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EU will be hard pressed to deal with turmoil in Greek stock, bond markets

A fresh crisis in Greece is coming at a bad time for the eurozone, already worried about deflation and a slowing economy.

Deflation and slowing economies already a worry as Greece looks to need new round of credit

Greece is at the centre of Europe's financial woes again amid turmoil on its stock and bond markets. Investors fear a party that could renege on debt will come to power in upcoming elections. (Associated Press)

A fresh crisis in Greece is coming at a bad time for the eurozone, already worried about deflation and a slowing economy.

The Greek stock index has lost 12 per cent over the past two days and was down another 2.5 per cent today.

Investors been spooked by the prospect of new elections that could result in more power for the left-wing Syriza party, which wants to renege on Greece’s massive debt.

After five years of austerity, Greece has a jobless rate of 27 per cent and a moribund economy beset by inflation.

Just as the government was making plans to exit its bailout program, underwritten by the rest of Europe, its bond market has taken a hit.

The rate on the benchmark 10-years bonds jumped to 8.71 per cent from just 5.6 per cent just last month -- a sign investors are more worried the country might default.

Bond yields on the eurozone’s other troubled members  -- Spain, Portugal and Italy – also rose.

In Spain, a debt auction fell short of the government’s maximum target, with 3.2 billion euros sold, down from an expected 3.5 billion at yields of 2.196 per cent.

European leaders say they support Greece and are willing to make credit available, probably through the European Central Bank.

 "There should be no doubt that Europe will continue to assist Greece in whatever way is necessary" so the government can keep financing itself, said Jyrki Katainen, vice-president of the European Union's executive Commission, in a statement Thursday.

Uncertain times in Europe

But it’s not the best time for Europe, where stocks have participated in the global route these past two weeks.

The European Central Bank is looking at buying up bonds and other assets to try to get some credit into markets and stimulate growth.

Prices are falling in Sweden and Spain – the deflation that so worries the ECB. It fears a downward spiral in prices in places like Spain and Greece. Eurostat statistics agency reported that the annual inflation rate in the monetary union slipped in September to just 0.3 per cent, down from 0.4 per cent in August and 1.1 per cent a year earlier.

The Eurozone’s strongest member, Germany, has cut its growth forecast to 1.2 per cent this year and in 2015, down from 1.8 per cent this year and 2 per cent the following year.

Eurostat figures showed that industrial production across the eurozone slumped in August by an alarming 1.8 per cent from the previous month.

The IMF has cut its growth forecast for Europe, estimating growth of just 0.8 per cent this year across the Eurozone.

And it faces a winter reliant on Russian gas, at a time when geopolitical tensions are high.

Germany is worried about the fiscal situation in the rest of Europe but reluctant to act, says Diane Swonk, chief economist at Mesirow Financial.

“We kind of hope that Europe would muddle along, but that requires a lot of heavy lifting by Germany which isn’t in the best of shape right now. They’re resisting calls to stimulate their own economy, let alone other economies in the region,” she said in an interview with CBC’s The Exchange with Amanda Lang.

There is a danger of Europe’s woes affecting the U.S. recovery despite the strength it seems to be showing, Swonk said.

“A stronger dollar means imports are going to be cheaper and exports are going to be more expensive going forward, which could undermine growth and decelerate U.S. inflation to lower than the Federal Reserve would like,” she said.

Greece will need more credit

Loans from the EU to Greece will stop at the end of this year and it must renegotiate. Greece needed 240 billion euros ($307 billion) in bailout loans in 2010 and 2012 from other countries that use the euro and from the International Monetary Fund.

In Athens, Finance Minister Gikas Hardouvelis insisted Greece was not sliding back into financial turmoil and remained committed to meeting bailout targets.

"The market atmosphere seen in the last couple of days does not reflect the state of the Greek economy ... Our path to growth is now a reality," he told parliament.

"Of course, the future will not be cloudless but it is certainly not reminiscent of the painful course we took to get here. We can make it."

With files from the Associated Press

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