Relief in Spain, tension in Greece for euro zone

Thu Jan 19, 2012 12:40pm EST
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By John Stonestreet and Deepa Babington

MADRID/ATHENS (Reuters) - The embattled euro zone cleared a major funding test on Thursday when Spain romped through a key bond sale, while signs pointed to only a mild recession for the 17-nation bloc.

Talks between Greece and its creditors remained deadlocked, however, threatening to derail a needed bailout and keep the region's all-consuming debt crisis on the boil.

Ireland passed the latest review of its European Union-International Monetary Fund bailout, although it faces difficulty keeping its deficit reduction going if its economy sours.

A Reuters poll of economists pointed to the euro zone wallowing in a mild recession until the second half of this year, but contracting by just 0.3 percent for the year compared with a forecast three months ago of 0.9 percent.

At the same time, the IMF is expecting the euro zone economy to contract by 0.5 percent in 2012, according to draft document reported by the Italian news agency ANSA.

Neither figure is comforting, but both suggest a downturn is seen as shallow and probably short.

European Central Bank President Mario Draghi, speaking in Abu Dhabi, repeated his view that the euro zone economy is fragile.

"We see a softening business cycle in Europe with significant downside risk. We also see some tentative signs... but I have to be quite cautious here... some tentative signs of stabilization of economic activity at low levels," he said.   Continued...