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World Business

El-Erian: Europe crisis may spread

By Sree Vidya Bhaktavatsalam (China Daily)
Updated: 2010-05-08 11:11

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"The transmission mechanisms for this latest round include disruptions in European inter-bank lines, a flight to quality, and market illiquidity," El-Erian said.

The euro tumbled the most since the collapse of credit markets in 2008, dropping 1.5 percent to $1.2620 and touching a 14-month low of $1.2529.

Amid protests, Greece's parliament approved austerity measures demanded by the European Union and International Monetary Fund as a condition of its 110 billion euro ($139 billion) bailout.

Europe's debt-ridden nations have to raise almost 2 trillion euros within the next three years to refinance maturing bonds and fund deficits, according to Bank of America Merrill Lynch data.

"The issues in Greece are a global issue," Axel Merk, president and chief investment officer of Merk Investments LLC in Palo Alto, California, said in an interview. "The recovery priced in that access to credit is available, and cheaply."

Italy faces the biggest bill, followed by Spain. Greece needs 152.6 billion euros, while Portugal and Ireland each have to raise about 80 billion euros, the data show.

"There may well be some defaults. If not Greece then some other nation," Merk said. That's "hitting the banking sector particularly hard".

Europe's fiscal crisis could threaten banks in Portugal, Spain, Italy, Ireland and the UK as the risk of contagion grows, Moody's Investors Service said in a report.

Bloomberg News