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4 major risks to Europe debt crisis loom in 2012

(Xinhua)

08:29, January 09, 2012

BEIJING, Jan. 8 (Xinhua) -- With the sovereign debt and banking crises in Europe accelerating, most eurozone economies have suffered a marked slowdown in economic growth, casting clouds over the economic outlook for 2012.

Analysts predict that the Europe debt crisis faces four major risks including a double-dip recession, a downgrade of sovereign credit ratings, the shrinkage or breakup of the euro zone, and an acute banking crisis.

RISK 1: A DOUBLE-DIP RECESSION

International institutions have mostly adopted a negative viewpoint on the European economy by downgrading their projections on economic growth since the end of 2011.

The European Central Bank projected economic growth of minus 0.4 percent to 1.0 percent for the euro zone, compared with its previous estimate of 1.3-percent growth.

Similarly, the Organization for Economic Co-operation and Development (OECD) has forecast negative quarter-on-quarter growth in the first three months of 2012 for the euro zone.

OECD chief economist Pier Carlo Padoan warned in an interview with Xinhua that there are major negative events in the euro area such as liquidity defaults and a significant credit crunch. Those troubles, Padoan said, may spark a generalized contagion and generate an impact on the real economy that could cause severe recession in 2012 and 2013.

Credit rating agency Standard & Poor's was also pessimistic about the outlook for the eurozone economy. It has warned that a mild recession has a 60-percent probability while there is a 40-percent chance of a more severe slowdown.

"Europe's approaching recession first took hold in Spain, Portugal, and Greece, and the economic woes are now spilling over into the eurozone's core of France and Germany," said Jean-Michael Six, Standard & Poor's chief Europe economist.

Christine Lagarde, managing director of the International Monetary Fund, warned in mid-December that no country is immune from an "escalating" eurozone crisis and each must act to head off the risk of a global depression.

"It is not a crisis that will be resolved by one group of countries taking action. It is going to be hopefully resolved by all countries, all regions, all categories of countries actually taking action," Lagarde said.

The IMF also cautioned that it is likely to cut its 2012 growth projections as the world economy struggles with a worsening two-year eurozone debt crisis and sluggish U.S. growth.

RISK 2: A DOWNGRADE OF SOVEREIGN CREDIT RATING

Since October, the top three international rating agencies - Moody's,Standard & Poor's and Fitch Ratings - have issued warnings that in view of the severe economic situation in the euro zone, most economies in the area appear unlikely to maintain their current credit ratings.

As the second largest economy in the euro zone, France is most vulnerable to the impact of the economic woes and faces the loss of its prized AAA credit rating.

An envisioned downgrade of France's credit rating would be an indication of the escalation of the European sovereign debt crisis, which is spilling over into the eurozone's core.

A chain reaction would likely be set off should France be downgraded. First, there would probably be an increase in the cost of the French government's financing followed by a downgraded credit rating for the European Financial Stability Facility and a possible downgrade of credit ratings for banks and enterprises.

Under such circumstances, European nations and enterprises would be caught in dire straits with no financing sources or government bailouts.

Zhou Hong, director of the Institute of European Studies of the Chinese Academy of Social Sciences, said the most urgent challenge facing the euro zone is how to pay off the enormous debt falling due while the yields of government bonds remain high and refinancing sources scarce.

The latest data released by international financial data provider shows that in 2012 the eurozone governments have to settle a debt of 1.1 trillion euros (1.4 trillion U.S. dollars), including about 300 billion euros coming due in the first quarter of the year.

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