Europe's debt crisis could get worse

The European Union (EU) and the International Monetary Fund (IMF) have decided to audit Greece's progress in cutting its public debt deficit and economic reforms amid the risk of bankruptcy looming over the country.

AFP reported that the EU and IMF will decide whether to provide Greece with another $11 billion bailout package after the conclusion of this audit. Greece is anxiously waiting because without this money, Athens will not be able to pay its current public debts from mid-October 2011.

Police block protesters in Athens against the Greek government's new austerity measures - Photo: Reuters

“Preventing Greece from defaulting is more important than promoting European growth”

The IMF's annual meeting in Washington this weekend came as markets continued to fall after new economic forecasts showed the world economy would continue to stagnate. IMF Managing Director Christine Lagarde called on eurozone countries to immediately implement the agreements of the July 21 meeting, saying "time is of the essence." US Treasury Secretary Timothy Geithner also warned that "preventing a Greek default is more important than boosting European growth."

“The IMF has put Europe on trial. The IMF’s annual meeting on September 23rd will see Europe sitting on the bench,” La Stampa newspaper described Europe’s current situation.

Meanwhile, the IMF said a larger, more ambitious eurozone rescue plan is being prepared as the European debt crisis worsens. The plan involves cutting Greece's massive government debt by 50% and increasing the eurozone's bailout package to $2.7 trillion, according to reports from the IMF. European governments are expected to come up with a plan in the next five or six weeks. But analysts say the cost of failure could be an even worse financial crisis.

Investors say they are unimpressed with the speed with which European policymakers have addressed the debt crisis. Analysts say the time for action is now, and that the most important thing now is to stabilize volatile stock markets. If big banks are not stabilized, the global financial crisis could make the global economy worse than the 2008 financial crisis.

Stock markets in Frankfurt and Paris rose about 3% at midday before falling slightly. France's CAC 40 lost 2%, Britain's FTSE 100 and Germany's Dax fell 1% in early trading. US stocks also rose about 0.6% in early trading. Earlier, Asian stocks also fell. The Nikkei fell 2.2%, Hong Kong's Hang Seng fell 2.4% and South Korea's Kospi fell 2.6%.

“European debt crisis is more serious than the 2008 financial crisis”
According to Bloomberg, Europe's sovereign debt crisis is getting worse because Europe now lacks the mechanisms that the United States applied in 2008.

During the 2008 financial crisis, the US Treasury resorted to “unprecedented” measures by injecting huge amounts of liquidity into the market, recapitalizing banks and reassuring investors when the market was worried about the banks’ solvency. However, the current situation in Europe is potentially fraught with unpredictable instability if European banks are withdrawn at the same time.

“The situation in Europe is more serious than the 2008 financial crisis because the US had a mechanism to deal with the crisis,” said billionaire George Soros. Mr. Soros proposed establishing a common finance ministry for the eurozone to deal with the current debt crisis.

Financial analysts say policymakers need to come up with more initiatives than establishing the European Financial Stability Fund, because the fund's liquidity is not strong enough in case Greece defaults, which would push a series of other European countries such as Italy, Spain... into debt crisis.

Meanwhile, IMF Director General Christine Lagarde warned that the IMF's current financial resources of 384 billion USD are not enough to meet the near-future borrowing needs of debt-ridden countries and countries at risk of default.

(According to Tuoi Tre)