Debt Crises, IMF Warnings And Worried Investors Plague EU

Online, May 16, 2011 (Newswire.com) - Based on an IMF report, Zinnia Financial analysts believe that the debt crisis in the EU may be spreading, with richer countries having to bear most of the burden. Investors have reason to be wary, as investing in the euro zone may turn out to be high-risk.

In a recent report, the IMF has estimated that the 17 member eurozone will see economic growth of 1.7% this year and 1.9% in 2012, if debt crises do not harm the economy. However, debt crisis seems to be looming, with Finland agreeing to back the proposed EU-bailout for Portugal on Thursday - the third (and smallest) such bailout in one year. Finance ministers of the single currency area are set to approve a €78 billion rescue plan for Portugal on Monday after Finland's prime minister-in-waiting clinched a deal to ensure parliamentary approval of the package. There are fears that Greece's rescue is unraveling and that the Portuguese bail-out will not be the eurozone's last. The great fear in the eurozone is that Portugal's bigger neighbour Spain will also need bailing out, which the EU may not be able to afford. The Portugese economy will probably contract by 4% over the next two years, and debt is predicted to stand at 101.7% of GDP in 2011 and increase to 107.4% next year.

The EU's Monetary Affairs Commissioner Olli Rehn has said Greece needs to cut spending even further than foreseen in its bailout program. Markets are increasingly concerned that Greece will never be able to repay its 327 billion euro debt and will have to restructure, forcing losses on investors with severe consequences in the euro zone and beyond. There are doubts about Greece's ability to return to the capital markets, with the Greek Prime Minister being accused of not sticking to the reform agreements promised to its international creditors. The situation is critical, and there have been heavy hints that Greece may need a second bailout over last year's €110 billion in expedited loans. In Germany and France, the region's two largest economies, growth accelerated more than economists expected in the first quarter. Germany's economy grew 1.5% from the fourth quarter, while France expanded 1%. That's helping offset tougher austerity measures in periphery countries and softens the impact of rising borrowing costs.

Ireland, the second country to be bailed out, is expected to make a debt of 112% of gross domestic product this year before rising to 117.9% in 2012 - a marked increase from forecasts of 107% and 114.3%. The IMF warns that turmoil in Greece, Ireland and Portugal could spread across the continent in a major blow to the single currency, urging European leaders to fix the banking system and slash national deficits to restore confidence to the region. The higher debt forecasts, combined with larger budget deficits and weak growth, boost the complaints of many economists that the bailouts are taking too hard a toll on economic activity and are not solving the debt problem. The semiannual IMF report said peripheral members of the euro zone need to make "unrelenting" reform efforts to overcome the debt crisis and prevent it spreading further, and urged the European Central Bank to tread carefully on further rises in interest rates after last month's first increase since 2007, saying euro zone monetary policy could "afford to remain relatively accommodative." The ECB last month raised its benchmark interest rate by 25 basis points to 1.25 percent, the first increase in almost three years, to fight oil-driven inflation.