Europe could face years-long debt grind

Greece's efforts to restore confidence in its finances have only called attention to its woes, and now investors are fretting debt contagion could spread to other countries, starting with similarly troubled Portugal, but with markets wondering who's next.

Some experts believe a bailout may be needed to prevent a continental conflagration — but EU leaders resist the idea, while going cap in hand to the International Monetary Fund would be a humiliating step they're unlikely to take.

A growing chorus of voices is predicting a less dramatic, but potentially more corrosive, outcome: a years-long grind of fiscal pain that neither plunges Greece into default nor restores its finances to health.

As it denies the possibility of a bailout, the EU has been desperately voicing its confidence in Greece's ability to contain spending and pay down debt in the hopes that investors will give the country a break and stop betting on its fiscal demise.

A number of investors now appear inclined to think the politicians will go to any length to avoid the humiliation of a member state going bust or being bailed out, by the EU or by the IMF.

The result may leave Greece and other debt-plagued countries in the 16-member euro zone in limbo — without the boost of a bailout or the catastrophe of a default, but stuck for years in an uphill struggle to gets its finances straight that will mean lower salaries for many workers, especially those in public jobs, plus higher interest rates and less chance that governments can spend to stimulate their economies.

David Jones, chief market strategist at IG Markets in London, believes that after last week's sharp sell-off in equities, when markets were evaluating the risk of default and the possibility of contagion across the eurozone, investors are now turning to the view that the debt crisis will become a long-term burden — both for Greece and the wider eurozone.

The bigger danger: high interest rates that will sap spending for years, as indicated by the roughly 3.5 percentage point spread in the markets between Greek bonds and those of Germany, considered a benchmark of safety.

Greece's figures -- a budget deficit that rocketed to 12.7 percent of annual economic output in 2009, four times above the EU limit, and a national debt of more than 113 percent of GDP -- have alarmed the country's EU partners and international markets, forcing a spike in borrowing costs for Greece and other weak European economies and pushing down the euro exchange rate.

There are also fears the troubles could spread. The PIGS (Portugal, Ireland, Greece, Spain) are in obviously in trouble, but debt levels are sky high in countries typically considered more solid: Italy is at 127 percent and Belgium at 105 percent. Austria's banks have troublesome exposure to recession-hit Eastern Europe.

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