New market storm could catch euro zone unprepared

Sun Feb 21, 2016 3:03am EST
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By Yves Clarisse

PARIS (Reuters) - Distracted by an unresolved migration crisis and negotiations on keeping Britain in the European Union, euro zone leaders could be caught unprepared by a new storm on financial markets.

Global market turmoil since the start of the year has helped set warning lights flashing in euro zone sovereign bond markets. In early February, the premium that investors charge to hold Portuguese, Spanish and Italian government debt rather than German bonds hit some of the highest levels since the euro zone crisis that peaked in 2011-2012.

European bank shares have been badly hit by concerns over their high stock of non-performing loans, new regulatory burdens and a squeeze on profits due to sub-zero official interest rates. New EU banking regulations that force shareholders and bondholders to take first losses if a bank needs rescuing are further spooking the market, notably in Italy.

All this comes at a time when public resistance to further austerity measures has surged all over southern Europe, producing unstable results at the ballot box.

Furthermore, the storm clouds are gathering above a tenuous and slow euro zone economic recovery - growth is officially forecast to reach 1.9 percent this year versus around 1.6 percent in 2015. Southern periphery countries all face budget problems that are fuelling political tension with Brussels.

Inflation is also refusing to perk up despite the European Central Bank's bond-buying program and negative interest rates, making it harder for heavily indebted euro zone countries to pay down debt.

Yet euro zone governments transfixed by differences over sharing out refugees, managing Europe's porous borders and accommodating British demands for concessions on EU membership terms have a huge amount on their hands already.

One French government adviser said the EU had never faced such an accumulation of crises in the last 50 years.   Continued...

A rainbow is seen behind European flags during a euro zone EU leaders emergency summit on the situation in Greece at the European Council headquarters in Brussels, Belgium, July 7, 2015. REUTERS/Eric Vidal/Files