Trust deficit plagues euro zone

London : Governments in Athens, Madrid and Lisbon struggled on Friday to quell fears of a looming debt crisis in Europe that is pummelling the euro and rippling across global markets, as authorities vowed to impose fiscal austerity and plug their yawning budget deficits. The problem, however, is that investors don't appear to believe them.

Senior officials at the major rating agencies on Friday played down the risk of an immediate debt crisis, saying even nations such as Greece have enough reserves to put off for months a day of financial reckoning. Yet investor doubts over the will of Greece, Portugal and other nations to right their accounts has sparked a crisis of confidence that is seeping into stock and corporate bond markets across Europe and beyond. It is especially hitting banks and other institutions with broad exposure to the sovereign debt of the "PIGS" of Europe — Portugal, Ireland, Greece and Spain.

Investor panic is threatening to drive up the cost of borrowing for myriad nations around the world and to destabilise global currency markets, with the falling euro and strengthening dollar already hitting US exporters by making such items as American beef to US steel more expensive overseas. The euro on Friday fell almost 1 per cent against the dollar.

Parallels

The crisis has some parallels to the debt crises that hit Latin America and Asia in the past, particularly in how Greece's problems have spread so quickly to other countries in the region with similar economic woes.

But there are also major differences. Analysts said the healthy, large economies of the so-called eurozone — namely Germany — are likely to step in to prevent a default in one of their weaker neighbors, if only to head off the turmoil it may cause in the value of the European currency, the euro.

Still, analysts remain concerned the problems in Europe could spread to emerging markets. And while the chances of a default by Greece may be low, its impact would be felt by investors worldwide, including in the US; roughly 70 per cent of Greek bonds are held by foreigners, from pension funds to global banks.

Investors also drove up to fresh highs the cost of insuring against a default in Greece, Spain and Portugal. In some instances, analysts say, those fears may not be wholly misplaced.

Debt panic

Portugal, a nation that in recent days has been swallowed up in the debt market panic that began in Greece late last year. Portuguese officials have pledged to slash spending. Nevertheless, opposition lawmakers on Friday successfully pushed through a controversial bill funneling tens of millions of euros to the Azores and Madeira islands in a move the country's finance minister openly warned could have "grave consequences for Portugal's public accounts".

In Greece and Spain, analysts additionally fear bouts of civil unrest that could roll back attempts to address the fiscal problems. The Greek government's pledge to slash spending and curb public sector pay sparked angry protests in Athens Thursday. Customs officials and tax collectors walked off the job in the first of a number of planned mobilisations against government austerity measures set to continue this week.

Though EU officials demanding tighter spending have signed off on Greece's plan, they are dispatching a team to review government accounts, which were found late last year to have been grossly underestimating the extent of the country's economic woes.

In Spain, government union leaders on Thursday also vowed a series of protests against planned cuts, while opposition parties have threatened to hold a no confidence vote on Prime Minister Jose Luis Rodriguez Zapatero.

— Washington Post