European stocks rebounded Tuesday after sharp losses the day before on fears about Europe's debt crisis. But rising borrowing costs at bond auctions for Spain and Italy showed that debt fears still stalk the eurozone.
The tapering of stimulus by the U.S. Federal Reserve risks reigniting Europe’s debt crisis and pushing weak countries into a “debt-deflation spiral”, the International Monetary Fund has warned.
“The macro-economic environment continues to deteriorate. Recovery remains elusive,” said the IMF in its annual health check on the eurozone. “Growth has weakened further and unemployment is still rising. Mounting social and political tensions pose an increasing threat to reform.”
The EU has accused Spain of overstating its 2011 budget deficit thus making it easier to make progress in 2012. Furthermore the EU is upset about delays in austerity measures ahead of regional elections next month.
Marc Chandler submits:There is one main force in the capital markets today and it is European debt crisis. The crisis is becoming deeper and broader. Deeper in the sense that the Greek 2.0 is looking more difficult and some reports suggest that if the rating agencies will declare nearly any "voluntary" private sector participation as a "stressed exchange" and therefore at least partial default (selective default), European officials might has well consider bolder action now.
"The ECB’s OMT is practically dead," says Joachim Fels, the top economist at Morgan Stanley. OMT, or "outright monetary transactions," was the game-changing monetary policy construct introduced last year by the ECB in order to reduce financial market stress in the eurozone.
The European single currency held above $1.31 on Thursday as the foreign exchange market digested successful bond auctions in Italy and Spain, ahead of an interest rate call from the European Central Bank.In late morning deals, the euro rose to $1.3137 from $1.3128 in New York late on Wednesday.Spain passed a major test on Thursday in its first bond auction of 2011, bolstering its case that it has no need for an emergency bailout which would take the eurozone into a new chapter of crisis.