The Eurozone’s government debt pile has risen to 90% of GDP,according to new data from Eurostat this morning which showed the region’s annual deficit had fallen.

Eurostat has calculated that eurozone members’ collective debt reached €8.6 trilion in 2012, when its combined economic output was nearly €9.5 trillion.

The total eurozone deficit fell to 3.7%, from 4.2% a year ago. Brussels will see that as proof that tough fiscal consolidation programmes are finally bearing fruit.

But the data shows stark difference across the region, and the wider EU. Five eurozone countries have deficit levels above 6% of GDP, a position shared with the UK.

And seventeen memebrs of the European Union missed the target of a deficit below 3% of output (with Spain the worst, at 10.6%)

As Eurostat put it:

In all, thirteen Member States recorded an improvement in their government balance relative to GDP in 2012 compared with 2011, twelve a worsening and two remained stable.

The world’s leading central banks should maintain or strengthen expansionary monetary policy to support their economies, even as there are risks of asset-price bubbles, the Organization for Economic Cooperation and Development said.

“Given limited fiscal space in most OECD countries, monetary policy remains a key instrument for supporting demand,” the OECD said Thursday in its interim assessment of the Group of Seven leading economies.

There is a risk of investor sentiment getting ahead of fundamentals and of monetary policy encouraging excessive risk-taking, the OECD said. But low inflation in most major economies means exceptional measures can and should remain in place, or be pursued further, it said. >> Read More

The French data is predictably bad. The French services sector shrank in February at its fastest rate in nearly four years, suggesting it is far from a turnaround.

The services PMI came in at 42.7 in February, compared with 43.6 last month. The manufacturing index ticked up to 43.6, but remains well below the 50 mark that separates growth from contraction.

The composite PMI, which accounts for roughly two-thirds of French economic output, dropped to 42.3 from 42.7 in January.

Trimming its holdings of US government securities for the fourth straight month, India held American treasury bills worth $57.9 billion in December.

India, which is among the top 20 holders of American government securities, has been reducing its holdings since August 2012, even as neighbouring China is purchasing more of these bills.

Amid global uncertainties, the US economic output for the first time in more than three years shrank 0.1% in the 2012 December quarter. >> Read More

A radical new option for the financial rescue of Cyprus would force losses on uninsured depositors in Cypriot banks, as well as investors in the country’s sovereign bonds, according to a confidential memorandum prepared ahead of Monday’s meeting of eurozone finance ministers.

The proposal for a “bail-in” of investors and depositors, and drastic shrinking of the Cypriot banking sector, is one of three options put forward as alternatives to a full-scale bailout. The ministers are trying to agree a rescue plan by March, to follow the presidential elections in Cyprus later this month.

The new plan has not been endorsed by its authors in the European Commission or by individual eurozone members. The memo warns that “the risks associated with this option are significant”, including a renewed danger of contagion in eurozone financial markets, and premature collapse in the Cypriot banking sector.

The radical proposal is intended to produce a more sustainable debt solution for the country, cutting the size of Cyprus’s bailout by two-thirds – from €16.7bn to only €5.5bn – by involving more foreign depositors and bond holders.

It would reduce Cyprus’s outstanding debt to just 77 per cent of economic output, compared with 140 per cent in the current full bailout plan. >> Read More

German objections to suffering losses on official loans to Greece have forced the eurozone to explore more complex means of helping Athens cope with its debt mountain.

After almost 10 hours of intense talks on Tuesday night, eurozone finance ministersfailed to agree on how fast to cut Greece’s debt pile. They called a further meeting next week to settle differences and release €44bn of long-overdue aid.

The main stumbling block was Berlin’s refusal to back “illegal” cuts to the interest rates on bilateral loans to Greece or return the profits from the European Central Bank’s purchases of Greek bonds, said people involved in the talks.

An alternative proposal involves offering €10bn of extra loans to Athens from the European Financial Stability Fund, the eurozone’s temporary bailout pot. The option is seen as a leading contender for a compromise deal. >> Read More

Eurozone finance ministers last night postponed agreement on Greece’s long-delayed €31.3bn aid payment for yet another week as divisions between the International Monetary Fund and EU creditors over how fast Athens must reduce its burgeoning debt levels burst into the open.

Christine Lagarde, the IMF chief, and Jean-Claude Juncker, chair of the eurogroup of finance ministers, publicly sparred over whether Greece must reduce its debt levels to 120 per cent of economic output by 2020, long viewed the target to get Athens back to a sustainable debt level.

An agreement between the IMF and eurozone governments is essential to releasing the bailout tranche since both creditors disburse financial assistance concurrently. >> Read More

Are the austerity measures imposed on struggling eurozone countries contributing to a deepening recession in the region?

It is a question that returned to the front burner last month when the International Monetary Fund published a study arguing both the IMF and the European Commission were routinely underestimating the impact of austerity on economic growth over the course of the eurozone crisis.

On Wednesday, Brussels shot back.

In a highly technical report of its own, the commission argues that contraction in countries such as Spain and Greece, while exacerbated by austerity measures, was bigger than expected as a result of panic in sovereign bond markets. That in turn led to a credit crunch, stifling private investment. So more austerity and not less, it suggests, might have convinced the markets and kept capital flowing. >> Read More