Crisis deepens as traders bet against the euro
Markets want to know what Portugal, Ireland, Greece and Spain plan to do about their deficits
The US Dow Jones index has closed below 10,000 for the first time since November on growing concerns that deficit problems in the European PIGS - Portugal, Ireland, Greece and Spain - could derail any economic recovery.
It's a sign of the deepening crisis in Euroland, which analysts say could be the worst to strike European monetary union since its launch in 1999, and it comes as investors lose confidence that the single currency is robust enough to withstand a serious financial crisis.
According to the FT, global currency traders have bet nearly $8bn against the euro - the biggest ever short position in the history of the single currency. The markets, which abhor economic or political uncertainty, want to know how these peripheral states plan to tackle their problems.
They fear the PIGS do not want to acknowledge or come to terms with the extent of their financial dysfunction. Greece, for instance, is running a budget shortfall of 12.7 percent of GDP - nearly 10 per cent over the bloc's three per cent limit.
The fiscal emergency presents a problem for central bankers at this week's European Union summit in Brussels. They fear that publicly addressing the problem of defaulting PIGS may only exacerbate a difficult situation.
The PIGS are adopting strikingly different positions. Spain, for example, claims simply that the media is stirring up the trouble. Jose Blanco, Spain's public works minister, lashed out at "financial speculators" and "apocalyptic commentaries". He said: "Nothing that is happening in the world, including the editorials of foreign newspapers, is casual or innocent."
Publicly at least, Greece is resistant to any outside assistance. "We are trying to implement a very difficult stability and growth program to which we are fully committed," Greek finance minister George Papaconstantinou said yesterday. "The worst possible signal which we could be sending out is one calling for outside help."
Yet the question certain to be on EU president Herman Van Rompuy's mind is why Greece, Ireland and Portugal - all countries that have benefited from billions in regional aid - are in a worse situation than ever in terms of competitiveness.
"It's very important to address this," says Jose Manuel Barroso, European Commission president. "We have to concentrate on the quality of public expenditure."
Yet that carries grave political risk. If exposure heightens the risk of Greece defaulting on its debts, and that in turn triggers a contagion through the weaker members of the Eurozone, then investors may come to see the euro itself as fatally flawed without further fiscal and political integration.
"For monetary union to survive, it has to become political union," Gerard Lyons of Standard Chartered tells the BBC. "Monetary union needs fiscal union." And that, the BBC notes, is "a stick of dynamite." ·
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