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The crisis in the periphery of the eurozone, although not raging as until recently, is dangerously smoldering. Events in the countries, pressed by debts and deficits and stifled by lack of economic growth, show that they are not out of the woods yet and the fire is likely to flare again.

Greece

is haircutting investors, who were tempted to invest in "risk free" Greek debt. Replacing old Greek debt with new one must be completed on the evening of 8 March. At this stage it is known that the largest holders of Greek bonds have agreed to participate in the operation. According to The Financial Times, those are large foreign and Greek banks, that hold about 40% of the debt. Investors` interest in the deal rose sharply after the Greek authorities threatened lenders who did not participate that they might receive nothing. The newspaper explains that the threat was directed to 14% of the investors holding debt issued under international law. The remaining 86% hold bonds worth 177 billion euros, issued under Greek law.

As to the second group of investors, Athens warned that it could use the provisions of the new collective action clause to force them to participate. To achieve the goal of reducing the Greek debt by 100 billion euro, participation rate of 95% is needed. Athens expects to close the deal with about 90% participation rate. If the eurozone finance ministers assess that the swap was successful, they will make a final decision to disburse the second bailout to Greece. On March 1, they agreed to activate half of the amount earmarked for activities related to debt exchange, after concluding that the Greek authorities had fulfilled their commitments.

Despite encouraging results, however, there have already been predictions that the country will not be able to return on the financial markets by 2014, as provided, and will continue to need external financing by 2020. Moreover, even after the debt restructuring, it will remain too heavy a burden for Greece to bear, given the expected prolonged recession.

Portugal

might follow the Greek example and look for partial debt remission, analysts predict, despite vows of European leaders that Greece will remain an isolated case. Portuguese bonds are already being traded at half of their value and the country`s borrowing costs are rising alarmingly. For the last two weeks it rose by 2 percentage points to nearly 14%, which is twice as much as a year earlier. There is some talk that the country will inevitably ask for a second loan from the EU and the IMF, although the authorities deny having such intentions. In May 2011 Portugal received a rescue loan of 78 billion euros. The situation is further hampered by the country’s poor economic outlook. According to the European Commission`s forecast, the Portuguese economy will contract by -3.3% in 2012, after having shrunk by -1.5% last year. Only Greece is expected to perform worse with -4.4% GDP contraction.

Spain

changed on its own its deficit target of 4.4% for 2012 after it became clear that Madrid had missed the 6% target for the last year by more than 2%. The government believes the target of 5.8% is far more realistic, given the poor economic outlook. At this stage the Commission has not officially commented on this unprecedented move, defined by Prime Minister Mariano Rajoy Brey as a "sovereign decision". Brussels prefers to await the adoption of the new Spanish budget, which has been postponed for the end of March 2012 because of the parliamentary elections last November. Madrid, however, can hardly hope for leniency.

The conclusions of the Spring European Council meeting clearly state that "Member States under market pressure should meet agreed budgetary targets and stand ready to pursue further consolidation measures if needed." EU Economic and Monetary Affairs Commissioner Olli Rehn`s spokesman Amadeu Altafaj said that the Commissioner has requested more information and specific figures from the Spanish authorities.

The greatest concern of the government, however, is not Brussels but the regional authorities, because it is there that the implementation of the fiscal targets has failed. At a meeting with Finance Minister Cristobal Montero on 6 March most regions have supported the proposed spending cuts of 10 billion euro. The measure was supported mainly by regions controlled by the Popular party, while Andalusia, governed by the Socialists, voted against the cuts. The Spanish regions have a large autonomy and are responsible for half of all public spending, while central government is responsible for only 18 per cent.

The financial situation of the regions is one of the reasons why Spain is still unable to regain market confidence, in spite of the consolidation efforts and reforms, initiated by the socialist government of Jose Luis Zapatero back in September 2011, the parliament adopted constitutional amendments introducing a debt brake and giving debt payments explicit priority over any other expenditure.

Size does matter even more

Against this background, the European leaders discuss whether to increase the ceiling of the eurozone rescue fund. The permanent fund, the so called European Stability Mechanism (ESM), that will start operating in July, has a 500 billion euro lending capacity. Many European leaders, the European Commission, the IMF and G20 insist the fund's capacity to be increased significantly. One option is to combine the recourses of the permanent fund and the remainder of about 250 billion euros of the temporary fund. Meanwhile, European leaders agreed to accelerate the payment of their contributions to the ESM, starting with two tranches in 2012. Jean-Claude Juncker, Eurogroup president, explained that each tranche would increase the fund`s capacity by 100 billion euros.

The problem is that Germany is strongly opposed to the increase of the 500 billion euro ceiling. Leaders must take a final decision by the end of the month. Increasing the so-called "firewall" is a condition set by EU's international partners in order to pour money for solving the European debt crisis.