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Thursday, 18th August 2011

Severe stress in financial markets and subdued global outlook threaten Eurozone growth prospects

Source: Oxford Economics

The Eurozone is caught up in a new wave of sovereign debt fears, despite the new deal agreed by European authorities for Greece which seemingly brought to an end a long period of indecision. The threat of the crisis spreading beyond the Eurozone’s periphery has now risen significantly.

Market concerns have now focused on Italy and Spain, where bond spreads rose to post- euro highs of around 400 bps. The underlying fiscal position in Italy and Spain is different to the other peripheral countries: the problem is one of liquidity instead of solvency. But if financing costs continue to rise, this would no longer be the case and the threat of a wildfire of contagion would escalate.

The ECB decided to enter the secondary market and buy Spanish and Italian debt, which contributed to an 80 bps drop in Spanish and Italian bond yields. The ECB’s moves can be no more than a stop-gap and a sustainable solution requires significantly boosting the capacity of the EFSF. This would be one step closer to a Euro-bond market but offers a chance for the Eurozone muddling through the crisis.

However, the longer the sovereign debt market remains stressed, the damage to the wider economy will accumulate. Stockmarkets have fallen sharply, corporate spreads have widened and credit conditions have tightened. A further deterioration in financial conditions could severely damage the outlook for the whole of the Eurozone.

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Having begun his career in academic libraries, Adrian Janes has subsequently worked extensively in public libraries, chiefly in enquiry work as an Information Services librarian. In this role he has had particular responsibility for information from both the UK Government and the European Union. He wrote a detailed report on sources for the latter which was published by FreePint in 2007, and has contributed articles to FreePint and ResourceShelf. He is involved in training in information literacy and the use of online reference resources.

A Contributing Editor to DocuTicker, he also write reviews for Pennyblackmusic.

More articles by Adrian Janes »

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