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The euro zone's new year heralds a debt crisis that has alarm bells ringing and markets tracking government plans to tame the growing shortfall.
Officials have borrowed heavily to pull the 16-nation zone out of its first recession, and debt levels are set to smash a huge hole in the ceiling set by the European Union in its Stability and Growth Pact.
Soaring budget deficits, low growth and banking sector support "are feeding into significantly higher public debt levels," the European Commission has warned.
Average euro zone "public debt could reach 84 per cent of GDP in 2010, an increase of 18 percentage points from 2007", it said, far above the pact's limit of 60 per cent.
Government debt ratings have been downgraded in Greece by all three major international agencies, and by some of them in Ireland and Spain as well.
The Fitch agency has urged all governments with top ratings to tame debt, mentioning in particular Britain, which is not a eurozone member, along with France and Spain, which are.
Germany, long considered the cornerstone of eurozone fiscal discipline, forecasts public debt at around 78 per cent of GDP this year, while in France, the second biggest eurozone economy, public debt jumped to a record 75.8 per cent in the third quarter of 2009.
Greece says its shortfall come to 120 per cent of output in 2010.
Debt is raising the cost of borrowing for many countries and adding to the weight of reimbursing obligations on future budgets.
With unemployment rising and weak growth expected in 2010, officials cannot count on increased tax revenues for much help in paying down debt, a lot of which is owed abroad.
"The (economic) crisis is weighing on the sustainability of public finances and potential growth," the EU commission has warned as economists leave open the possibility of a "double dip" recession this year.
Finances will be undermined further by an ageing population that will need expensive health care in the years to come.
But tightening the financial screws, as many capitals have pledged to do, could choke off an economic recovery if officials act too soon, analysts warn.
Natixis economist Patrick Artus said that in the near term, "it will not be possible to return to less expansionary monetary policies, at the risk of creating huge problems" as money pumped out to boost activity has begun to generate fresh problems of its own.
They include new speculative bubbles in emerging economy assets, commodities and possibly even real-estate, a key factor in the mid-2007 financial meltdown.
Failing to act on deficits and debt however will spark a reaction at some point from financial markets, which will demand higher interest payments on loans, especially from highly exposed countries like Greece.
On Friday, the yield, or interest on 10-year Greek bonds was a hefty 2.36 percentage points higher than that for benchmark German bonds.
Before the financial crisis erupted in August 2007, the spread was just 0.29 points, and in early December, Greek Prime Minister George Papandreou warned: "Either we eradicate the debt, or the debt will eliminate the country."
The Greek debt debacle constitutes one of the eurozone's biggest tests ever as Europe's single currency begins its 12th year in existence.
That has weighed on the euro, which traded for $1.44 on Thursday ahead of the New Year holiday.
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