London - From credit bottlenecks in eastern Europe to slower
growth in China, delays in tackling the eurozone's debt crisis are causing
ever-greater economic and financial damage well beyond the borders of the
17-nation bloc.
As politicians dither over how to share the costs of
cleaning up the mess and preventing a recurrence, concern is mounting among
policy advisers and academics that Europe could be condemned to several years
of sluggish growth as excess debts are gradually worked off.
And wrangling over how to pay for decades of debt
accumulation is not limited to Europe.
As Francesco Garzarelli of Goldman Sachs has noted, the
political stalemate over how to reduce the US budget deficit is another example
of the difficulties advanced economies face in reforming the "social
contract" against a background of repairs to overstretched private sector
balance sheets.
"We're in for a very slow growth period in the world.
This is going to define the next 15 to 20 years," said one international
official who was critical of the "intoxicating" monetary and fiscal
policies that turbocharged growth and enabled the West to live well beyond its
means until the bubble burst in 2007.
Figures on Wednesday underlined how difficult it is to shed
debt, or deleverage, without throwing a spanner in the wheels of the economy.
The eurozone's private sector is likely to shrink in November for the third
month in a row, according to a survey of corporate purchasing managers,
pointing to economic contraction this quarter.
A companion survey in China showed an even sharper
deterioration in business sentiment, and economists were quick to make the
connection with Europe, which buys about 20% of China's exports.
"We see downside risks to our below-consensus forecast of 8.4% GDP (gross domestic product) growth (in China) for 2012, mainly from the deterioration in the euro area growth outlook (a mild recession looks increasingly likely) and the ongoing and widespread property market correction in China," analysts at Barclays Capital in Hong Kong said in a note.
Widening fallout
Evidence is also piling up of contagion from the eurozone
through financial channels, not least because banks are complying with orders
from regulators to strengthen their capital ratios - expressed as a percentage
of their risk weighted-assets - by rapidly reducing exposure to non-core
markets.
Eastern Europe is in the firing line, but so are countries
as far afield as Chile, where Spanish bank Santander plans to sell a $1bn stake
in its local unit to raise cash.
Asian currencies are also a casualty. The Indian rupee plumbed a record low on Tuesday and analysts are more bearish on the currency than at any time in more than three years.
"As the exchange rate will continue to be driven by
global capital flows to emerging economies, and the eurozone crisis looks set
to drag on into 2012, the rupee could weaken further as portfolio investment is
withdrawn," Andrew Kenningham of Capital Economics, a London consultancy,
told clients.
There is no shortage of technically feasible remedies to the eurozone's malaise, including a strengthened financial rescue fund, massive secondary-market bond purchases by the European Central Bank (ECB) and jointly issued bonds.
What is lacking, however, is a broad political compact
between eurozone surplus and deficit countries on how to put the bloc on a more
solid footing.
Will the first group have to guarantee, one way or another,
the debts of weaker deficit countries? Will the latter, as a quid pro quo,
accept outsiders second-guessing their budgets submitted to democratically
elected parliaments? How will underlying economic imbalances be corrected?
Fear that Germany, the European Union's traditional
paymaster, will ultimately have to foot the bill was one of the factors at play
in a rare failed auction of German government bonds on Wednesday.
The Bundesbank had to buy almost half of the €6bn ($8bn) of
bonds on sale as investors went on strike.
Keep your nerve
ECB vice-president Vitor Constancio played down what one
analyst called a "disastrous" auction. "Markets often overshoot
from time to time," he told an audience in London. "We have to keep
our nerve."
But Constancio acknowledged that the architects of the euro
had never envisaged the day that buyers for the long-term debt of a eurozone
member might suddenly vanish. Apart from Greece, Ireland and Portugal have also
been locked out of the bond market. Spain, Italy and now Belgium are paying
punitive rates.
What was needed, Constancio said, was deeper fiscal
integration and a workable financial rescue mechanism. The details might take a
year to implement, but markets would settle down if they saw that politicians
were in agreement on the deep reforms required.
"What's important is that the final goals are very
clearly explained and are strong and credible," Constancio said.
Not only is a blueprint to prevent new crises still elusive, but banks and governments have yet to agree with Greece on how to share the burden of writing off a chunk of Athens' old debts.
But Larry Hatheway, chief economist for UBS' investment bank
based in London, said the proposal to wipe out half of the face value of the
debt was progress.
Governments had long resisted the principle of a writedown,
fearing it could be the thin end of a very long wedge that banks under their
jurisdiction could not cope with.
"Now there's an acknowledgement among creditor
governments that financial institutions will have to accept a loss on the
exposure to certain sovereigns. That's a step forward," he said.
Yet even as crumbling confidence in policymakers drains life
from the eurozone economy, demanding immediate action, the history of debt
workouts suggests many more steps will be needed before creditors and debtors
strike a compromise.
Patrick Butler, a board member of Austria's Raiffeisen
International bank, complained about weak political leadership and said the
proposed 50% haircut for Greece was unlikely to be the end of the story.
"It is clearly difficult for any investor to have the
confidence to put his money at risk when unequivocal statements made by heads
of state, finance ministers and central bank governors are jettisoned within
weeks and actions taken in flat contradiction to the words," Butler told a
financial conference in Moscow.