POLL-Euro zone debt problems to last at least another 12 months

Published: 19 Aug 2010 04:48:02 PST

* U.S. slowdown biggest risk to euro zone recovery - poll

* 43 pct chance of Greek restructure in next 5 years - poll

* Most economists say unlikely any state to leave euro zone

LONDON, Aug 19 - The symptoms of the euro zone debt crisis will persist for at least another year, according to a Reuters poll of 60 economists, who see governments struggling to contain their vast debts for some time to come.

A slowdown in the United States poses the biggest threat to a sustainable recovery in the euro zone economy, the poll showed, with fiscal tightening and debt worries also seen as major risks to growth.

The crisis -- defined in the poll as 10-year government bond yield spreads of at least two euro zone members staying above 100 basis points over German Bunds -- will last at least a year, according to 55 economists who answered the question.

Twenty-six of them said it would last at least two years.

Several euro zone governments have committed to stringent austerity measures to regain control over swollen budget deficits, although many of these programmes are still in the earliest stages.

"Only when some of these countries translate words into action, and some of these spreads start to come in, then perhaps markets will fully believe we're on the road to a longer-lasting recovery," said Mark Miller at Lloyds Banking Group.

"I think that's going to happen over a longer, rather than a shorter, time horizon."

On Wednesday, Portuguese and Irish 10-year government spreads over the equivalent German bunds hovered just under the 300 basis point mark, while the Greek spread was around 845 basis points.

While the 16-nation euro area enjoyed quarter-on-quarter growth of 1.0 percent during April-June, attention has shifted over the last month or so from the sovereign debt crisis in Europe to the fast-cooling U.S. economy.

Growth there slowed to an annualised rate of 2.4 percent in the second quarter from 3.7 percent in the first -- a figure that could yet be revised lower after last week's appalling trade deficit data for June and worrying unemployment trends.

"Over the past 40 years, a recession in the U.S. has always been followed by a significant contraction in developed countries' output, and in Europe in particular," said Slavena Nazarova of Credit Agricole CIB.

She added that the euro zone looks more vulnerable to any drop in global demand today than during previous business cycles, with medium-term growth prospects restrained by high unemployment and a large degree of economic slack.

Nineteen respondents cited a U.S. slowdown as the biggest risk to the euro zone, with 15 saying fiscal tightening and 14 pointing to debt concerns, for which no end seems likely soon.

GREEK RISK

Greece, the epicentre of the crisis, is so far on track with unprecedented measures to cut its budget deficit -- although economists still harbour doubts about the government's ability to sustain the painful cuts they say are needed over the years ahead.

Median forecasts put the chances of a sovereign debt restructuring in Greece over the next five years at 43 percent, a ten percentage point hike increase over a poll conducted in May at the height of European financial markets' volatility.

Nearly half of respondents gave a probability for this of greater than 50 percent in the latest poll, although overall they gave Spain, Portugal and Ireland a 10 percent chance each of a debt restructuring within 5 years.

"Debt restructuring makes sense for high-debt countries only -- so it is a possibility for Greece, but not the other three countries in the poll," said Luca Mezzomo at Intesa Sanpaolo.

The prospect of any member state leaving the euro zone in the next five years, mooted by a minority of economists earlier this year, still looks remote, the survey found.

Fifty-four described this possibility as "unlikely" or "very unlikely", with only six saying "likely" or "very likely".

One of those in the "likely" camp, Stephen Lewis of Monument Securities, explained the global economy was still in a fragile state and the risk of a return to recession sometime in the next five years was high.

"Five years is a very long time and there are a lot of disasters that can befall sovereign borrowers in a global situation which is still far from settled," he said.