Europe’s relief from Greek vote likely fleeting

ATHENS, Greece (AP) — Greece’s election result has eased fears of imminent financial disaster for Europe, but the continent’s leaders are still searching for a way to contain a debt crisis that threatens the global economy.

A narrow victory for the New Democracy party in Greece means that the country is more likely to stick to the harsh austerity terms of its $300 billion bailout and not face a chaotic exit from the euro in the very near future — an event many fear would destabilize Europe and send shockwaves through the world.

The country’s economy is still in a very vulnerable state, however. It is in a fifth straight year of recession and could easily deteriorate to point where a default and euro exit were inevitable.

Europe is struggling to put out several fires, not just the one in Greece. Heavily indebted Spain and Italy saw their borrowing costs rise Monday, increasing pressure on their government finances and keeping alive fears that another big bailout might be needed. That would considerably strain the eurozone’s ability to protect its members and keep the currency union together.

“The crisis is far from over,” Commerzbank analyst Christoph Weil said in a note to investors. “A sovereign default by Greece and the country’s exit from the monetary union have probably been avoided for the time being. “

The eurozone’s challenges run deep. The economy is expected to shrink this year, with the so-called peripheral countries like Greece and Spain in painful recession. Many of its banks remain on life support, propped up by emergency credit from the European Central Bank.

Europe is a substantial trading partner with the rest of the world. If it falls into a deep recession sparked by a default in Greece or a massive bailout for Spain, orders for goods made in the U.S. and China are going to start falling off.

No clear route out of the crisis has been laid out, and expectations are uncertain whether a June 28-29 summit of European leaders in Brussels will prove any more convincing than previous ones that failed to restore confidence.

“The crisis in Greece and the eurozone remains intense,” Fitch Ratings said. “While the risks from Greece have fallen for now, the severity of the systemic crisis engulfing the eurozone is unlikely to diminish until European leaders articulate a credible road-map that would complete monetary union with much greater fiscal and financial integration.”

One beneficiary of Sunday’s result in Greece may be President Barack Obama, who has urged European leaders to take more vigorous action to avoid a threat to the U.S. and global economies.

The election win for New Democracy increases the likelihood that any disruptive Greek exit from the eurozone would not happen until after Obama’s contest with challenger Mitt Romney in the November U.S. presidential election, rather than before.

Key developments Monday:

GREECE — Cleanup crews swept up Athens’ central Syntagma Square and took down election posters as Greeks waited for the formation of a new government that’s unlikely to bring any immediate relief to the suffering of people who have lost jobs and small businesses in a 5-year-old recession and financial crisis.

New Democracy was starting talks to form a coalition government Monday morning after securing a narrow victory over left-wing Syriza, which advocated rejecting the deep spending cuts demanded in return for its bailout from other eurozone governments and the International Monetary Fund.

A coalition partner could include old socialist rival PASOK, which led the country until late last year.

SPAIN — Spain’s borrowing costs spiraled higher in a sign markets remained deeply skeptical about Europe’s chances to contain and end the crisis. Interest rates, or yields, on 10-year government bonds — a key indicator of how bad the crisis is — spiked to just over 7 percent. That indicates increasing doubt that the country will be able to manage without a bailout like the ones received by Greece, Ireland and Portugal.

Yet Spain is bigger than the three bailout countries combined, and would stretch the eurozone’s (euro) 500 billion bailout fund if help were needed. The country has already asked for (euro) 100 billion to bailout its banking system, weighed down with heavy losses on bad real estate loans.

BRUSSELS — Meanwhile, Europe’s governments are struggling to agree on measures to put new foundation under the euro. Without agreement on bold new steps, the June 28-29 summit of European leaders may fall short of expectations and lead to even more market tension.

European leaders have conceded the euro’s foundations were flawed when it was introduced in 1999.

Comments

Use the comment form below to begin a discussion about this content.

Please review our Policies and Procedures before registering or commenting

News Tribune - comments