Eurozone crisis brews as ECB governors meet

FRANKFURT, Jan 14, 2010 (AFP) - The eurozone faces an unprecedented internal crisis as European Central Bank governors meet on Thursday, with financial woes in Greece and other bloc members putting interest rate talk on the back burner.

Markets are sure the bank's main rate will stay unchanged at a record low of 1.0 percent, said Deutsche Bank economist Mark Wall.

"Arguably, the most eagerly awaited aspect of the January press conference is what ECB President (Jean-Claude) Trichet says about Greece," he added.

Athens is not the only eurozone capital causing alarm in Frankfurt however.

The credit rating agency Moody's has warned that Portugal's economy also faces a "slow death" unless it becomes more competitive and officials collect more tax revenues.

Across Europe, Moody's said "ratings will likely be scrutinised even more closely than usual" this year.

It warned its own "assumptions about those countries that will be able to restore their economic and fiscal health and those that will not be able to, particularly in the Aa-A range, will be tested."

That includes Greece, which Moody's downgraded last month to "A2" from "A1," with a negative outlook.

Spain and Ireland have also gotten recent downgrades from other agencies, while Portugal has been told it could be next.

International Monetary Fund (IMF) experts have begun a week-long mission at Greece's invitation meanwhile to mentor the government on how to plug a huge hole in its public finances.

Although the 16-nation eurozone is no longer in recession, the financial crisis exacerbated fiscal disparities among its members, presenting the ECB with a patchwork quilt of problems that is fraying at the seams.

Germany should manage to hammer its bloated deficit back into shape while "peripheral" members like Greece, Ireland, Portugal and Spain must "step up budget consolidation far more than the core countries," Commerzbank chief economist Joerg Kraemer warned.

The situation is such that Wall expected Trichet to be asked "whether and under what conditions Greece could be put under pressure to voluntarily choose to exit" the eurozone.

An ECB paper published last month concluded there was little chance of a member leaving or being forced out, but the fact the bank produced such a document at all raised eyebrows in financial markets.

ECB chief economist Juergen Stark, known for orthodox fiscal positions, told an Italian newspaper last week: "The markets are fooling themselves if they think that at some point the other EU member states will put their hands in their pockets to save Greece."

UniCredit analysts said that on Thursday, "in regard to Greece, the ECB will never openly support a bailout, but Trichet will probably sound less explicit than Stark."

On Wednesday, Greek Prime Minister George Papandreou told a news conference: "There is no way we will leave the euro or seek recourse to the IMF. We do not need to."

The Greek public deficit rose to 12.7 percent of the nation's total output last year, towering above the 3.0 percent ceiling permitted to countries that share the single currency.

Greek debt was estimated at 113 percent of output meanwhile, and will likely climb to more than double the European Union limit of 60 percent.

Source: AFP

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