The government bond markets of the Eurozone continue to weigh "fears of the crisis spreading to other countries, in addition to Greece, Ireland and Portugal". Public finance consolidation maneuvers and "decisive actions" are needed to counter fears of the risk of contagion. This can be read in the latest monthly bulletin of the European Central Bank published today (downloadable in pdf). The fear of contagion is fueled by uncertainty about the Greek government's ability to implement the reform plan, to which is added the threat by Moody's to lower the valuation of US debt.
Greek debt, according to ECB data, should reach a peak of 2012% of GDP in 161, to then start decreasing to return to 127% in 2020. "The achievement of this downward path depends to a decisive extent on the will and ability of the Greek Government to preserve the consolidation of public finances and to fully implement the structural reforms and the privatization program”, reads the bulletin.
In June, the Frankfurt institute observed many flows towards "safe haven" investments, a sign that confidence in the European bond markets is not yet close. These movements "are mainly attributable to the uncertainty relating to the Greek government's recovery program and the prospects of a debt restructuring". This flight of capital has rewarded Germany's Bunds, causing spreads to reach record values in many countries in the euro area (Italy in primis).
Another risk looming over the economic recovery is the spread of the crisis to the real economy. The latest macro indicators "signal a continuing expansion of the area's economy in the second quarter of this year, albeit at a more contained pace". The global economy, on the contrary, is experiencing a recovery phase and this could bring benefits to the euro area. According to the ECB, in the second half of the year, the fallout from the earthquake in Japan and the rise in raw material prices will have fewer negative effects and the global recovery will resume in a more forced manner.
The stance of monetary policy in the euro area remains “accommodative” and supports economic activity and job creation.
Attachments: Bulletin_monthly_ECB_July_2011.pdf
