an IMF rescue would blight their monetary union.

For the 16-nation monetary community, which comprises 330 million people, the current problems are by far the most severe in its history, which began in 1999 with 11 charter members.

However, no break-up of the eurozone, even with future problems of the “fringe” members, is part of the calculations at present. For one reason, there is no legal path to depart from the zone.

Mr. Dickson reported from Washington.

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