Europe may be losing control of debt contagion: analysts

(PARIS) - Europe is at risk of losing control of the Greek debt debacle and may now be powerless to halt an onslaught elsewhere that could threaten the very existence of the eurozone, analysts warn.

Investors fear a 110-billion-euro EU-IMF rescue package may be inadequate and -- worse -- may prove insufficient to shield Spain and Portugal from the market pressures assailing Greece.

Stock markets are tumbling around the world while the euro, the lynchpin in the grand European experiment, has fallen from 1.45 dollars at the start of the year to 1.29, calling into question the very survival of the single currency.

Economists since January have agonised over what they see as the European Union's halting and ineffectual response to the Greek crisis, with the rescue plan still awaiting formal and final endorsement by eurozone parliaments.

Analysts French bank BNP Paribas have warned that "authorities do not look as though they know what they are doing."

"Still less do they look in control of the situation."

That approach, which BNP described as "a chronic and widespread problem in Europe," hardly inspires market confidence.

The BNP analysts also observed: "There are worries about banks. The ECB did not do a U-turn on changing collateral rules for an individual country without reason."

It was likely that Greek banks would need more cash support from the ECB, they said and "there are worries about Spanish banking and there are worries about wider European banking contagion."

The reference to collateral related to a dramatic about turn by the European Central Bank into agreeing to accept all Greek bonds as guarantees to borrow precious funds from the central bank regardless of the quality of the bonds.

"If the president of the ECB in the space of a few weeks abandons basic principles, why should the euro remain stable in the decades to come," asked an editorial writer in the German newspaper Die Welt.

Under the circumstances some analysts are questioning the viability of a currency that links countries with economic performances as starkly different as Germany and Greece.

Critics of the euro argue that the single currency deprives countries in crisis such as Greece from resorting to devaluation, as a means of boosting exports, and thereby condemns them to recession.

"It is time to acknowledge the failure of the euro," said Jean-Jacques Rosa, an economist and emeritus professor at the Institut d'etudes politiques here.

He said that at best Germany and several of its neighbours might be able to from "a small mark zone," based on the former German currency, that would be "economically logical."

The possibility that Greece may not actually get the loans it has been promised from the eurozone and the International Monetary Fund, if it fails to implement deep spending cuts and tax rises, also weighs heavily on market sentiment.

The measures have sparked furious and deadly protests in Athens that could pose a real risk to the government's capacity to push through the cuts.

"The escalation of public protests in Greece clearly reflects that the country is not swallowing the bitter pill of austerity," said Jane Foley, research director at Forex.com.

"These conditions suggest it is probably impossible for Greece to achieve its dual aim of slashing its budget deficit and simultaneously meeting all of its debt obligations."

Contagion fears are centered on Spain and Portugal, two other eurozone members that are struggling with big public deficits and could like Greece be targets for damaging market speculation.

Foley said that although the debt burden on Spain and Portugal was lower than that on Greece, "given the risk of default in Greece, investors are in no mood to take chances."

"If capital flight continues from Portugal's bond market it too could require an IMF loan," she said.

The ratings agency Moody's on Wednesday it might downgrade Portugal's sovereign debt within three months, sparking a sell-off on the Lisbon stock market.

Moody's said it had placed Portugal's Aa2 government bond ratings "on review for possible downgrade," adding that it could be cut by up to two notches because of worsening public finances and weak growth prospects.

Analyst Ben May of Capital Daily said that while uncertainty hangs over whether Greece is prepared "to take years of fiscal punishment and recession, ... it is still unwise to rule out the government eventually defaulting or restructuring its debts."

Nobel laureate economist Joseph Stiglitz has meanwhile cautioned that the harsh steps demanded of Greece could actually worsen the situation there.

"If you cut budgets too excessively the economy gets weaker, tax revenues go down and the improvement in the fiscal position of the country is much less that one would have hoped," he said Tuesday.

The concern is that reducing salaries and raising taxes will cut deeply into consumer spending and thereby hobble critically needed economic growth in Greece.