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Still, its limited bond purchases have provided essential support to Spain and Italy by helping hold down borrowing costs. And its latest massive infusion of euro489 billion ($639 billion) in cheap, long term loans may help troubled governments borrow, as stronger banks may use some of the money to buy higher-yielding government bonds. Italy pays an average of about 4.2 percent on its existing stock of euro1.9 trillion in debt, but the crisis has pushed bond yields on the country's benchmark ten-year bonds to over 7 percent. Italy's new government, led by economist Mario Monti, can probably pay rates that high for a while, analysts think. Italy paid much higher interest rates in the 1990s for several years; rates peaked at 14 percent in 1992 but fell gradually to around 4 percent by 1998 as the country shaped up its finances to join the euro at the beginning of 1999. But the country is now hit by contagion after eurozone authorities allowed Greece to ask creditors to take less than they were owed. Italy also suffers from lagging growth, held back by burdensome red tape and bureaucracy while Spain has an unemployment rate of 22.8 percent
-- 48.9 percent for people under 25 -- after the collapse of its real estate bubble. Italy and Spain's battle will be even harder if the debt troubles pull the whole eurozone into a recession. Economists at Ernst & Young foresee a mild recession in the first part of the year and only 0.1 percent growth for the year as a whole, with unemployment at 10 percent for several years. That will increase the strain on governments trying to persuade voters to accept more cutbacks in spending, pensions and government wages while raising taxes. It's also not clear how long voters in Greece, which will have its fourth straight year of recession next year, will tolerate continuous austerity. Yet the cutbacks are the price of getting the bailout loans that have kept Greece from default. Meanwhile Greece is striving to get creditors to agree to write down some debt and avoid larger losses in case of a default that is not agreed ahead of time. A euro14.4 billion ($18.8 billion) chunk of debt comes due in March. Guntram Wolff, deputy director of the Bruegel think tank in Brussels, said that governments may get past the early hurdles
-- only to confront a souring mood among voters in the second half of the year over continuing cutbacks and sacrifices. New governments in Spain and Italy, currently enjoying political honeymoons, will be pressed to show progress. Greece has seen repeated protests and strikes. "There will be a point in the summer when people have seen a lot of action from government and no improvement in their living conditions and they will ask, do we have this euro to live with austerity and high unemployment," he said. Wolff thinks that the determination of political elites to keep the euro together will win out: "I think it's going to survive."
[Associated
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