The upcoming economic collapse of US and Europe

[VersusAllOdds]

Armand, thanks for the insightful replies! I roughly think what you said there, but I don't have enough factual data like you to support it.

Anyway, the Pound is experienced quite an inflation, that's true, but I think that the British economy, no matter how many problems it has will survive what Eurozone one cannot. The UK has a very strong real estate market, as well as a pretty good stock exchange. Please don't ask me to elaborate more on this, because, again, I have no factual data, but I'm positive that's right. On the other hand, no matter what the British experienced throughout history, they have miracleously gotten out of it alive (Spanish Armada, WW 2 some of them), so that's why I'm pretty confident in the English.

Euro is, in my opinion, a failure at it's core, at least to an extent. How can one currency be the same for so many diverse countries? It may become very vulnerable to fall of a single member of the Eurozone...
Another thing - Germany is the country with undoubtebly the strongest economy in Europe. And yet they whine pretty big time about the first phase of crisis that's striking Europe - Greece. By the time the economic turmoil reaches Spain (it already has, but I'm speaking of the point where they need a huge bailout just like Argentina/Iceland/Greece), they'll already ragequit the Eurozone, and probably form another Mark with the Austrians, Luxemburgh, and maybe a few more still healthy economies...
Also, there's a huge number of speculators worldwide, speaking of doom of Euro and European economy. That many speculators don't just come out of nowhere... It seems that the fall of Euro is already decided. I'm only interested in what will be the concequences...

The Chinese Yuan is a story for itself. That currency is as manipulated as it can get! Anyway, China has something no other country has - an almost unlimited pool of cheap labour force. It will take a while before China starts slowing down, although it's very inevitable, given their rise is exagerated and forced by their government policies.

 

[AkhandBharat]

Anyway, the Pound is experienced quite an inflation, that's true, but I think that the British economy, no matter how many problems it has will survive what Eurozone one cannot. The UK has a very strong real estate market, as well as a pretty good stock exchange. Please don't ask me to elaborate more on this, because, again, I have no factual data, but I'm positive that's right. On the other hand, no matter what the British experienced throughout history, they have miracleously gotten out of it alive (Spanish Armada, WW 2 some of them), so that's why I'm pretty confident in the English.

You have no factual data and you're positive that you're just based on a hunch and historic data and expect people to just listen to you? Hahahaha!

Euro is, in my opinion, a failure at it's core, at least to an extent. How can one currency be the same for so many diverse countries? It may become very vulnerable to fall of a single member of the Eurozone...
Another thing - Germany is the country with undoubtebly the strongest economy in Europe. And yet they whine pretty big time about the first phase of crisis that's striking Europe - Greece. By the time the economic turmoil reaches Spain (it already has, but I'm speaking of the point where they need a huge bailout just like Argentina/Iceland/Greece), they'll already ragequit the Eurozone, and probably form another Mark with the Austrians, Luxemburgh, and maybe a few more still healthy economies...

This is exactly the problem with Euro. France and Germany are banking on Euro to rise up out of the crisis, but the PIIGS are too big! Unless the Euro is dissolved, France and Germany are going to get dragged along with the other countries going belly-up in debt. Creating an economic government is a joke. What powers will this economic government have compared to individual sovereign governments of EU countries?

Also, there's a huge number of speculators worldwide, speaking of doom of Euro and European economy. That many speculators don't just come out of nowhere... It seems that the fall of Euro is already decided. I'm only interested in what will be the concequences...

The consequences will depend on how quickly the eurozone breaks up. If its too early, the big economies can save themselves. If its too late, everyone is shooting themselves in their foot.

The Chinese Yuan is a story for itself. That currency is as manipulated as it can get! Anyway, China has something no other country has - an almost unlimited pool of cheap labour force. It will take a while before China starts slowing down, although it's very inevitable, given their rise is exagerated and forced by their government policies.

The chinese are tying themselves to the fate of the Americans. Thats all I have to say for now.

 

[AkhandBharat]

The US public debt hits its tipping point

CONGRESS RAISED the federal debt limit this month by $1.9 trillion to a record level of $14.3 trillion. Given the projected budget deficit for the next year, the gross public debt of the US government will probably hit that $14.3 trillion limit by the end of 2010. This huge expansion of public debt is not just an abstract concern of economists; it is likely to hurt the practical situation of most American families and firms.

In an advanced industrial society like the US, the gross public debt of the central government ("public debt'') can rise from 30 percent to 90 percent of its Gross Domestic Product with surprising little impact on inflation or economic growth. (The gross public debt includes Treasury bonds held by public investors and internal obligations like those to the Social Security trust fund.) However, as research by Harvard Professor Kenneth Rogoff has recently shown, once gross public debt exceeds 90 percent of GDP, the adverse effects on the economy come quickly into play. At the end of 2010, the public debt of the United States will be close to 100 percent of our GDP for this year.

How will this dynamic work? When the US public debt gets close to the US GDP, foreign investors will become concerned about America's ability to keep its deficits under control, and will start to demand higher interest rates to buy the ever increasing volume of US Treasury bonds. Although the recession may delay this spike in interest rates, it is likely to happen during 2011 or 2012.

Higher US interest rates will hurt consumers with credit card debt, homeowners with adjustable rate mortgages and businesses with borrowing needs. At the same time, higher interest rates will substantially increase annual payments on the federal debt.

In addition, when the public debt of an advanced industrial country gets close to 100 percent of its GDP, its rate of economic growth slows significantly. This occurs because more capital is needed to finance continuing budget deficits and less is available for productive private investments.

With such a huge public debt, Congress will not have the option of enacting a stimulus program to boost economic growth. Indeed, Congress will come under increasing pressure to cut back on discretionary spending (including defense) to stop the skyrocketing of public debt. However, discretionary spending involves less than one quarter of the federal budget - the bulk goes to debt service and entitlements.

Similarly, the United States is nearing a tipping point for federal entitlements. This year Social Security will pay out more in benefits than it receives from payroll taxes; in 2017, the trust fund for Medicare is almost certain to be exhausted. Yet any reductions in these entitlement programs will take years to impact the federal budget since politically they cannot be reduced for those already in retirement or close to retirement.

Can the deficit freight train be stopped by higher taxes? The Obama administration has proposed almost $1 trillion in tax increases over the next decade for wealthy families with annual incomes over $250,000 and over $300 billion in tax increases for business. Nevertheless, the Administration projects a $10 trillion increase in the federal debt over the next decade.

Nor would it be feasible to close the budget deficit by putting even more of a tax squeeze on wealthy families and American firms. Only 2 percent of American taxpayers have adjusted gross incomes over $250,000 per year and US corporate tax rates are already significantly higher than those of most European countries. To raise substantially more amounts of revenue, most economists would advocate some form of a carbon tax because it would promote efficient use of energy with a relatively low impact on economic growth.

In short, there are no easy answers. To tackle these difficult spending, entitlements and tax issues, President Obama has begun to appoint members of a budget commission that would have a small majority of Democrats. In return for having an equal number of Republicans and Democrats on the commission, Congress should agree that its proposals would be given an up-or-down vote - without amendments - a few months after their publication. There is no time left for partisan politics.

 

[Armand2REP]

Hahaha! How does buying back one's own debt bonds shore up a country's currency value? LOL! If the goverment buys back its own debt bonds, it means no other creditors are willing to buy it, which will only lead to currency devaluation because the creditors are losing interest in buying debt and when the debt matures, BOOM, devaluation!

Moreover, how is the government going to pay itself back? By increasing taxes, ofcourse? So, the US government is preparing for a massive tax hike?

No other creditors were willing to buy it at the rates you offered, so buying it yourself is the cheaper option as you will only be paying yourself back at the interest rate you wanted to sell. When one buys your own bonds you are decreasing money supply by taking it out of circulation. It is the same effect as buying FOREX. When the time is right you will cash the bond and place that money back at the Central Bank to be recirculated or sold in a bond offering. You would be surprised how large Central Banks holdings of their own government securities are. That and FOREX are how they control their monetary policy.

 

[AkhandBharat]

No other creditors were willing to buy it at the rates you offered, so buying it yourself is the cheaper option as you will only be paying yourself back at the interest rate you wanted to sell. When one buys your own bonds you are decreasing money supply by taking it out of circulation. It is the same effect as buying FOREX. When the time is right you will cash the bond and place that money back at the Central Bank to be recirculated or sold in a bond offering. You would be surprised how large Central Banks holdings of their own government securities are. That and FOREX are how they control their monetary policy.

No fool. When you buy your own bonds, you don't take money supply out of circulation, because that money doesn't exist at all. It is a guarantee of payment of credit!

 

[AkhandBharat]

US deep in debt: Go to India if you have brains

US deep in debt: Go to India if you have brains

 

[Armand2REP]

Armand, thanks for the insightful replies! I roughly think what you said there, but I don't have enough factual data like you to support it.

Anyway, the Pound is experienced quite an inflation, that's true, but I think that the British economy, no matter how many problems it has will survive what Eurozone one cannot. The UK has a very strong real estate market, as well as a pretty good stock exchange. Please don't ask me to elaborate more on this, because, again, I have no factual data, but I'm positive that's right. On the other hand, no matter what the British experienced throughout history, they have miracleously gotten out of it alive (Spanish Armada, WW 2 some of them), so that's why I'm pretty confident in the English.

The English are in a far worse spot than the Eurozone. At 68% debt and bringing deficits down to a 6.3% average the EZ is in a much stronger position than the UK running a 13% deficit which will place them at 74% this year and 100% by 2012. The FTSE has not been performing any better than the CAC 40 or any of the other major exchanges on the Euronext. BP is one of their biggest cap stocks and it has crashed dragging the FTSE down with it performing 7% worse than Paris CAC 40.

Euro is, in my opinion, a failure at it's core, at least to an extent. How can one currency be the same for so many diverse countries? It may become very vulnerable to fall of a single member of the Eurozone...

It can be the same when it is allowed to carry out monetary policy. The Greek crisis has and is seeing new powers granted to the ECB and uniting economic policy. All the PIGS are making drastic austerity measures and it is under pressure from the ECB and French and German governments. They cannot survive without our cash so they have no choice but to step in line. There is no one with a gun to the head of the UK, they spend with reckless abandon thinking they can grow their way out of it. Inflation is twice that of the Eurozone and economic growth is half that of France and Germany. The French president of the ECB has made it clear that we will not bail out the UK since they would not contribute to the PIGS bailout package. UK will stand alone.

Another thing - Germany is the country with undoubtebly the strongest economy in Europe. And yet they whine pretty big time about the first phase of crisis that's striking Europe - Greece. By the time the economic turmoil reaches Spain (it already has, but I'm speaking of the point where they need a huge bailout just like Argentina/Iceland/Greece), they'll already ragequit the Eurozone, and probably form another Mark with the Austrians, Luxemburgh, and maybe a few more still healthy economies...

Spain is already reducing their deficit to 6% by next year and public debt of 55% of GDP. They have far more leeway than the UK and are also backed up by a $1 trillion slush fund. The UK will see turmoil before Spain.

Also, there's a huge number of speculators worldwide, speaking of doom of Euro and European economy. That many speculators don't just come out of nowhere... It seems that the fall of Euro is already decided. I'm only interested in what will be the concequences...

Those are the same speculators who are short selling PIGS bonds.

The Chinese Yuan is a story for itself. That currency is as manipulated as it can get! Anyway, China has something no other country has - an almost unlimited pool of cheap labour force. It will take a while before China starts slowing down, although it's very inevitable, given their rise is exagerated and forced by their government policies.

The Chinese labour pool is dried up. The One Child Policy has aged their population and it has already peaked. Labour shortages abound across the export based coastal regions which is why they are striking for higher wages. China will slow down when their asset bubble bursts.

 

[Armand2REP]

No fool. When you buy your own bonds, you don't take money supply out of circulation, because that money doesn't exist at all. It is a guarantee of payment of credit!

The money supply is not increased if you do not set it out into M1 for lending. The purpose of a debt bond is to raise capital for debt expenditure. The Central Bank is buying the bond to hold for another bond offering to raise FOREX. When they sell it they will decrease money supply. They are not issuing the bond for quantitative easing fool.

 

[AkhandBharat]

The money supply is not increased if you do not set it out into M1 for lending. The purpose of a debt bond is to raise capital for debt expenditure. The Central Bank is buying the bond to hold for another bond offering to raise FOREX. When they sell it they will decrease money supply. They are not issuing the bond for quantitative easing fool.

I am going to print this on a tshirt and sell it to Americans and Europeans, LMAO! When the government sells the debt bonds, they decrease the money supply?

Here's my reply again:

No fool. When you buy your own bonds, you don't take money supply out of circulation, because that money doesn't exist at all. It is a guarantee of payment of credit!

 

[Armand2REP]

I am going to print this on a tshirt and sell it to Americans and Europeans, LMAO! When the government sells the debt bonds, they decrease the money supply?

Here's my reply again:

Yes, when the government sells the bonds on the open market, it decreases money supply. ECON 101, no charge for the lesson.

 

[AkhandBharat]

Yes, when the government sells the bonds on the open market, it decreases money supply. ECON 101, no charge for the lesson.

MB money supply doesn't decrease. Thanks for playing! Regarding the ponzi scheme thats M2, M3 levels of supply, lookie here below.

Thank you come again. End of line. Wootabaga!

U.S. Money Supply Plunges, Double Dip Near?

Milton Friedman must be turning in his grave as the Daily Telegraph reports that despite all of the federal stimulus, the U.S. Money Supply, M3 is contracting at an accelerated rate that matches the decline last seen since the Great Depression.

The M3 figures – which include broad range of bank accounts and are tracked by British and European monetarists for warning signals about the direction of the US economy a year or so in advance – began shrinking last summer. The pace has since quickened.

The stock of money fell from $14.2 trillion to $13.9 trillion in the three months to April, amounting to an annual rate of contraction of 9.6pc. The assets of insitutional money market funds fell at a 37pc rate, the sharpest drop ever.

"It's frightening," said Professor Tim Congdon from International Monetary Research. "The plunge in M3 has no precedent since the Great Depression. The dominant reason for this is that regulators across the world are pressing banks to raise capital asset ratios and to shrink their risk assets. This is why the US is not recovering properly," he said.

Lawrence Summers, the White House economic advisor said that the U.S. needs to continue to support the economic recovery via another stimulus bill to the tune of $200 billion. Addressing job growth and boosting output first before addressing the issue of the growing budget deficit should be the concern of U.S. lawmakers. According to the article, Summers stated, ""We are nearly 8m jobs short of normal employment. For millions of Americans the economic emergency grinds on."

The White House request is a tacit admission that the economy is already losing thrust and may stall later this year as stimulus from the original $800bn package starts to fade.

Recent data have been mixed. Durable goods orders jumped 2.9pc in April but house prices have been falling for several months and mortgage applications have dropped to a 13-year low. The ECRI leading index of US economic activity has been sliding continuously since its peak in October, suffering the steepest one-week drop ever recorded in mid-May.

Mr Summers acknowledged in a speech this week that the eurozone crisis had shone a spotlight on the dangers of spiralling public debt. He said deficit spending delays the day of reckoning and leaves the US at the mercy of foreign creditors. Ultimately, "failure begets failure" in fiscal policy as the logic of compound interest does its worst.

However, Mr Summers said it would be "pennywise and pound foolish" to skimp just as the kindling wood of recovery starts to catch fire. He said fiscal policy comes into its own at at time when the economy "faces a liquidity trap" and the Fed is constrained by zero interest rates.

If the U.S. is unable to spark significant job growth through future fiscal policies, an economic recovery may never get off the ground. Stagnant growth coupled with downward pressures in price levels could result in the U.S. following the path of the Japanese who have been mired in the "Lost Decade" for close to 20 years now. Japan who has attempted to use fiscal measures as way to ignite growth now has a debt-to-GDP ratio of nearly 200 percent, tops in the world.

"Fiscal policy does not work. The US has just tried the biggest fiscal experiment in history and it has failed. What matters is the quantity of money and in extremis that can be increased easily by quantititave easing. If the Fed doesn't act, a double-dip recession is a virtual certainty," he [Mr Congdon] said.

Mr Congdon said the dominant voices in US policy-making – Nobel laureates Paul Krugman and Joe Stiglitz, as well as Mr Summers and Fed chair Ben Bernanke – are all Keynesians of different stripes who "despise traditional monetary theory and have a religious aversion to any mention of the quantity of money". The great opus by Milton Friedman and Anna Schwartz – The Monetary History of the United States – has been left to gather dust.

Mr Bernanke no longer pays attention to the M3 data. The bank stopped publishing the data five years ago, deeming it too erratic to be of much use.

This may have been a serious error since double-digit growth of M3 during the US housing bubble gave clear warnings that the boom was out of control. The sudden slowdown in M3 in early to mid-2008 – just as the Fed raised rates – gave a second warning that the economy was about to go into a nosedive.

Mr Bernanke built his academic reputation on the study of the credit mechanism. This model offers a radically different theory for how the financial system works. While so-called "creditism" has become the new orthodoxy in US central banking, it has not yet been tested over time and may yet prove to be a misadventure.

With the collapse in the money supply, the threat of deflation as we have mentioned here on Bondsquawk a number of times is real and closer than most people think. Core CPI is dangerously low with little buffer and will continue to decline as prices decline in face of light demand from consumers who are dealing with job uncertainty. Furthermore, commodity prices are dropping along with markets that support it such as China and Australia.

The Daily Telegraph article warned against the mechanical interpretation of the M3 measure of money supply. Specifically, M3 could be declining due to people going out and purchasing stocks, bonds, properties, and other assets.

While possible, the data as suggested by Lipper is telling us that the money isn't being spent on stocks or bonds. The most recent data, which can serve as a general indication, shows that a total of $25.5 billion of outflows occurred in the week ending May 19 of which, $27.1 billion came from Money Market Funds. Bond Funds received a light inflow of $1.9 billion while Stock Funds had an outflow of $0.3 billion.

The decline in the money supply probably isn't headed to the real estate market as very few are predicting a run up in real estate for a very long time. While the recent data on housing has been decent at best, much of the improvement in activity comes from federal tax incentives that expired recently. Furthermore, both residential and commerical real estate pricesare showing some signs of weakness as of late which implies weak demand as evident by the recently released Moody's and Case-Shiller data.

If we can rule out the aforementioned three assets, where did the money go exactly? An unconventional answer is to present another question. In this case, David Rosenberg, chief economist for Gluskin Sheff asked a bunch in his daily report, "Breakfast with Dave."

After an 18-month period of unprecedented fiscal, monetary and bailout stimulus, it is completely legitimate to pose the question: why is the yield on the 5-year T-note sitting below 2%? (Not to mention a record low 0.769% two-year note yield at yesterday's auction.) Is that consistent with a V-shaped reflationary recovery? And, wasn't the Fed so convinced just a few months ago that the recovery was going to be entrenched enough to allow the central bank to start to shrink its pregnant balance sheet? If so, then why is it that since March, the Fed's balance sheet has expanded a further $50 billion, and all with extra mortgage backed securities?

The answer to all of our questions is that the money supply is dropping for a reason. The "recovery" isn't real. The deflationary spiral may already be upon us. If not, it soon will.

 

[AkhandBharat]

Btw, lending against a fraction of the reserves is what brought the western economies to this stage. The central banks should hire some mathematicians. LOL!

 

[Armand2REP]

MB money supply doesn't decrease. Thanks for playing! Regarding the ponzi scheme thats M2, M3 levels of supply, lookie here below.

Thank you come again. End of line. Wootabaga!

When the bond is sold, the bank reserves are reduced. So is the monetary base (MB) getting rid of excess liquidity. Perfect example...

Bank Rossii May Sell Bonds as Money Supply Rises 50%

May 18 (Bloomberg) -- Russia's central bank may withdraw excess liquidity through bond sales and by raising reserve requirements as the country's broad money supply is set to rise 50 percent, Citigroup Inc. said.

The broad money supply rose an annual 21 percent in March, Citigroup said, citing central bank estimates. The narrower base money supply, which comprises cash, grew 48 percent in March and 52 percent in April, Citigroup said.

"Taking into account the expansion of credit to the private sector, without proper sterilization of the excess liquidity, growth of broad money supply could go far beyond 50 percent," Citigroup said.

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

I don't know how much more nonsense you want to spout, but it is funny. Rootabaga!

 

[AkhandBharat]

When the bond is sold, the bank reserves are reduced. So is the monetary base (MB) getting rid of excess liquidity.

Jeebus, When the bonds are sold, the bank reserves are not reduced magically. Its an artificial way of controlling the currency value vis-a-vis other free floating currencies, depending on how wide the circulation is of the currency in question. The money still exists. The bank issuing the bond is loosing money on the entire deal by paying interest when the debt matures. If the interest rate is low, which is in the case of big economies, its not a problem. However, the western economies are beyond that point. Because now, the promise made by Eurozone countries to bail out PIIGS, will be a lot more expensive, since the public debt is at record high in all western economies and foreign investors (who buy the bonds) are rejecting buying these bonds at low interest because they fear a default. So eventually, the interest rates will rise. This is a vicious cycle. Austerity measures proposed will be more effective in the longer term, but it will be painful in the short term, simply because, lending will be tight. Because of the public debt incurred by US, UK and Eurozone, there is not as much freedom as there was in the last decade.

There are only two ways out of this:
1) Hyperinflation, eventually leading to currency devaluation or
2) Depression and negative growth.

So you are damned if you do, damned if you don't if you choose to keep the eurozone intact. US/UK are going down the drain, unless they accept a huge recession, which doesn't seem likely on the cards.

 

[Armand2REP]

Jeebus, When the bonds are sold, the bank reserves are not reduced magically. Its an artificial way of controlling the currency value vis-a-vis other free floating currencies, depending on how wide the circulation is of the currency in question. The money still exists.

Jeebus, why don't you Google contractionary monetary policy and educate yourself.

A central bank can use open market operations to reduce the monetary base. The central bank would typically sell bonds in exchange for hard currency. When the central bank collects this hard currency payment, it removes that amount of currency from the economy, thus contracting the monetary base.

http://en.wikipedia.org/wiki/Contractionary_monetary_policy

 

[AkhandBharat]

Jeebus, why don't you Google contractionary monetary policy and educate yourself.

Jeebus, why don't you google hyperinflation and educate yourself.

 

[Armand2REP]

Jeebus, why don't you google hyperinflation and educate yourself.

Why would I google hyperinflation when the Eurozone is conducting contractionary monetary policy??? Make some sense please.

 

[AkhandBharat]

Why would I google hyperinflation when the Eurozone is conducting contractionary monetary policy??? Make some sense please.

Do I have to do everything for you? Enroll yourself in an economy class, fool.

The root cause of deflation and hyperinflation is the same: a nation plagued by mountain of debt. This mountain of debt can be in form of a massive national debt, an insolvent financial system, or both. What determines whether a debt-plagued nation experiences deflation or hyperinflation is the response of that nation's monetary authority:

A) If the monetary authority does nothing while a country defaults on its debt, its banks go bankrupt, and its depositors see their savings wiped out, then that country will experience deflation.
B) If the monetary authority chooses to monetize a country's national debt, its banks' bad loans, or the savings of depositors at failed banks, then that country will experience hyperinflation.

All western economies today are choosing option B to keep recession away, which is inveitable.

 

[Armand2REP]

Do I have to do everything for you? Enroll yourself in an economy class, fool.

I wouldn't want you to do anything for me, you're talking out of your nose.

A) If the monetary authority does nothing while a country defaults on its debt, its banks go bankrupt, and its depositors see their savings wiped out, then that country will experience deflation.
B) If the monetary authority chooses to monetize a country's national debt, its banks' bad loans, or the savings of depositors at failed banks, then that country will experience hyperinflation.

Eurozone countries are choosing option B.

Have you not listened to what has been said about the ECB's monetary policy? Money supply is contracting, not expanding so it is obviously not conducting quantitative easing. It is China that is entering the liquidity trap. Eurozone is in a credit crunch because ECB does not want to lend. This means less demand and excess supply. These are deflationary fundamentals if you had bothered to learn anything about macroeconomics. This will be offset by an increase in exports thanks to a devalued currency and the ECB will keep a fine balance. That is what we pay them for. No country is going to default, there is a $1 trillion slush fund that says it won't. Maybe you are talking about UK, there is some truth to that.

 

[AkhandBharat]

Euro rescue plan averts disaster but fears persist

Analysis: Euro rescue plan averts disaster but fears persist

Indebted euro zone countries other than Greece are retaining their ability to raise money in the bond market, avoiding the worst-case scenario that appeared possible before the scheme was announced: a string of debt restructurings or defaults.

But part of Europe's interbank money market remains frozen as nervous banks refrain from lending to each other. Bond yields have been rebounding after a dip in mid-May, and the cost of insuring banks and governments against default is sky-high.

European policy makers are clearly worried and frustrated by the failure of their unprecedented scheme to calm the markets.

European Central Bank Governing Council member Axel Weber said on Wednesday that the way in which the markets were taking a skeptical view of the scheme was "incomprehensible."

But analysts say fears over Europe's debt problems and slow growth may have become too serious to be resolved by any bailout plan, however large.

Markets may only start returning to normalcy if Europe demonstrates that it can achieve steady economic growth while cutting its government budget deficits -- a process that could take many months, even years.

"The underlying, fundamental problem is not being addressed," said Daniel Gros, director of the Center for European Policy Studies in Brussels.

"It's a problem of insolvency that is actually in marginal parts of Europe, but it's like a bag of apples -- a few rotten ones infect all the others."

A Reuters poll of 52 economists, published on Thursday, found exactly half of them thought the worst of the euro zone's debt crisis had passed. Others saw the possibility of worse instability, despite the EU's bailout plan.

EMERGENCY LOANS

On May 10, European governments announced that along with the International Monetary Fund, they would provide as much as 750 billion euros ($915 billion) of emergency loans if that became necessary to help euro zone states finance themselves.

The European Central Bank backed that up by launching an unprecedented program of buying government bonds of the most indebted countries from the secondary market.

Strong demand at Spanish and Portuguese government bond auctions this week showed the EU had succeeded in preventing those countries from losing access to the debt market. Spain looks likely to meet a 16.2 billion euro bond redemption on July 30, its last big redemption this year.

But both countries had to pay massive spreads on their bond issues, which they cannot do indefinitely without worsening their debt problems.

Other areas of the markets have continued to deteriorate in the past month. The euro has lost about 10 cents against the dollar, while benchmark interbank lending rates hit a five-month high this week. The costs of insuring against debt defaults by European governments and banks through credit default swaps are back near early May highs.

Policy makers themselves appear partly to blame. Weber himself has criticized the ECB's bond-buying strategy as inflationary, making investors wonder whether the central bank would be willing to step up its buying aggressively enough to offset any fresh wave of panic in the market.

EU finance ministers have so far resisted publishing the results of "stress tests" of the health of individual banks. Many investors think more transparency could reassure the markets by revealing the full extent of problems.

Gros said the rot would spread if governments refused to come clean on specific bank exposure to the debt of various governments and sectors.

"Nobody knows exactly what the magnitude of the problem is, and when you don't know you assume the worst."

And though governments are moving to tighten rules on fiscal discipline in the zone, they are showing few signs of correcting big imbalances in policies that cause economic tensions. For example, Germany is determined to tighten fiscal policy rather than keeping it loose to help European trading partners.

NO BAILOUT BIG ENOUGH

There are also more fundamental grounds to doubt whether any bailout could be large enough to rescue the weakest countries in the euro zone.

In order to reassure the debt market, the most indebted countries are being pressured into draconian austerity programs that are expected to slow economic growth, putting fresh pressure on their tax revenues and banking systems.

The Reuters poll of economists published on Thursday found them estimating a 30 percent chance of the euro zone slipping back into recession, a bigger chance than for Britain or the United States.

Given the poor outlook for growth, many investors think the debts of one or more euro zone countries may simply be too large to manage over the long term. A bailout would buy them time, but they would eventually prove unable to repay the bailout loans, and Europe's rich countries would not support them indefinitely.

World Bank President Robert Zoellick raised this possibility in a speech in Berlin on Wednesday when he said that in some situations, debt restructurings might be the best course of action -- though he did not specify whether he thought any European countries had reached that point.

"If it becomes clear that a particular debtor cannot pay back its borrowings, a managed restructuring, combined with financial support, can create confidence that growth can be restored," he said.

Lena Komileva, economist at brokerage Tullett Prebon, said the combination of slow growth and austerity in the euro zone was deterring many private investors from buying government bonds in response to the ECB's reluctant purchases.

"The euro bloc remains burdened by the toxic arithmetic of a debt crisis that will keep investors away -- spreading government default risk and loss of confidence in the currency, government spending cuts, rising taxes, job losses, credit shortages, undercapitalized banks and indebted households."