EU tries to calm market fears over debt crisis

[May 05, 2010]  BRUSSELS (AP) -- The European Commission on Wednesday tried to calm fears that Greece's debt crisis is spreading to other European countries, insisting Greece is a "unique case."

Presenting a small upward revision to this year's growth forecast for Europe, EU Commissioner Olli Rehn said the market's fear that Spain and Portugal would be enveloped in the same sort of fiscal crisis is "significant overshooting."

"I want to underline that Greece is a unique and particular case in the EU" because of its "precarious debt dynamics" and because it "has cheated with its statistics for years and years," he said.

Spanish and Portuguese bonds and stocks have fallen this week on fears that they may likewise have trouble repaying their debt and that the eurozone would have to extend even larger bailouts to them.

In Greece, flights to and from the country were grounded, and trains, ferries and public services were paralyzed as angry workers went on strike Wednesday to protest harsh new spending cuts aimed at staving off bankruptcy.

The cuts are required as part of the euro110 billion ($144 billion) bailout package for Greece from the EU and International Monetary Fund.

Containing the Greek crisis is crucial for all of Europe, Rehn said.

"In order to safeguard the economic recovery which is still rather modest and somewhat fragile, it is absolutely essential to contain the bushfire in Greece so that it will not become a forest fire and a threat to financial stability for the European union and its economy as a whole."

He denied that any rescue plans were being prepared for Spain.

"We are not going to propose because there is no need to propose financial assistance," he said in a Brussels news conference.

Europe's total government deficit has tripled since 2008 and is expected to peak this year at 7.2 percent of gross domestic product in the EU and 6.6 percent in the euro-zone, the EU said.

While Greece's deficit is not the highest in the EU, concerns about the government's ability to pay it back are greater because of its high debt level and weak economy.

Britain is set to have the highest deficit in the EU at 12 percent of GDP this year, dropping to 10 percent next year, according to the forecasts.

The Greek deficit is likely to be lower than the forecast 9.3 percent of GDP this year, and 9.9 percent in 2011 because the figures don't take account of the new measures agreed by the government last weekend, Rehn said.

In Spain, the EU forecasts a deficit of 9.8 percent this year and 8.8 percent in 2011. Portugal, which markets also fear may follow Greece, is seen with a budget gap of 8.5 percent this year, falling to 7.9 percent.

When they created the euro, governments agreed not to let their deficits exceed 3 percent, but the rules were soon broken, even before the crisis. They were supposed to stop governments racking up debt and pushing up inflation, threatening the currency.

Debt levels this year according to the forecasts vary from 125 percent of GDP in Greece and 118 percent in Italy to 79 percent in Britain and 78 percent in Germany.

Of the euro members, only tiny Finland, Luxembourg, Slovenia and Slovakia have debt levels this year below the EU's prescribed 60 percent of GDP.

In its scheduled spring forecasts, the EU executive said the 16-nation currency bloc's economy will grow by 0.9 percent in 2010, up from a November forecast of 0.7 percent, despite the crisis.

Growth in the euro region will be held back, however, by the shrinking economies of Spain, Greece and Ireland.

Next year, the euro-zone is seen growing by 1.5 percent, with every economy except Greece seen expanding.

Rehn said Greece is likely to do worse than the EU forecasts show. Taking into account the news measures, its economy should shrink by 4 percent this year instead of the 3 percent contraction forecast, and by 2.5 percent instead 0.5 percent next year, he said.

The full 27 nation European Union economy is expected to grow at a clip of 1 percent this year, rising to 1.7 percent next year.

Official data released Wednesday also showed retail sales in the eurozone were flat in March, disappointing market expectations for a small increase and suggesting the region's recovery will be slow at best..

[Associated Press; By EMMA VANDORE]

Associated Press writer Raf Casert in Brussels also contributed to this report

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