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European Central Bank policymakers will confront mounting euro zone financial tensions at a meeting on Thursday in the face of a brewing crisis brought on by Greece's spectacular public deficit and debt.
That the ECB's main interest rate will stay unchanged at a record low of one per cent is considered a done deal for most, if not all, of 2010, analysts say.
Although headlines are being grabbed by Athens and its deficit of 12.7 per cent of gross domestic product and debt of roughly 113 per cent of GDP, other euro zone countries have serious problems too.
Italy has debt equivalent to 115 per cent of output, also nearly twice the accepted euro zone limit of 60 per cent. Portugal's public deficit last year was 9.3 per cent of GDP, more than three times the euro zone ceiling of 3.0 per cent, and Spain has estimated its shortfall at 11.4 per cent.
On Friday, the Spanish government unveiled an austerity plan to save €50 billion (Dh257bn) over three years, while Ireland has drafted a drastic fiscal programme.
Analysts do not expect any country to leave the euro zone, but they are worried about a widening growth gulf between northern and southern European countries. Investec securities analyst David Page said his firm anticipated "ongoing tensions that are beyond the scope of euro zone monetary policy to address."
Support for Greece is reportedly under consideration, but the German foreign ministry has said that "Greece has the duty to live up to its responsibility for the euro zone's stability by its own means." French Finance Minister Christine Lagarde however said that "Greece is not alone."
EU rules prohibit direct bail-outs but euro zone neighbours could extend bilateral loans to see Athens through its crisis, though that might undermine the credibility of criteria that underpin the single currency.
Overall economic confidence rose for a tenthmonth running in January, the European Commission said, but consumer confidence was just slightly better, because companies do not plan to start hiring new employees in the near future and government spending has left populations wondering when they will have to pay the bill.
"Deteriorated labour market conditions combined with fiscal consolidation will probably weigh on private consumption," Deutsche Bank economist Gilles Moec said.
One in 10 workers across the euro zone is unemployed, EU data shows, while the rate in Spain is nearly one in five. Partly as a result, inflation remains at a relatively tame one per cent, even though the Greek crisis has caused the euro to fall against the dollar, raising the cost of imported commodities and energy.
Elsewhere, the ECB's latest bank lending survey determined that credit to households had improved but businesses faced tough conditions that could harbour "some tentatively unpleasant developments in the remainder of 2010," Moec said.
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