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Eurozone debt woes overshadow G8 summit

By Jiang Xufeng: 0 Comment(s)Print E-mail Xinhua, May 20, 2012

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Staying in the loop [By Jiao Haiyang/China.org.cn]

The simmering eurozone debt crisis loomed over a gathering of Group of Eight (G8) leaders hosted by U.S. President Barack Obama at Camp David, but the two-day summit offered no silver bullet to cure the two-year-old crisis which shed light on the fundamental weakness of the euro project.

Crisis epicenter

In former European Central Bank (ECB) head Jean-Claude Trichet's view, the eurozone is now the epicenter of the global economic crisis. The world economy has been on "what is best described as a roller coaster" for the last six months, to borrow the International Monetary Fund (IMF) chief economist Olivier Blanchard's words.

"This morning, we're going to be spending a lot of time on economic issues. Obviously the eurozone will be one topic," Obama said on Saturday before kicking off the working sessions of the summit.

A string of bad news weighed on investors' confidence in recent weeks. Global rating agency Fitch has slashed Greece's rating from B- to CCC, the lowest possible grade for a country that is not in default, on heightened risk that Greece could leave the euro area.

Greece is expected to conduct a second round of election next month with an anti-bailout leftist party ahead in the polls, in a bid to resolve the political stalemate after the May 6 national election that produced a legislature divided among supporters and critics of the austerity measures mandated by the global rescue package.

At issue is whether Greece exits from the eurozone to escape austerity policies, a once taboo topic that global leaders have begun to discuss openly. Experts including IMF chief Christine Lagarde have warned of "extremely expensive" consequences of Greek departure from the currency bloc.

G8 leaders expressed their strong wish to keep Greece in the eurozone, saying in a statement that "we agree on the importance of a strong and cohesive eurozone for global stability and recovery, and we affirm our interest in Greece remaining in the eurozone while respecting its commitments".

The fate of eurozone is also critical to Obama's own political survival, as he has geared up the reelection bid. "A stable, growing European economy is in everybody's best interests, including America's", Obama told reporters after the G8 summit concluded.

Fragile banking sector

Prior to the gathering of leaders of major economies at the heavily-guarded presidential retreat in Maryland, the U.S. stock market has been in a slump over the past two weeks, on fresh risk triggered by Greek political deadlock and fragility of the eurozone banking system.

Earlier this week, another global credit rater Moody's Investors Service downgraded the long-term debt and deposit ratings for 16 Spanish banks, on the heels of its decision to downgrade 26 Italian banks. Experts held that Spanish lenders were exposed to large amount of soured investments in the real estate sector, a leftover from the financial crisis for several eurozone economies.

Investors were also rattled after a report showed customers at Bankia, a leading bank in Spain, had withdrawn more than 1 billion euros from their accounts although the Spanish government said there had been no deposit flight from the lender.

Bankia has been considered a litmus test of the government's efforts to fix the country's banking sector, but uncertainty over how much the banking sector rescue would cost the government has stirred up market jitters, as investors worried that Spain and Italy may follow suit after Greece, Portugal and Ireland and turn to global rescue from their European partners and the IMF.

G8 leaders offered no specific steps to beef up the fragile banking sector except for pledging to take all necessary steps to combat financial stresses.

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