New recession threatens the globe as debt crisis grows

China's carefully managed soft landing has turned uncomfortably hard, with ripple effects through the commodity markets. Spot iron-ore prices have dropped 30pc since July to $126 a tonne. Copper prices have fallen 20pc since August.

Barclays Capital said the risks of contagion to China has become serious. The bank is monitoring the country's "key high frequency data" for early warning signs of the sort of sudden crash in metals demand seen during the Lehman crisis.

China had the firepower to respond to the 2008 crisis with blitz of credit that helped lift the whole world out of slump, a feat that cannot easily be repeated if there is a second shock.

The IMF said loans have doubled to almost 200pc of GDP, including off-books lending. This is an unprecedented level of credit growth, twice the intensity of the Japanese bubble in the late 1980s.

The authorities are trying to deflate the excesses slowly with higher interest rates and reserve ratios. This is proving painful. Yao Wei from Societe Generale said prices of new residential property fell 14pc in October. Railway investment collapsed by 40pc as the insolvent railway ministry struggled to cope with $300bn of debt. Highway construction dropped 2pc.

Europe is in a deeper, more intractable crisis. Industrial output buckled in September with falls of 4.8pc in Italy, 2.7pc in Germany, and 1.7pc in France from a month earlier as the effects of the debt crisis – as well as fiscal contraction and prior monetary tightening – finally hit with a vengeance.

EU commissioner Olli Rehn slashed growth forecasts from 1.6pc to 0.5pc next year, warning "that recovery has now come to a standstill and there's the risk of a new recession unless determined action is taken". This did not stop Brussels sending a letter to Italy calling for yet more fiscal cuts to meet it is balanced budget target by 2013.

"It is imposing pain for pain's sake, and it is going to cause creditors to collect even less on their Club Med debts than if austerity were abandoned. Even in the early 1930s they weren't as bad as this," said Charles Dumas from Lombard Street Research.

Humayun Shahryar from the hedge fund Auvest said the eurozone faces a "major economic collapse", perhaps with double-dgit falls in GDP. "European banks are massively over-leveraged and almost every one is worthless if you mark to market. This is going to be worse than 2008 because they have run out of bullets. The sovereign states are not strong enough to stand behind the banks," he said.

Professor Johnson said the EU authorities had made a serious mistake by raising capital ratios for banks to 9pc rather than forcing them to raise fresh capital. "That will lead to a further contraction of credit."

Banks have already taken drastic steps to cut their loan books rather than raise money in a hostile market, earmarking over €700bn for the next year. There will be knock-on effects for the rest of the world. European banks account €2.5 trillion cross-border loans to emerging markets.

In the US, the economy has held up better than feared so far but faces a fiscal shock early next year. Tax write-offs have pulled capital expenditure forward into late 2011, flattering the picture.

Payroll taxes will rise automatically from 4.2pc to 6.2pc in January. Dumas said the combined fiscal squeeze could be as much as 2pc of GDP, heavily "front-loaded" in the early months. "Sharp recession is likely," he said.

"The credit spigot has been turned off in the US," said Chris Whelan from Institutional Risk Analytics. "Almost every bank is still running down its loan book, so we are facing a slow motion credit-crunch."

Fiscal and monetary stimulus has disguised the underlying sickness in the debt-laden economies of the West over the past two years. This heavy make-up has at last faded away, exposing the awful visage beneath.

It is a delicate moment. The risk of a synchronised slump in Europe, the US and East Asia is bad enough. What is chilling is to face such a possibility with the monetary pedal already pushed to the floor in the US, UK and Japan.

Worse yet is to do so with Europe spiralling into institutional self-destruction, allowing its debt crisis to metastasize because EMU has no lender of last resort. That is an unforced error we could do without.

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Traders brace for eurozone crisis fallout

The German chancellor warned that Standard & Poor's decision to downgrade nine eurozone countries on Friday evening demonstrated that politicians needed to step up their efforts to resolve the crisis, warning that it was a "longer process" that would take more than a few months.

"The decision confirms my conviction that we have a long way ahead of us before investor confidence returns," she said in a radio address. Germany was not among the countries downgraded.

The downgrades, after markets closed on Friday, marked a further escalation of the debt crisis, which has seen investors lose faith in euro governments' ability to service their debts.

Stalled talks over "haircuts", or writedowns, of Greek government debt will further worry investors, as they pose the threat of Athens making a disorderly default.

Nicolas Sarkozy, the French President, yesterday called for cool heads after his country was scalped of its prized triple-A rating, pushing up its borrowing costs.

"The crisis can be overcome provided that we have the collective will and the courage to reform our country," he said. "We must resist, we must fight, we must show courage, we must remain calm."

The rating agency had explained its move by warning that recent European policies "may be insufficient to fully address systemic stresses in the eurozone". While downgrades were widely rumoured, its decision to cut the ratings of some but not all eurozone nations has complicated the political situation.

In the UK, William Hague, the Foreign Secretary, warned that the clutch of downgrades "is serious. It underlines the fact that the eurozone is not through its problems."

Spanish Prime Minister Mariano Rajoy, responding to his country's own downgrade, pledged spending cuts and a reform of Spain's banking system.

While European leaders appeared to be signing from the same hymn sheet of reform yesterday, eurozone officials suggested there remained considerable doubts over how the region's bail-out fund would be funded, and by who.

"There is a debate. The question is still open and there is no consensus so far," one official reportedly told news agency AFP. Germany is thought to be still unwilling to increase its contribution to the European Financial Stability Facility (EFSF). The S&P downgrades could hit the EFSF's triple-A rating, economists have warned, sending borrowing costs higher.

In an example of the affect the crisis is having outside the region, Japan's prime minister warned that his country, hobbled with the world's largest debt load, could fall into the same problems. Yoshihiko Noda said Europe's situation "isn't a house burning on the other side of the river," telling voters: "We must have a great sense of crisis."

Attempts to stabilise the euro situation were further undermined on Friday after talks between the Greek government, international lenders and private sector holders of Greek debt collapsed.

Officials from the "troika" of Greece's international lenders – the International Monetary Fund, European Commission and European Central Bank – are due in Athens tomorrow to assess the country's efforts in cutting its borrowing and enacting reforms.

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World Bank fears Europe's crisis could set off deeper global slump than Lehman collapse

"The global economy has entered a dangerous phase. The financial system of the largest economic bloc in the world is threatened by a fiscal and financial crisis that has so far eluded policy-makers’ efforts to contain it," said the bank in its Global Economic Perspectives.

"The possibility of further escalation of the crisis in Europe cannot be ruled out. Should this happen, the ensuing global downturn is likely to be deeper and longer-lasting than the recession of 2008/2009 because countries do not have the fiscal and monetary space to stimulate the global economy. Activity is unlikely to bounce back as quickly."

"An escalation of the crisis would spare no one," said Andrew Burns, the key author. "Developing countries should hope for the best and plan for the worst. If these downside risks materialised there is not much developing countries can do to prevent it. But they can prepare for it."

The report said rich countries had used up their fiscal and monetary shock absorbers after the Lehman crisis. While some poorer states still have the means to cushion the blow, many have already pushed fiscal deficits and credit growth to the limits of safety.

"Developing countries would have much less fiscal space than in 2008 with which to react to a global slowdown. As a result, if financial conditions deteriorate, many of these countries could be forced to cut spending pro-cyclically, thereby exacerbating the cycle."

The bank said there is a risk that turmoil in Europe could interact with the delayed effects of monetary tightening in Asia and Latin America, reinforcing each other in a "downward overshooting of activity".

The bank cut its global forecast from 3.4pc to 2.5pc for 2012, warning that the eurozone has already fallen into recession and is likely to contract by 0.3pc this year. "The possibility of much worse outcomes are real," it said. If Europe’s financial system to seizes up, this could lop a further 4pc off global GDP.

"While contained for the moment, the risk of a much broader freezing up of capital markets and a global crisis similar in magnitude to the Lehman crisis remains. The willingness of markets to finance the deficits and maturing debt of high-income countries cannot be assured. Should more countries find themselves denied such financing, a much wider financial crisis that could engulf private banks and other financial institutions on both sides of the Atlantic cannot be ruled out. The world could be thrown into recession as large or even larger than that of 2008-09."

The consequences would be dire for 30-odd countries with external finance needs above 10pc of GDP. The bank advised these states to "prefinance" their needs while the credit markets are still open, reducing the risk of a sudden crunch. Commodity exporters should brace for a fall in oil and metal prices of almost a quarter.

Emerging markets have already seen a rise in average bond spreads of 117 basis points since last July. Global trade volumes contracted at an 8pc annual rate in the three months to October. Capital flows to developing countries fell to $170bn in the second half of 2011 from $309bn a year earlier.

In a veiled attack on Europe’s austerity policies the bank said "it is not yet clear whether there is an end in sight to the vicious circle whereby budget cuts to restore debt sustainability reduce growth and revenues to the detriment of debt sustainability".

The bank’s "downside scenario" involves a credit freeze in two "larger Euro Area economies". Such an event would cause a further contraction of Euroland’s GDP by 6pc over the next two years. The bank stopped short of modelling what would happen if the eurozone breaks up altogether.

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Price of gold like a crisis

There is still scope for gold to outperform, as the price adjusted for inflation is medium off the coast of its peaks 30 years ago. Photo: ALAMY

"Gold is likely to record highs if disorder continues," said Adrian Ash, Director of research at the tomb of Bullion, which holds more than $billion (621 m £) gold for customers.

At $ 1 405, the price is already closing in on his record of $1,423.75, struck on 6 December last year.

"Gold is a form of insurance crisis, which retains only pay", said Mr. Ash. "If you have purchased at Northern Rock began to crumble you would have doubled your money now.". He kept payment as an assurance of crisis for the past four years. »

Indeed, the final nail however big shares some similarities with the situation in which the world is now.

"There are interesting with 1980 historical comparisons when the tanks went in Afghanistan and he was weak leadership in the United States," said Mr. Ash.

"Back then us also saw outbreak of oil prices and inflation, making the sound events today very similar to the last time really succeeded gold medal."

But there is always place for outperformance, as the price adjusted for inflation is always medium off the coast of its peaks 30 years ago. He hit $ 850 an ounce in January 1980, which is something of the order of $2 250 when adjusted for inflation. If the 1980s are really return, or much beyond a run.

Capital Economics, headed by economist and Telegraph columnist Roger Bootle, scheduled in December that gold could hit $ 1,600 in 2011 and reach $2,000 at the end of 2012.

"We are more positive on gold". A firmer dollar, fears of inflation if feather and large appetite for risk may be limited in the coming months. But the price of gold should continue to be supported by demand for shelter with other possible economic and financial shocks Capital Economics said.

However, it is political unrest driving the price higher than at the present time - is a very political metal. "Buying gold is always a political investment because you are essentially disengagement of the monetary system of the world," said Mr. Ash.

With the money continues printing via quantitative easing to the United States, many lose faith of global currencies. It is not just investors who are frightened by printing crawling of money by the Fed or investors concerned by inflation are turning to gold. Central banks are too.

Earlier this month, the World Gold Council revealed that central banks became net purchasers of metal in 2010 for the first time since 1988. Until 2009, the central banks had been unloading their reserves of gold, believing he could go no higher, but things have changed.

Historically, Western Governments had been holders of gold, but now central bankers in emerging markets more and more purchase in the history of gold.

"Emerging nations which have not historically supported their gold coins and therefore have not acquired vast holdings of the metal are redressing the situation," said Daniel Major, an analyst with metals at RBS. "The trend is characterized by Russia, where purchases are planned to continue to 100 tonnes per year, having bought 135 tonnes last year."

China began to purchase of its massive holdings of debt denominated gave substantial currency of the country risk in its reserves. The most recent American finance figures show that China held almost $892bn we obligations.

"China's gold reserves had tonnes at end of 2010 represented 1. FP7 just to forex total reserves", said Mr Major. It would be surprising that the Chinese did not wish to diversify their reserves more.

There are several ways to play the price of gold - take the physical metal exchange funds shares traded. The price is likely to remain volatile but high, therefore equities are a good way to play the merchandise. You invest in gold companies that have production, but also the possibility of increasing their production or reserves.

Whenever you turn on the TV, you can find another reason to buy gold. It seems that crises just won't go away.

Discover the best sale ISAs and get 0% commission when you order online with Telegraph ISA-Fund supermarket.

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OPEC to raise output of the oil crisis deepens

Merchants in the Middle East.  Photo: BLOOMBERG

The fears were intensified by Libya attended a day of violent clashes between forces loyal to Colonel Gaddafi and those trying to topple his dictatorship, Saudi Arabia, the largest producer of oil in the regionactivists renewed calls for a day of protest later this week.

That helped propel Brent crude as high as $118.50 per barrel, while he withdrew more later close down 93 cents at $115.04 in volatile trade. American crude prices jumped briefly to a peak of intra-day of $107 per barrel.

The unexpected political changes sweeping in from the Middle East and North Africa caught unaware investors since it broke out earlier this year. Although an economy world improvement had sent oil higher in the last three months of last year, experts say that a run at about $120 per barrel at risk of serious recovery facing the wind.

"Events that develop in the Middle East to seize the attention of the market until that uncertainty is resolved," said Steven Weiting, Economist in New York at Citigroup.

Investors were betting on a quick resolution yesterday, as a flight to safer assets pushed the price of gold to a new record of $1,444.30.

Stock markets, in turn, retreated, with the FTSE 100 closing down 0 3pc inhabitants. The & S P 500 slipped almost 1pc in New York trading, while prices for the obligations of the Government of roses.

Mounted at the beginning of crude caused a day of headaches and of debate for those control a large part of global oil production. OPEC said members of the consultations on the opportunity to organize an emergency meeting. Major countries members, including the Kuwait, the United Arab Emirates United, Nigeria joined Saudi Arabia in the planning of production to fill the hole left by the Libya lift.

Saudi Arabia has raised output by 700,000 barrels per day, and the others are adding some 300,000 barrels per day. The international agency of energy considers the crisis in Libya cut the supply by approximately 1 m barrels per day.

The increase in prices is the greatest threat to the fragile economies, including Britain. "With fiscal tightening and food, the price of oil prices are a real threat to the United Kingdom" said Julian Jessop, Economist at capital economics. The Council expects this country around a recession yet, but predicted just 1. 5pc growth this year and next.

High oil prices have put the British Government under pressure to increase in the duty of the scrap fuel and Chancellor abandoned its wider tip that there could be a help for drivers in the Budget. "I'm looking, of course, the fuel duty," he said yesterday. "I see what I can do to help."

In United States, the White House is considering tapping the country strategic oil reserves if prices continue North. "We are looking at options." The question of reservations is one before us, said William Daly, Chief of staff of the President Barack Obama.

Last America operated its reserves, which hold about 727 m barrels per day, Hurricane Katrina in 2005. Analysts at Deutsche Bank reduce oil. Price of gasoline is close to a maximum of two years of $3.81 per gallon, according to AAA, an organization of U.S. automobile.

Stimulated by December tax reductions, consumers have been behind more recent performance of the US economy.

Energy & Utilities and positions vacant Oil & Gas jobs Telegraph

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Shares Japan tumble as fears of the nuclear crisis create panic

The damaged Fukushima Daiichi Central nuclear where several explosions took place. Photo: Getty

The benchmark Nikkei 225 closed 5 FP7, with the broader Topix 6 FP6 increase but London of the main shares index added just points of 0 1pc with 5,700.81 open.

Gains in Europe has been also muted DAX 30 Frankfurt 0 FP7 and Paris's CAC 40 amounting to 0 5pc.

Other Asian markets had followed Japan higher, then even if the number of victims human and economic disasters, including an escalation of the nuclear crisis, remains uncertain.

At a time given the Nikkei climbed more FP6 but fell back after the Japan suspended operations to prevent a nuclear power plant disaster down after a surge of radiation is too dangerous for the workers to remain in the installation.

Most wanted shopkeepers deals after panic selling sent the index sinking 10 FP6 the day before. The Nikkei closed at its lowest level in nearly two years on Tuesday after the fall of more than 1 600 points, or 16pc, during two days - its worst two-day sell-off since 1987.

During this time, the Central Bank has pumped cash markets of money from Tokyo for a third day.

The Bank of the Japan injected 3.5 billion yen (£ 27bn), following injections totalling 23 billion yen ($283 billion) over the last two days. Contributing to banking shares perk up, lifting Mitsubishi UFJ Financial, the largest bank in the country, 2 2pc.

Exporters of power plant of the Japan took their breath after suffering staggering losses. Toyota Motor, constructor of no. 1 in the world, increased 6 4pc, Sony shot up to 7 5pc and truck-maker Isuzu was 7 3pc higher.

Industry heavy share rose the shock of the disaster gave way to thoughts of the reconstruction. Kobe Steel rose 11 3pc and Matsu Construction increased 4 8pc.

However, investors still remain tight on a crisis of change quickly to a central nuclear crippled northeast of the Japan. Authorities were still struggling to control the situation at the plant in Fukushima Dai-ichi after a string of explosions and fires, and a burst of radiation.

"It's very early days for the calculation of any impact on the economy and the stock and bond markets," said Sarah Williams, head of Japanese equities at Threadneedle based in London, which manages approximately $65bn assets.

"Until the safety of these plants is assured, investors remain cautious."

Markets elsewhere in the region of pointe. ABN Korea of added South 1. 8pc 1,957.29 and S & P/ASX 200 the Australia increased by 0. FP7 to 4,558.20. Landmarks in New Zealand, Singapore and Taiwan were also higher.

Shanghai Composite China has 1. 1pc, and actions on the Hang Seng in Hong Kong were flat.

Markets in Indonesia and the Philippines - who rely on the Japan for a relatively large share of their export - were down. Viet Nam and the Malaysia also fell.

The nuclear crisis swept financial markets of the world Tuesday as fears grew that the disaster to the Japan could slow the global economy. The Japan is the third largest global economy, manufacturing goods of automotive computer chips and bought 10pc of U.S. exports.

However, Wall Street counter. Index Dow Jones Industrial closed just 1. 1pc - or 137.74.49 points-11, 855. 42after fall as much as 3pc at a given time. FTSE 100 Xenopus Britain also melts to terminate 1. 38pc to 5,695,28. Earlier, the blue-chips were fallen to a minimum of expense 5622.53 year, wiping about £ 32bn offshore of the value of the index.

Levels of market in London and New York had expected a rebound in Japanese stocks today, claiming that the world liquidation had been exaggerated.

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Seeds of euro debt crisis will spread unless politicians Act

Whenever I look at things are capture. The participation rate for the gathering of end of term of my son was only seven - the rest had measles. During this time, for a time Friday night, they were dropping like flies to News Corporation. First Rebekah Brooks, then the Hinton. Who consider their palm and see black spot then?

Nowhere contagion was so virulent that in today's financial markets. We are not near the level of irrational fear sweeping markets in late 2008, but more than any time in the past that three years ago the feeling that no one is safe from infections.

Investing is never completely rational and it is a common place that markets hate nothing more than the uncertainty. Investors are able to watch the same facts and draw completely different conclusions, according to fear how they feel

Take the Chinese companies who chose, for reasons good and bad, win a stock exchange quotation to the United States by taking over a company with a market in the dormant list it but no business - a so-called society.

When confidence in the history of China's investment was high, is there no reason to believe that this was nothing other than a good hunting for interesting investment field. Today, after a flurry of alleged fraud and the attention of speculative short-sellers, it has become a case of "there be dragons".

Nothing has really changed and there is, without doubt, some legitimate Chinese companies for these courageous and diligent enough to do the necessary due diligence, but they are as popular as children with measles now.

Closer to home, contagion is the watchword in the markets of Europe debt too. Ten days ago the line in the sand in the sovereign debt crisis device was drawn to the Spain. It is the "too big for the guarantor". Italy enjoyed the status of a relative safe haven, but within days, he resembled a suspicious Chinese dress establishing its goods in New York.

As shown in the figure, Rome was the interchangeable years with Berlin in the eyes of investors in sovereign debt. This began to change with the onset of the financial crisis in 2008, but last week, as the extra performance required by investors to invest in bonds of the Italy reached a euro-ère high, no one would approach the country unless sanitized in gown and mask.

It is true that the Italy has a larger burden of debt, eye-watering 1.8 billion euros (1.58 billion to £) or 120pc of economic production, all countries in Europe, other than the Greece (150pc). Its debts are almost twice those of Spain (64pc), for example. It is also true that its debt reduction plans have been casual - they were not due to kick in until 2013. Undeniable, is also the divide between Prime Minister Silvio Berlusconi and Finance Minister Giulio Tremonti. And no one would claim that the "liberal revolution" the Italy was a success - the country has suffered a decade of declining productivity.

However, it is also the case that, unlike the Greece, the Italy has a track record of reducing its budget deficit. Unlike the Spain, it is not a housing bubble and bust. According to the IMF, he runs a surplus of low-budget 0 2pc and its current account deficit is relatively low in the FP7 2 of GDP. The external debt of the Italy is only one-fifth of economic production and its loans to deposit ratio is comfortable. It has a decent sector which makes things, that the rest of the world wants to buy therefore exports are recovering and unemployment is manageable. He can afford its pension commitments.

Unfortunately, all little account because, with a big and liquid, Italy bond market has become a proxy for hedge finance betting on a breach of the euro area. It is a bet much better that speculate on the default value of credit market swaps.

Markets are attempts to force the issue, Lasse to the failure of politicians to fight against the evils of long duration in the heart of the European crisis - that the only lasting solution to a broken monetary union is a greater tax integration and, finally, the common euro area bond issue, collectively funded by all Member States.

While policies are outstanding, investors in Europe must expect the dissemination to the germs.

? Tom Stevenson is a Director of Fidelity International investment. The views expressed are his own.

tomrstevenson@fil.com
Twitter: @ tomstevenson63

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Share price up to the levels pre-banking crisis shoot

Move triggered hopes that the largest global economy will begin to develop, encourage investors to buy shares and climb the price on the stock markets from around the world.

The book reached its highest level against the dollar since January more than $1.62 as the Bank of England has kept historical low 0.5% interest rate.

The Bank decided against pumping money into the system, but the Chancellor said yesterday that facilitate further quantitative is a possibility if the economy slows significantly next year.

George Osborne told MEPs that monetary policy, spending, the Government step should be the "main"tool for stimulating economic demand.

Experts said that floating FTSE is good news for the millions who relied on actions, although they warned that it was not evidence the economy was on track to make a quick recovery.They also warned that many savers find life difficult for some time yet.

The stock market in London, which includes more than 1,000 companies is approximately 1.8 billion to £.A large part of the invested money is owned by the Corporation or public sector pension funds.

The value of the stock market has a direct effect on the size of a pension that someone enjoys if they purchase an annuity on their retraite.Millions households have savings invested directly in equities - many thanks to savings accounts (ISAs), whose annual limit is passed earlier this year to £ 7,200 to £ 10,000.

Someone whose cumulative investment in an ISA was worth £ 20,000 when the market was at its nadir in the spring of last year would have increased the value of their portfolio £ 11,600.

Net gains yesterday followed several months of encouraging economic news.Manoj Ladwa, senior capital ETX trader said: "even if the decision to other funds of pump in the u.s. economy was a surprise, it seems certainly given the equity market."

David Buik, associate principal at BGC Partners, explained the jump in the price of the shares: "there was a momentum of quantitative easing, third quarter earnings were much better than expected, and there is no cloud storm on the horizon that austerity package starts to bite."

Week last economy showed the official figures of the United Kingdom had increased by two per cent in the last six months.

Mark Dampier, Hargreaves Lansdown, an independent financial adviser, said: "much of this gathering is driven by EQ in the États.Mais not enough credit is given to retail - investor private shareholders - in the United Kingdom .they started back on the market and were buying shares seriously in recent months."

"And politicians have been big sellers.Whenever they are taxes, a judicious intelligence looks to the taxe.Avec funding the upper limit of £ 10,000 ISA many have been profiting by buying shares.»

The majority of companies in the FTSE 100 index earn profits abroad, most experts consider the index of blue chip to take account of health economy internationale.Cependant, the FTSE 250 - small businesses, which most do their business in Great Britain - was also renaissante.Il closed until 140.18 yesterday evening at 11,016.46, a maximum of three years.

Mr. Dampier has added: "" companies reported that profits attendus.De companies made it better that Governments should done: cut their debts and get their houses in order .they are reaping the benefits now. ""

Economists warned that the resurgent markets were not a sign that life would be best for the majority of consumers.

Charles Davis at the Centre of the economy and research companies, a think tank, said: "we had some surprisingly strong economic data, but it has not improved from one day to the next."

"There are winds .Familles economy are feeling the pinch of rising cost of living at a rate much faster than average gains.Et which is rising year next TVA and the effects of reduced benefits and public job losses increased."

Investors with money in a bank or building society were warned that they were unlikely to take advantage of the best savings rates.

Although the Bank of England voted against a fresh episode of quantitative easing, most believe that it will keep rates low interest for a future time.

"Cash savers have had a shocker and they will continue to do so, said Mr. Dampier.

Howard Archer, UK to INS Global Insight Chief Economist said: "ahead still interest rates remain low current weakness in registration of 0.5% until at least late 2011."

"In addition, we would not rule out interest rates remain low 0.5% by 2012."

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Stablise markets after week "nightmare" on the crisis of the Japan

The action United by the countries of the G7, the first of its kind in more than a decade, has caused the yen abandon 81.20 3pc against the dollar, the Nikkei to win 2 FP7 and the price of Brent crude, which had jumped to $117 per barrel settle 0 3pc $114 per barrel.

The confidence of the traders was reinforced by the resolution of the United Nations not to impose a fly no area on the Libya and the statement of ceasefire by Muammar Al-Qadhafi, the leader of the country. Although reports Saturday that the leader Libyan broke the truce is bound to hit markets and the price of oil Monday.

Intervention by the G7, which has been requested by the Government of the Japan, was followed by insurance more than the Bank of Japan that would pump additional funds into the economy of the country.

In a note analysts at Nomura said the G7 action, the exact size that will remain secret for tww months, was "powerful". But they added: "it remains to whether coordinated intervention is temporary or more sustained." We will seek indications of size and duration of interventions in the coming days to assess its potential to take the dollar/yen higher. »

The FTSE 100 closed 0. 4pc day but still down from 1. 9pc on the week. The Nikkei was down 10 2pc on the week. A trader said: "neither to the Japan or the Middle East problems have been resolved, but the international community has shown, he wants to engage rather than allow the crisis to take their own path, which has delivered stability after a week of nightmare.

After a reply veiled markets last Friday, the magnitude of the earthquake and tsunamis Japanese was not included until over the weekend. Monday, concern about the issue of the power plant of Fukushima of Japan plant has triggered fears for a nuclear crisis. The Swiss moved first, announcing a ban on "coverage" permission for nuclear replacements. Germany, followed by suspending a decision on whether to prolong the life of nuclear power plants for three months. In Britain, the Government insists on the fact that its initial response - commissioning of a report - was not sufficient for the moment.

But markets were ahead of the politicians. World uranium stocks took the first impact. A raft of companies throw around 25pc on resource-heavy Australian Stock Exchange, coup of landslides on the markets of Europe and the Canada, too.

Tuesday, the fear spread, wiping more than a thousand billion (£ 622bn) off the coast of values of the market in the world in the fears that the humanitarian and nuclear disaster to the Japan could trigger a global financial crisis.

The Nikkei suffered its biggest fall since the 1987 crash and its third worst in the history with a drop of 10 FP6, taking its losses to 16 3pc in two days.

In Britain, the FTSE 100 lost £ 32bn by the lunch hour, while Dax, France Germany ACC and the Dow Jones Industrial index on Wall Street all plunged. Copper fell to a low shed FP7 and Tin in three months.

There is good hope for recovery on Wednesday, including as the Nikkei jumped by 5 68pc of day to the next day. But the worsening of the crisis to Fukushima was underlined when the China Security Council announced it was "temporarily suspend approval of projects for nuclear power plants, including those in the preliminary stages of development."

During this time, insurers estimated losses of fact sector faces between billion $ (£ 7. 5bn) and $ 25.

Thursday, the nuclear disaster gave way to a crisis costs - the yen. The expectation that large insurance of Japan and the savings industry would sell assets and "repatriate" the yen to fund insurance claims and rebuild the currency had sent to all time high of 76 Yen to the dollar. For the Japan and the g-7 countries, jumping represented a dangerous change that can trigger dislocations in the world. They install to correct the situation.

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IMF warns markets "not persuaded" eurozone leaders can resolve the debt crisis and prevent damage to the global economy

The IMF said that despite not "support of the euro Member States and the ECB, market participants remain convinced that a lasting solution is at hand".

"It would be very expensive for the euro area but also for the economy to delay to tackle the crisis of the sovereign,"said Luc Everaert, head of the political area of the IMF European common Euro."

The IMF said that despite not "support of the euro Member States and the ECB, market participants remain convinced that a lasting solution is at hand".

He said in a staff report that the results of any political decision would be "unpredictable" and that the euro-zone needed money more private in support of the "most vulnerable" of his "still-frail banks."

The Fund has recommended that the European financial stability facility (EFSF) have increased in size and allowed to buy debt on the secondary market, as a means to mitigate the threat of contagion of the peripheral States of the euro area.

He also said the indispensable to the adoption of the much stronger economic governance of the euro area. "We need more not less Europe," said Mr. Everaert.

Markets she said Tuesday, and the fears of mounting that politicians cannot resolve the sliding equities sent eurozone debt crisis Monday. The FTSE 100 gained 0. 65pc, the Germany DAX 1. 1pc, France CAC 1. 2pc, the Spain Ibex 1pc and Italy MIB 1. 9pc.

However, traders said the rebound was lowest in the belief that the liquidation were exaggerated and the fear is that jitters on a dangerous rift in Europe, top of the criticism of the euro Thursday the advance on the Greece can trigger falls further.

The Summit should attempt to complete a second round of aid for the Greece, a value of €110bn, but nations are divided on how to structure it and comments of Angela Merkel, German Chancellor Tuesday that the Summit will not be the last step in the resolution of the debt of the Greece crisis did not help sentiment.

The the euro fell against the dollar, after she said in a joint press conference with the President of Russian Dmitry Medvedev: "additional steps will be necessary and not simply a spectacular event that fixes everything." Which takes political responsibility seriously knows that such a dramatic step will not happen. »

To solve the problems of the Greece once and for all, the euro area need to consider options to reduce its debt and increase its competitiveness, said.

"Europe is unthinkable without the euro, and therefore it is worth of effort responsible for really solve the problems in the same root", she said.

Russian President says financial woes of the euro area is not a fault of the euro, but a result he used by countries to the uneven economy.

"The main euro today is a problem that a strong and respectable currency serves the countries with very different levels of the economy, said Medvedev." "It never happened in the history of humanity."

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Deepening crisis traps America's have-nots

The retail data can be quirky but it fits in with everything else we know. The numbers of people on food stamps have reached 43.2m, an all time-high of 14pc of the population. Recipients receive debit cards – not stamps -- currently worth about $140 a month under President Obama’s stimulus package.

The US Conference of Mayors said visits to soup kitchens are up 24pc this year. There are 643,000 people needing shelter each night.

Jobs data released on Friday was again shocking. The only the reason that headline unemployment fell from 9.7pc to 9.4pc was that so many people dropped out of the system altogether.

The actual number of jobs contracted by 260,000 to 153,690,000. The “labour participation rate” for working-age men over 20 dropped to 73.6pc, the lowest the since the data series began in 1948. My guess is that this figure exceeds the average for the Great Depression (minus the cruellest year of 1932).

“Corporate America is in a V-shaped recovery,” said Robert Reich, a former labour secretary. “That’s great news for investors whose savings are mainly in stocks and bonds, and for executives and Wall Street traders. But most American workers are trapped in an L-shaped recovery.”

It is no surprise that America’s armed dissident movement has resurfaced. For a glimpse into this sub-culture, read Time Magazine’s “Locked and Loaded: The Secret World of Extreme Militias”.

Time’s reporters went underground with the 300-strong `Ohio Defence Force’, an eclectic posse of citizens who spend weekends with M16 assault rifles and an M60 machine gun training to defend their constitutional rights by guerrilla warfare.

As it happens, I spent some time with militia groups across the US at the tail end of the recession in the early 1990s. While the rallying cry then was gun control and encroachments on freedom, the movement was at root a primordial scream by blue-collar Americans left behind in the new global dispensation. That grievance is surely worse today.

The long-term unemployed (more than six months) have reached 42pc of the total, twice the peak of the early 1990s. Nothing like this has been seen since the World War Two.

The Gini Coefficient used to measure income inequality has risen from the mid-30s to 46.8 over the last quarter century, touching the same extremes reached in the Roaring Twenties just before the Slump. It has also been ratcheting up in Britain and Europe.

Raghuram Rajan, the IMF’s former chief economist, argues that the subprime debt build-up was an attempt – “whether carefully planned or the path of least resistance” – to disguise stagnating incomes and to buy off the poor.

“The inevitable bill could be postponed into the future. Cynical as it might seem, easy credit has been used throughout history as a palliative by governments that are unable to address the deeper anxieties of the middle class directly,” he said.

Bank failures in the Depression were in part caused by expansion of credit to struggling farmers in response to the US Populist movement.

Extreme inequalities are toxic for societies, but there is also a body of scholarship suggesting that they cause depressions as well by upsetting the economic balance. They create a bias towards asset bubbles and overinvestment, while holding down consumption, until the system becomes top-heavy and tips over, as happened in the 1930s.

The switch from brawn to brain in the internet age has obviously pushed up the Gini count, but so has globalization. Multinationals are exploiting “labour arbitrage” by moving plant to low-wage countries, playing off workers in China and the West against each other. The profit share of corporations is at record highs across in America and Europe.

More subtly, Asia’s mercantilist powers have flooded the world with excess capacity, holding down their currencies to lock in trade surpluses. The effect is to create a black hole in the global system.

Yes, we can still hope that this is a passing phase until rising wages in Asia restore balance to East and West, but what it if it proves to be permanent, a structural incompatibility of the Confucian model with our own Ricardian trade doctrine?

There is no easy solution to creeping depression in America and swathes of the Old World. A Keynesian `New Deal’ of borrowing on the bond markets to build roads, bridges, solar farms, or nuclear power stations to soak up the army of unemployed is not a credible option in our new age of sovereign debt jitters. The fiscal card is played out.

So we limp on, with very large numbers of people in the West trapped on the wrong side of globalization, and nobody doing much about it. Would Franklin Roosevelt have tolerated such a lamentable state of affairs, or would he have ripped up and reshaped the global system until it answered the needs of his citizens?

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How the Egypt companies were composed by the crisis

The Egyptian Government closes scholarship after political rallies countrywide caused the benchmark to dive by 16 pc in two days.

Although the reopening of the Sunday market has not yet confirmed, analysts have warned of a predatory renewed by frightened investors trade once resumes.

The regulator said that the swap would suspend trade for a half-hour if its large 100-share index declined by 5MC more and even more if it fell by 10pc.

Second most well enumerated grand developer Egypt said on Tuesday it had resumed operations after a break of one week. It is said that with the Egypt scholarship, he confirmed that his actions could be trade normally when the stock market has reopened.

Palm Hills development is among the biggest fallers main when index it last traded on January 27.

Haitham Moneim, responsible investor relations at carpetmaker shirting machine largest in the world, said February 6: "week last, we have closed all our production as all business facilities, and we made sure our showrooms...". To avoid any delay to customers, we moved orders of plants Egypt plants, the United States and China. »

Biggest steel maker the Egypt said its factories functioned even though not at full capacity, said an investigation involving the President would not affect the business activity. "The company confirms that...". Mr. Ahmed Ezz, President and principal shareholder of Ezz Steel was led by Egyptian remain in Egypt authorities. This measure, which is strictly personal for Mr. Ezz does not affect the functioning of society, "he said, adding that he denied the charges against him."

Most large firm enumerated the Egypt said he had returned to work at almost 90pc of Egypt Sunday construction sites on February 6. BEC said production rates were normal in its fertilizer plants and exports were underway, adding it had shipped 52,000 tons of urea and was in the process of sending 38500 tons of ammonia.

Most large investment bank by the Egypt, which has $6 MD in assets under management, said he had resumed work, and no there was no damage to any of its assets or property elements. The firm said that no there was no change of management to its Board of Directors of events.

The largest cement listed country company said it had resumed deliveries of cement stocks suspended by political demonstrations. Suez, a subsidiary of Italcementi, which supplies about one-quarter Egypt grey cement and its white cement 42 pc repeated operations in all its plants February 5.

Cairo-based enterprise private equity capital of the Citadel resumed full operations on February 6, without damage to its assets or subsidiaries of the affiliate, the firm said. "On the long term, the Citadel capital believes this difficult period will result in a more stable and faster growth Egypt and region," said a statement on its Web site. "In the coming period we see very compelling opportunities for long-term capital Egypt private investors and beyond".

Arafa Holding, largest exporter of clothing Egypt, said that all its production facilities had started again on Saturday. "We expect a delay in delivery of nearly a week mainly due to the interruption of logistics which took place in seaports, last week," said Arafa. "However, we are pleased to say that shipments of goods by sea and air have initiated effective Saturday, February 5.

Al Baraka Egypt Bank, an Islamic Bank based in Cairo, where Al Baraka Banking Group of Bahrain was a part of control, said he had returned to full activity. "Any damage occurred at one of the branches of the Bank and five new branches to Exchange was also opened to the public there.

Great Arab cable said Sunday manufacturer all facilities in Egypt were operational. The firm said its logistics underwent a bottleneck was partially resolved by moving its manufacturing orders and exports sales outside the Egypt.

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Euro slide gathers pace on the fears of the debt crisis

The currency fell to $1.2997 against the dollar in trade on Tuesday morning, his lowest point in two months, even if it later recovered back losses after U.S. consumer confidence burned in November at the highest level of five months.

The brightest prospects suggest u.s. consumers might be more willing to open their wallets in addition, despite the high unemployment rate.

Agreement of a package of emergency aid of €Ireland stunned by bailing out on its shores, costs 85bn failed to allay the fears of market on the health of the euro area.

Concerns are now focusing on other countries responsible for debt with the Spain Portugal for more in-depth examination.

Governments have seen the cost of soar them loan during the past weeks and bond - yields rewards investors seek to take on the risk - increase again.

Gaps between the Spanish and Italian 10-year bond gives German cue points, which have a strong status, have reached their highest level since the euro was launched in 1999.

The crisis has started the year Greece, who was since a rescue operation last €110bn EU and the IMF, and thorough this month in the Middle fears holders will have to share future costs orchestrated.

An area of concern is that the Spain economy is twice as large as Greece, Ireland and combined Portugal prompting fears about safety net for the €750bn euro area may be almost enough if the country requires that aid.

Similarly, although most analysts view Italy at the lowest risk, the country is now called "too big" failure"and"too big to bail.

The cost of backup most euro-dette area is also on the rise, with five credit default swaps (CDS) - instruments that operate as insurance against a default country - Irish debt place 13 basis points to 6 25pc, which means that it now costs €services to ensure that the 10 million euros worth of bonds Irish.

Even the France, which is considered, along with Germany as one of the more stable members of the euro area is affected, with 5-year CDS amounting 6 points basic 1. 05pc, reflecting concerns about the toll of bailing out weaker economies.

Latest figures show Germany unemployment fell again in November, confirming its status as a powerhouse in the euro area.

The British pound gains as investors seek a safer alternative in the euro area. Sterling has jumped to its highest level since September 20 and was directed against the euro for its biggest monthly gain since January 2009.

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How the market see the Ireland debt crisis

Berry Fleming, who were dismissed from a leading retailer recently, makes sense in the main shopping in Dublin area. Photo: AFP

"Irish bond price action has become infamous Recalling that observed earlier this year with the Greece as investors concluded that problems are simply too great." - David Scammell, head of the United Kingdom and the strategies of the Schroders European interest rates

---------------------------------

"" The strains in the banking system are intensifying, dependence on the ECB, more liquidity and Ireland appears to be under mounting pressure in the euro area to ask for help. ""HSBC

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"Unless the steps of the ECB of its commitment, the probability Ireland must seek external support... will continue to increase,"-UBS ".

---------------------------------

"Until fiscal Ireland challenges are resolved, uncertainty should also keep the euro under pressure," -UBS.

---------------------------------

"EU policy makers appear to be worried that the Ireland problems could spill over to the rest of the so-called economy of swine," - Neil MacKinnon, an economist at VTB capital.

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How the Egypt companies were composed by the crisis

The Egyptian Government closes scholarship after political rallies countrywide caused the benchmark to dive by 16 pc in two days.

Although the reopening of the Sunday market has not yet confirmed, analysts have warned of a predatory renewed by frightened investors trade once resumes.

The regulator said that the swap would suspend trade for a half-hour if its large 100-share index declined by 5MC more and even more if it fell by 10pc.

Second most well enumerated grand developer Egypt said on Tuesday it had resumed operations after a break of one week. It is said that with the Egypt scholarship, he confirmed that his actions could be trade normally when the stock market has reopened.

Palm Hills development is among the biggest fallers main when index it last traded on January 27.

Haitham Moneim, responsible investor relations at carpetmaker shirting machine largest in the world, said February 6: "week last, we have closed all our production as all business facilities, and we made sure our showrooms...". To avoid any delay to customers, we moved orders of plants Egypt plants, the United States and China. »

Biggest steel maker the Egypt said its factories functioned even though not at full capacity, said an investigation involving the President would not affect the business activity. "The company confirms that...". Mr. Ahmed Ezz, President and principal shareholder of Ezz Steel was led by Egyptian remain in Egypt authorities. This measure, which is strictly personal for Mr. Ezz does not affect the functioning of society, "he said, adding that he denied the charges against him."

Most large firm enumerated the Egypt said he had returned to work at almost 90pc of Egypt Sunday construction sites on February 6. BEC said production rates were normal in its fertilizer plants and exports were underway, adding it had shipped 52,000 tons of urea and was in the process of sending 38500 tons of ammonia.

Most large investment bank by the Egypt, which has $6 MD in assets under management, said he had resumed work, and no there was no damage to any of its assets or property elements. The firm said that no there was no change of management to its Board of Directors of events.

The largest cement listed country company said it had resumed deliveries of cement stocks suspended by political demonstrations. Suez, a subsidiary of Italcementi, which supplies about one-quarter Egypt grey cement and its white cement 42 pc repeated operations in all its plants February 5.

Cairo-based enterprise private equity capital of the Citadel resumed full operations on February 6, without damage to its assets or subsidiaries of the affiliate, the firm said. "On the long term, the Citadel capital believes this difficult period will result in a more stable and faster growth Egypt and region," said a statement on its Web site. "In the coming period we see very compelling opportunities for long-term capital Egypt private investors and beyond".

Arafa Holding, largest exporter of clothing Egypt, said that all its production facilities had started again on Saturday. "We expect a delay in delivery of nearly a week mainly due to the interruption of logistics which took place in seaports, last week," said Arafa. "However, we are pleased to say that shipments of goods by sea and air have initiated effective Saturday, February 5.

Al Baraka Egypt Bank, an Islamic Bank based in Cairo, where Al Baraka Banking Group of Bahrain was a part of control, said he had returned to full activity. "Any damage occurred at one of the branches of the Bank and five new branches to Exchange was also opened to the public there.

Great Arab cable said Sunday manufacturer all facilities in Egypt were operational. The firm said its logistics underwent a bottleneck was partially resolved by moving its manufacturing orders and exports sales outside the Egypt.

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The Greek debt crisis: billion will be more pumped to bring relief to the Greece

The IMF said it was "ready to continue to support" for the country, providing that the Government has introduced far-reaching economic reforms. He threatened not to support the Greece, which was to be paid next month, but it is now thought unlikely.

A new package to bail out, the second in 13 months, should be accepted in the next few weeks.

The economic official of the European Union, an Olli Rehn, stated that wait for the EU and the IMF to release a loan of EUR 12 billion in early July to keep solvent Greece.

The Greece has been warned last night that it must introduce austerity cuts and not by default on repayments on its loan of emergency to bail out the as a condition of the new deal.

Fears that the Greece was failing to repay its debts has shaken financial markets yesterday.

At one point, the value of the FTSE 100 had decreased by 1.5 percentage points.

But after the IMF statement, shares began to recover. By the close of trading the FTSE had fallen by 0.76 percentage points to 5,699, a loss of over $ 10 billion to £. The euro fell against other currencies.

Yesterday evening, Greek Prime Minister George Papandreou, announced a cabinet reshuffle and said that he would be for a vote of confidence that he seeks to force by reducing expenditures and tax rises against widespread opposition.

An attempt to form a Government of national unity failed. The country has been marred by strikes and riots this week while several politicians have resigned in protest against the proposed austerity drive.

The Greece credit rating was cut to the lowest in the world and its debts is now considered less secure than those in poor developing countries. There were fears that, if the Greece by default on debt repayments, other countries such as the Ireland could be tempted to follow suit, leading to another financial crisis.

Herman Van Rompuy, President of the European Union, said yesterday evening that the euro would emerge stronger from the crisis.

Mr Rehn admitted that it would take more time to implement a second rescue plan for the Greece because of differences on how to

private investors share the burden.

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EMU policies are pushing Southern Europe into systemic political crisis

This is what happened to Britain during the ERM crisis of 1992, the trial run for the monetary union.

German reunification was an "asymmetric shock", setting off a boom that compelled the Bundesbank to tighten the screw again and again, and forcing the Bank of England to follow suit at a time when the UK housing bust was already underway.

Spain is about to relive the experience, for Germany is going through another such shock. This one is caused by surging exports to the BRICs -- machinery, luxury cars, aircraft, medical kit, and chemicals. German exports to China rose 40pc last year, and 42pc to Russia.

Oddly, perhaps, I am not seriously worried about Ireland. It has a dynamic manufacturing and export service base, and can hope to export its way back to health. The fact that Ireland has required an EU-IMF rescue should not be misread as evidence that it is in worse shape than several others. Banking busts are desperate but not serious, as the saying goes.

The less open economies of Greece, Spain, and Portugal will find it more of a struggle to recover. The IMF says Portugal’s current account deficit will still be 9.2pc of GDP this year (and 8.4pc in 2015, if it is possible to defy gravity for so long), Greece will be 7.7pc, and Spain 4.8pc.

That these deficits should be so high two or three years into a slump shows how hard it will be to turn this crisis around. Meanwhile, The Netherlands will have a surplus of 6.8pc, and Germany 5.8pc.

The structural misalignment is grotesque, like the perma-divide between Italy’s North and South but without the vast annual subsidies that stops it blowing up.

A full 140 years after the Two Sicilies were gobbled up into Cavour’s lira zone, convergence has not occurred. The Bourbons might have done better.

Already reeling, the indebted European periphery must now brace for a fresh shock as the European Central Bank tightens monetary policy to stop Germany from over-heating.

One-year Euribor rates used to price Spanish mortgages have been creeping up for months, and jumped to 1.54pc after Jean-Claude Trichet turned seriously hawkish on inflation last week. It may go much higher very fast if the ECB starts to raise rates by the middle of this year.

This will not help clear a four-year backlog of unsold homes in Spain, which is no doubt why Madrid is pushing for a capital injection of up to €80bn into the smaller banks and cajas – by partial nationalization if necessary.

The central bank said in November that the banks have €181bn (£153bn) of "potentially problematic" loans to the real estate sector, or 17pc of GDP.

Mr Trichet’s fire-breathing rhetoric can be taken as a signal that the ECB will continue to run monetary policy for German needs and tastes, refusing to accommodate a little slippage on inflation to let Club Med regain lost competitiveness without having to endure the agony of debt-deflation. Indeed, the ECB seems to have picked up some of the worst habits of its mentor.

Mr Trichet is no doubt in an impossible position because the German people gave up the D-Mark under an implicit and sacred contract that EMU should never lead to inflation in their country. Should it ever do so, acquiescence in the whole project comes into question.

Yet Mr Trichet's comments on Thursday were astonishing. He cited the ECB’s rate rise in July 2008 with approval – and as a warning -- as if this monetary Charge of the Light Brigade had been vindicated by events. Most economists viewed that decision as best forgotten.

We now know that large parts of the eurozone were already in recession by then, that the commodity spike was burning itself out, that ECB rhetoric had set off a destructive dollar rout and pushed the euro to ruinous highs of $1.60, and that the foundations of the credit system were already crumbling.

A paper by the Richmond Fed suggests that ECB’s action was a key trigger of the global crisis.

The ECB is now itching to tighten again, this time because of a temporary jump in headline inflation to 2.2pc, caused by rising oil and food prices. No matter that M3 supply growth in the eurozone is anaemic at 1.9pc.

Real M1 deposits have contracted at a rate of 2.8pc over the last six months in the quintet of Italy, Spain, Greece, Ireland and Portugal.

"This is comparable with the decline in early 2008 just ahead of the plunge into recession," said Simon Ward from Henderson Global Investors.

The ECB has passed the eurozone debt parcel back to EMU governments, deeming it the proper responsibility of fiscal authorities to sort out the mess.

So be it. Since the only government that seems to matter in our new German Europe is in Berlin, the parcel has in reality been handed to Chancellor Angela Merkel.

She has two viable options. She can choose to save monetary union, first by doubling the size of the EU bail-out fund and halve the interest rate charged so that the debt-stricken states can recover; and then by acquiescing in fiscal federalism and a pooling of debts -- what McKinsey’s chief in Germany calls a "spiral into a Transferunion" – entailing a regime of subsidies for years to come.

That is to say, Germany must be prepared to do for Southern European what it has already done for its own kin in East Germany, but on six times the scale.

Or she can pull the plug, by quietly signalling to the Verfassungsgericht that Berlin would not be too angry if the eight judges declared the EU’s rescue machinery to be unconstitutional, ending EMU as we know it.

What is clear is that status quo is ruinous. The slow suffocation of nations still under Fascist rule just one generation ago cannot end well for liberal democracy in Europe.

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EMU debt crisis edges ever closer to the core

 Bail-outs could infect Europe's core, threatening the AAA ratings of France, Germany and others Photo: AP

The European Central Bank (ECB) intervened heavily in the markets, buying Greek, Irish and Portuguese bonds to drive down yields again, but has yet to broaden its emergency purchases to a fresh set of countries. Germany's Bundesbank is vehemently opposed to policy "creep" that involves the ECB in fiscal rescues by the backdoor.

The bank's refusal to be drawn further has left Belgium fending for itself as an escalating constitutional crisis pushes yields on its 10-year bonds to a post-euro record of 4.27pc. The country has not had a government since Flemish separatists emerged as the biggest party in elections seven months ago.

Stephen Jen, chief economist at Blue Gold Capital and a former IMF official, said Greece, Ireland and Portugal are already "insolvent". Refusal to face up to reality draws out agony, with a "cancerous" effect on the whole eurozone.

Mr Jen said the bail-outs themselves - done in the in the name of "saving the euro" - are causing the crisis to spread ever wider by contaminating stronger states instead of separating the balance sheets of good from bad, as would be normal in a debt clean-up operation.

The danger is that this will infect Europe's core, threatening the AAA ratings of France, Germany and others. If the EU's bail-out fund is enlarged by a further €250bn (£208bn) to €700bn, "one or more" of the AAA states may be downgraded, "most likely" France. "We see a further escalation of the debt crisis. There is no silver bullet because the underlying problems are 'knotted'," he said.

In Belgium, King Albert II asked caretaker ministers to push through a special austerity budget to reassure markets after the latest set of coalition talks broke down, chiefly over the scale of subsidies from the Dutch-speaking North to the poorer francophone Walloons. Didier Reynders, the finance minister, called for emergency powers to drive through reforms and cut the budget deficit below 4pc of GDP, deemed a step too far for now.

Fears Belgium may break up have thrown a fresh spotlight on its public debt, expected to reach 110pc of GDP by the mid-decade although offset by large private savings. Belgian banks are heavily invested on the EMU periphery with $54bn (£35bn) of exposure to Ireland alone, led by KBC and Dexia.

Spain also came under fresh pressure. Bond yields flirted with a post-EMU high at 5.58pc on fears that Madrid will struggle to find buyers at a crucial debt auction on Thursday, despite pledges by China that it would stand behind Iberian debt.

Antonio Pacual Garcia from Barclays Capital said Chinese assurances may "help at the margin" but will do little to change the ugly debt dynamics of the EMU periphery.

Barclays has called for a radical shift in policy by the EU authorities to break out of the impasse, proposing "unlimited funding" for the EU's €440bn bail-out fund (EFSF) to reassure markets that it can cope with Spain if necessary.

The interest rate charged on rescue packages should be slashed to allow EMU debtors to claw their way out of their traps. The fund is currently charging Ireland 5.7pc for rescue loans – which were arguably forced upon it – even though the EU raised the money at an average 2.59pc. The punitive rate has caused bitterness in Ireland.

"We think the EFSF should charge its own average funding cost, or even below it, offering an interest rates subsidy," said Frank Engels, Barclays' Europe economist. "This should be done under IMF-style conditionality to prevent moral hazard."

Mr Engels said the European Investment Bank should buttress the policy with €30bn of spending on infrastructure projects to underpin growth in the debt-stricken states.

Portuguese leaders continued to insist on Monday that their country does not need a rescue, but markets now think an EU-IMF loan package is inevitable after leaks in the German press revealed that Berlin – some say Frankfurt – is pushing the country to act.

David Owen, from Jefferies Fixed Income, said Portugal's reluctance to take this bitter medicine is entirely understandable since such packages have driven the bond yields even higher for Ireland and Greece, precisely because the punitive rates trap countries in debt-deflation and do nothing to reduce the likelihood of default in end. "The mere fact of asking for money makes matters worse," he said.

This is a grave indictment of EU strategy.

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European Central Bank arms itself for Spanish crisis

Spain's government and banks have to refinance almost ?300bn of debt next year, leaving the country prey to a buyers' strike Photo: AFP

The ECB said it would raise its subscribed capital by €5bn (£4.2bn) to €10.76bn, the first increase since the launch of the monetary union.

"Basically they are insuring themselves in case they have to step up bond purchases, and that probably implies Spain," said Julian Callow from Barclays Capital. "They have to be ready to dig the fire-break early on this because Spain is too large to handle, and there is risk of contagion to Italy."

The ECB's move came as Spain braved the debt markets following a downgrade alert by Moody's. Madrid paid the highest interest rates for a decade with yields on 10-year bonds rising to 5.45pc, compared with 4.63pc in November.

Spain's government and banks have to refinance almost €300bn of debt next year, leaving the country prey to a buyers' strike. "The auction wasn't a disaster but the markets are going to lose patience very quickly if the bond spreads widen further," said Elizabeth Afseth from Evolution Securities.

The ECB has so far bought €71bn of Greek, Irish, and Portuguese bonds in a bid to cap yields, but this was done against Bundesbank objections, and may breach EU treaty law. Jean-Claude Trichet, the ECB's president, is irked that the bank is having to shoulder the burden of propping up the EMU periphery, blurring the lines between fiscal and monetary policy. Critics in Germany say the ECB is turning into a "bad bank" for toxic debts.

Mr Trichet has tried to nudge EU leaders into taking over the task by deploying the EU's €440bn rescue fund in eurozone debt markets, meeting German resistance.

Officials fear that the ECB could face losses on bond purchases, as well as loans worth €334bn to Greek, Irish, Portuguese, and Spanish banks – much of it in exchange for suspect housing collateral. Barclays Capital said eurozone central banks have already lost about €5bn.

A report by Goldman Sachs said EMU states hold $760bn (£487bn) of Spanish debt securities, on top of other loans, or
three-quarters of all foreign holdings. "Debt sustainability in the European periphery is to a very large extent a domestic problem for the eurozone," it said.

France has $252bn, Germany $212bn, Luxembourg $77bn, Ireland $62bn, The Netherlands $61bn, and Belgium $48bn. Outside EMU, Britain has $69bn and the US $26bn.

The loss profile is different to the US housing crisis, when European creditors were heavily on the hook. American banks will not return the favour by absorbing big losses if the EMU debt woes escalate.

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Eurozone debt crisis spreads to Belgium on rising political risk

The country has been limping along with caretaker ministers since Flemish separatists emerged as the biggest party in June. Talks have broken down over the scale of subsidies to the poorer French-speaking areas, making Belgium a microcosm of EMU's North-South divide.

It is unclear whether the political system can muster the discipline of the early 1990s when Belgium came back from the brink of a debt compound spiral with an impressive fiscal squeeze.

"We believe Belgium's prolonged domestic political uncertainty poses risks," said S&P. "Belgium's current caretaker government may be ill-equipped to respond to shocks to public finances. If Belgium fails to form a government soon, a downgrade could occur, potentially within six months."

Spain also faced fresh debt woes at an auction on Tuesday. The yield on €2bn (£1.7bn) of one-year bills jumped to 3.4pc, up 100 basis points in a month. "It was pretty dire," said David Owen from Jefferies Fixed Income.

Mr Owen said the surge in yields on US Treasuries is causing the cost of capital to jump across the global system, including Spain. "This is raising the bar for everybody," he said.

While Spain can still borrow at a manageable cost, it is storing up rollover risk by issuing debt at short maturities. The IMF said Spain must refinance €220bn this year. Moody's this week raised its estimate of Spanish bank losses to €176bn, up from €108bn a year ago.

Jean-Claude Trichet, head of the European Central Bank (ECB), said a "quasi-fiscal union" may now be required to stabilise the eurozone's debt markets, adding the EU's €440bn rescue fund should be deployed with "maximum flexibility", and beefed up in "quantity and quality".

Mr Trichet hopes to prod political leaders into authorising use of the fund for pre-emptive purchases of bonds, perhaps from Spain, relieving the ECB of its lonely burden. The ECB has been stuck with the task of propping up the banks and debt markets of peripheral Europe, conducting a fiscal rescue without a legal mandate and on slender resources.

Officials are mulling plans to raise the ECB's capital to cope growing liabilities, which means asking member states to provide fresh money. Its capital base is just €5.8bn, compared with the US Federal Reserve's $57bn (£36bn).

Toby Nangle, from Baring Asset Management, said the ECB may already be insolvent under strict accounting rules. "Could the international financial system cope with a bankrupt ECB? The fact that it is not easy to dismiss this out of hand is cause for great concern," he said.

The agenda for this week's EU summit shows that the EU plans to slipping through the creation of its new permanent rescue fund from 2013 without the need for a fresh treaty, using the "simplified revision procedure" of Article 48.

"We always feared the EU would stretch this clause to ratchet up their powers," said Mats Persson from Open Europe. "Article 48 can be used only if it does not expand the powers of the EU, but the crisis mechanism clearly does because it allows the Commission to make key decisions about the future of countries in trouble."

The IMF said Belgium does not have the luxury of cutting its budget deficit slowly, tightening to 4pc of GDP this year instead of 4.7pc to send a "strong signal" to markets.

Belgium has an oversized banking system with assets equal to 340pc of GDP and big state guarantees. Belgian banks, led by Dexia and KBC, have $54bn of exposure to Ireland alone, according to the Bank for International Settlements.

Belgium has a current account surplus and large private savings. However, the IMF said suffered a big erosion of labour competitiveness against Germany since 2000, and now faces a major aging shock.

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