Despite the economic recovery signs in USA and Europe, post-crisis effects still weigh on country’s ability to finance their current account budget deficits, Erste Bank said in a report.
“Since the onset of financial crisis, the disparities between eurozone countries and USA have been accentuated. If exports-oriented countries, like Germany were harder hit by the crisis than the world’s largest consumer, USA, in the CEE region, countries with high consumption growth and major current account deficits have taken the heaviest blow”, said Gudrun Egger, Fixed Income Research Analyst at Erste Group.
Stimulus packages have been effective in dampening short-term losses of output, but in many countries this has resulted in governments taking over demand and indebtedness.
“The sharp increase in government debt is now at the epicenter of further downside risks to the global economy, as room for further stimulus is limited while consolidation efforts are likely to dampen growth”, the analyst said.
Interest rate cuts as of end 2010 most likely
If downside risks for the economy should grow to be more concrete and consolidation measures become increasingly difficult, this would lead to downside risks for the interest rate outlook and increase the likelihood of additional monetary support measures being implemented.
“From today’s perspective, we expect the Fed to start hiking rates at the very end of this year, ahead of the ECB (second quarter 2011) as the economic recovery should be faster in the US and the key rate is at a lower level”, said Rainer Singer, Erste analyst.
Sovereign debt remains a major problem
The sharp increase in yields for southern European countries seen recently is related to doubts aboud debt sustainability, even though speculation might have reinforced it. Indeed, in many countries looming deficits had their o
