Europe recession risk grows

@CNNMoney September 14, 2011: 12:56 PM ET

NEW YORK (CNNMoney) -- There are growing fears that a European country could default on its debt and spark a crisis in the global financial system. But even if authorities can stave off a default, Europe could still be headed for recession.

A survey of European fund managers by Bank of America/Merrill Lynch released Tuesday found 55% now believe there will be a European recession in the next 12 months. That's up from only 14% forecasting a recession as recently as July.

And last week the European Central Bank cut its growth forecast for next year to as little as 0.4%.

The main reason for those growing fears is the increasing risk of a sovereign debt default in one of the troubled "PIIGS" nations - Portugal, Italy, Ireland, Greece and Spain -- which could spread to other countries in the euro area, and eventually the rest of the world.

And the fears have intensified lately as plans to bail out Greece have been met with opposition, weak demand for bonds of debt-laden countries has raised borrowing costs and two major European banks got downgraded by Moody's because of their exposure.

"I'd put the chance of default over the next seven days at below 20%, but over 70% within a year," said Sandeep Dahiya, finance professor at Georgetown's McDonough School of Business.

Years of crisis punctuated by repeated deals to prevent default have left many doubtful that the weaker countries will be able to avoid that fate, Dahiya said.

"The dousing of flames every few months has been going on for two years now. It buys you a few weeks and months, but there needs to be a recognition that there are some countries with more debt than they can ever service."

Europe's debt crisis: 5 things you need to know

Worse yet, Europe's ability to respond to a recession is greatly limited by the debt crisis that's forcing governments to cut back on spending.

The weaker European economies, already struggling with their debt load, are in no position to implement stimulus measures and could actually be forced to make deeper cuts in the case of a downturn. And stronger nations like Germany aren't likely to try to pump up their own slowing economies with increased government spending.

"Obviously, there's not as much room to respond than there was to previous recessions," said Ben May, European economist for Capital Economics.

Of course there are still hopes that an actual sovereign debt default can be avoided, at least for now. But that might not even matter at this point. The simple threat of default is enough to cause a crisis of confidence that pushes the continent into recession anyway.

"Consumer confidence and business sentiment has really plunged," said May. "All of that suggests there's certainly a good chance that if the euro zone economy doesn't contract in the third quarter, then the fourth quarter is a real possibility." To top of page

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