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Eurozone crunch time

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Eurozone crunch time
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Europe’s weaker economies are again having to offer much higher rates of interest to get investors to buy their government bonds.

This comes as Greece debt talks turned into a marathon and Germany suggested Athens may have to surrender control of its budget policy to outside institutions if it cannot implement the reforms needed for it to get rescue money.

It is a perfect storm of problem. Greece in danger of a disorderly default, Spain is tumbling into recession, Portugal is all but certain to need another bailout, Italy drowning is in debt and France’s debt costs have risen as its credit rating was downgraded.

The European Commission has just hinted that it will allow Spain to miss its tough budget deficit reduction target on the basis that the euro zone’s fourth largest economy, needs to stimulate growth as well as reduce spending.

As Juan José Toribio, Economics Professor at IESE business school, notes there are difficult times are ahead: “We have a long period of economic adjustment ahead, which will be shorter if we are brave enough to make the necessary structural reforms, so that our way out can be more dynamic.”

Portugal is fast sliding towards becoming the next Greece – needing a second bailout to avoid chaotic bankruptcy.

There is a growing distrust among banks of Portugal’s ability to repay what it has borrowed and the cost of insuring Portuguese debt has spiked with insurers demanding their premiums be paid up front.

Portugal’s already soaring 10-year bond yields surged on Monday to just under 16 percent, more than twice the level that is generally considered unsustainable.

Business and consumer confidence there has recently hit record lows, as salaries are cut and taxes raised in the painful austerity programme.