Tuesday, May 25, 2010

Euro crisis fears grow

WASHINGTON - AFTER months of fragile economic growth, fears are mounting that the global recovery could be derailed by a debt crisis that began in one small corner of Europe.

At first investors voiced only mild concern about events in Athens. News that Greece had fiddled deficit figures did little except increase the country's cost of borrowing and raise eyebrows at the European Union's Brussels headquarters.

But as world stock markets were pummelled in recent weeks and the euro flirted with dollar parity, that concern has given way to scarcely concealed panic. Respected commentators are beginning to echo the twitterverse's shrill warnings that a once obscure debt problem could prompt another Great Recession.

If a US$1 trillion (S$1.41 trillion) EU rescue package fails to calm markets 'US GDP growth could be reduced by half to one percent over the next couple of years,' Deutsche Bank analysts warned clients. 'If the rescue programme fails altogether, we are looking at a potentially much more negative picture, with the distinct possibility of a double-dip recession.' The shape of the looming crisis looks eerily similar to last, with fingers pointing at the financial system, and banks in particular.

Daniel Tarullo, a member of the Federal Reserve's board, recently suggested a repeat of the 2008 crisis which saw the near collapse of the US financial sector was 'not out of the question'. 'One avenue through which financial turmoil in Europe might affect the US economy is by weakening the asset quality and capital positions of US financial institutions,' Mr Tarullo told Congress last week.

Banks, he said, were going through spasms that 'brought back memories of developments during the recent global financial crisis'. Then, faced with doubts about the health of competitors' balance sheets, banks began closing down credit lines. The fear is that banks will again stop trusting each other, according to Uri Dadush, a former director of international trade at the World Bank who is now with the Carnegie Endowment. -- AFP

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