Europe May Fall Back into Debt Pit

The temporary relief provided by ECB to euro zone banks seems to be fading as the manufacturing slowdown in Europe seems to be pointing toward a recession that is looming large on the horizon.

New York, April 9 ( - A temporary relief seems to have been provided by the European Central Bank that injected one trillion euros ($1.3 trillion) into euro zone banks at auctions in December and February. The intention was to ease concerns that banks might face a funding crunch.

Although, some of the cash reached the sovereign bond markets and helped in reducing the rates that countries need to pay to raise funds, the calm start to 2012 got a jolt because of a poor Spanish bond sale last week that indicates the honeymoon seems to be over for Europe and that it is heading back into its debt pit.

Although, the first quarter was particularly exceptional for state borrowing by euro zone countries, there are concerns whether, Italy and Spain would also need to be bailed out after Greece, Ireland and Portugal. In the first three months of the year, France and Germany could borrow at very favorable rates and Spain could cover about 43 percent of its financial needs for the year at an advantageous rate of 4 percent compared to 7 percent that was prevailing at the height of the crisis last year.

However, the first week of April saw the situation in the European debt market change drastically. Spain had to pay sharply higher rates at a bond auction Wednesday to investors, even after it announced a budget that will result in 27 billion euros in savings. Investors were jolted by Spain’s warning that its public debt will rise by 10 percentage points this year to about 80 percent of GDP.

Economists warned that risks will escalate next year because recession, high unemployment and bad real estate assets are likely to hit Spain. The latest economic data shows that manufacturing has slowed and that recession in the euro zone is round the corner.

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