Friday, September 9, 2011

Turmoil in euroland

THE ECONOMIST about a chaotic day

Sep 9th 2011, 17:41 by R.A. | WASHINGTON
FOR the past year, Europe has been in more or less constant financial and economic trouble, but there are moments when the problems seem worse than normal, and this is one of those moments. On Thursday, new data revealed that Greece's economic collapse over the past year was deeper than originally thought. The Greek economy shrank 7.3% in the year to the second quarter. And Greece is still under pressure to come up with additional budget cuts in order to hit its fiscal targets. Rumours have been flying about progress with Greek's debt rollover, and some sources suggested that a Greek default might occur over the weekend. That looks false. Denials are coming from all corners, and it's not clear what the immediate trigger for a default would be. It's yet another sign of shaky nerves, however.
Those nerves were tested today upon the announcement of the resignation of European Central Bank Chief Economist Jürgen Stark. Mr Stark's departure was not expected, and it was apparently prompted by his opposition to the ECB's bond purchase programme. The ECB has been purchasing tens of billions of euros of Spanish and Italian sovereign debt in order to calm markets. Mr Stark's resignation is a testament to the deep divisions over the policy within the ECB, and a sign that Europe may not be able to count on ECB commitment to bond purchases.
With the ECB's ability to continue purchases in question, markets sank, debt spreads widened, and the euro plunged. Were Spanish and Italian debt yields to rise sharply again, the future of the euro zone itself would be in doubt. Europe's response should be to provide the European Financial Stability Facility with the funds necessary to carry out emergency bond purchases; more than €1 trillion may be needed, all told.
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