New eurozone crises can be expected in next year
FRANKFURT: The recent eurozone debt crisis, which started in Ireland, was more perilous than the Greek episode earlier in 2010. Risks of contagion and longer-term threats to the euro's survival as a single currency are much more severe than previously thought. The euro is not in immediate danger - the emergency has mercifully subsided, but new eurozone crises can be expected in 2011.
While Greece was a classic case of profligate public spending and failed attempts to hide the true size of fiscal deficits, the attack on Ireland was due to an overblown banking sector that is still holding on its books too many clearly overvalued mortgages.
When the UK's recession was at its worst, the Irish authorities were forced to underwrite their banks in order to protect depositors, effectively transforming bank liabilities into potential sovereign debt. But when German prime minister Angela Merkel recently raised doubts about the strength of the guarantees given to eurozone banks, she inadvertently helped unleash major speculative attacks on Irish sovereign debt.
Germany's idea that private sector bondholders must share in losses incurred by banks is sensible; there is no reason why taxpayers should bear all the losses. But the timing and tone of the German plan triggered wider turmoil and set in motion dangerous contagion that engulfed other nations.
Speculative attacks on Irish sovereign bonds, causing sharp rises in yields, affected initially only Portugal and Greece, small and relatively weak nations in the eurozone's periphery. But debt crises triggered by weak banks cannot be contained for long. The assaults spread quickly and perilously, engulfing large economies such as Spain and Italy.
As yield spreads over German bonds rose to historic highs, the markets feared an avalanche. Belgium, a country usually seen as a member of the core, was also attacked. When even France, the second largest and most important member after Germany, was affected by speculative rumours, it became clear that the eurozone is facing serious long-term dangers.
The markets' initial reaction to the bailout package for Ireland, totalling €85bn (£72bn), was a brusque rebuff. Calm was only restored when the European Central Bank abandoned its previous misguided plan to start withdrawing liquidity support and started instead to purchase on a big scale sovereign bonds issued by periphery economies.
The market mood has now improved, but the next attack could be much more aggressive. In 2010, eurozone governments agreed, after much wrangling, rescue packages for Greece and Ireland. If absolutely necessary, they may reluctantly mount a salvage operation for Portugal. -PB News
LAHORE: President Lahore Chamber of Commerce Shazad Ai Malik and a head of Australian delegation sitting during a meeting at Lahore Chamber of Commerce and Industry. -Online