Eurozone’s tough time continues

THE eurozone faces another difficult week amid mounting worries over budget deficits in Greece, Spain and Portugal.

Finance ministers from the G7 countries meeting in Canada at the weekend insisted on a European solution to the problems rather than an IMF rescue. “We told our partners we had to solve the problem ourselves,” said Jean-Claude Juncker, chairman of Eurogroup, the group of eurozone finance ministers.

The euro hit an eight-and-a-half month low against the dollar on Friday, on fears that Greece’s government debt problems were spreading to other PIIGS economies (Portugal, Ireland, Italy, Greece and Spain). Credit spreads in Spain and Portugal widened sharply and stock markets plummeted.

The euro is poised for further falls this week and could test the $1.35 level as investors seek refuge in the dollar and the yen.

Analysts at Nomura said the most leveraged European countries with the highest deficits include Greece, Ireland, the UK and Spain. The least leveraged include the Nordic countries, France and Germany.

Deutsche Bank analysts said the increase in the cost of insuring against debt defaults in the PIIGS economies could be a “dress rehearsal” for the UK and US, whose own budget deficits worsened sharply during the downturn.