Europe's warning of bigger bailout bills

05/15/2011 21:37


Europe raised the spectre of a further round of multi-billion pound rescue packages yesterday after warning that its debt-crippled nations are sinking deeper into the mire.

In a worrying economic health check, the European Commission predicted that debt levels in bailed-out Greece, Ireland and Portugal are expected to soar significantly higher than first thought.

All three are trapped in vicious high unemployment levels, low economic growth and falling tax receipts, which will prevent governments from tackling their crippling national debts.

Debt-crippled: Ireland, Greece and Portugal are trapped in vicious high unemployment levels, low economic growth and falling tax receipts

The warning will raise fears that European nations, including Britain, will have to increase the £240billion of emergency support they has already extended to the stricken trio.

UK taxpayers will be on the hook for around £14billion if, as expected, EU finance ministers approve a £68billion rescue for Portugal on Monday.

The EC’s dire prognosis comes amid rising concerns that Greece and Ireland will have no choice but to default on a portion of their loans.

Any move to re-negotiate their crippling debts could send tremors through financial markets every bit as severe as the turmoil triggered by the collapse of U.S. bank Lehman Brothers in 2008, experts said.

The International Monetary Fund this week warned the debt afflicting the so-called PIG economies (Portugal, Ireland, Greece) at the margins of Europe could infect the entire eurozone. In a stark message to eurozone leaders, the IMF said a ‘shock of confidence could spread quickly throughout Europe’.

In the EC’s bleak prognosis, Greece’s national debt is expected to soar to 158 per cent of economic output this year, climbing to 166 per cent in 2012. That compares with forecasts of 150 per cent and 156 per cent six months ago.

The alarming forecasts will reinforce calls for a radical restructuring of Greece’s loans, which would force the profligate banks that lent money to Athens to accept lower repayments on Greek bonds.

Such a move has so far been met with heavy resistance in Berlin and Paris as it would trigger large losses for German and French banks, which could result in taxpayer bailouts.

Ireland’s debt is expected to surge to 118 per cent of national income next year – four percentage points higher than earlier forecasts, according to the EC.

The EC made its most brutal revisions to the Portuguese national debt which is set to reach 107 per cent of output in 2012, some 15 points higher than the estimate from late last year. The bleak forecasts for the eurozone’s three weakest countries contrast with strong economic growth in the currency union’s large countries.

But the growth figures also revealed that Britain’s recovery is lagging behind that of its eurozone rivals France, Germany – and even Greece’s.

Growth in the eurozone averaged 0.8 per cent in the first three months of this year, compared with a sickly 0.5 per cent in the UK, shocking figures showed. Germany, Europe’s powerhouse economy, grew by 1.5 per cent, while France exceeded forecasts to grow by 1 per cent in the first quarter.

The strongest growth was in Lithuania whose economy expanded by 3.5 per cent in the period. Even Greece enjoyed 0.8 per cent growth.

But the UK’s economy grew by just 0.5 per cent in the first quarter of 2011, after a decline of 0.5 per cent in the previous period – effectively stagnating over six months.


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