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Cat And Mouse Game In Europe: Analyst

Germany is playing a cat and mouse game with less successful European economies as negotiations over the euro zone crisis continue at the country level, Giles Keating, head of research at Credit Suisse, told CNBC Friday.

As bans in shortselling were extended in several European countries and the Spanish government passed measures to establish limits on the public deficit and debt as part of the constitution, European leaders are trying to restore confidence in the euro zone region.

A key ally of German Chancellor Angela Merkel signalled Friday that the German government would pass the measures necessary for the European Financial Stability Facility (EFSF).

There have been grumblings in Germany, the euro zone's biggest economy, which has recovered relatively well from the crisis of 2008, at the country having to help support weaker economies to shore up the euro.

"There's always a cat and mouse game in the relationship between creditor and debtor," Keating said. "They (European leaders) need to get something back from their other parties."

The German stock market was the latest victim of a market sell-off Thursday after rumours that a downgrade of its debt by credit ratings agencies was on the cards, despite the three main agencies reaffirming its rating.

As fears about the extent of the euro zone debt crisis have spread, economies previously viewed as sound, such as France, have been plagued by worries about their future.

Recent falls in some US banking stocks have been partly credited to worries about their exposure to European banks.

"A lot of European banks rely on US funding for short-term wholesale lending, and there are a lot of rumors that European banks are finding it difficult to borrow," Robin Bew, chief economist at the Economist Intelligence Unit, told CNBC Friday.

He pointed out that exposure to the domestic mortgage market was also a major factor in recent share price falls, particularly for Bank of America, which received a boost from a high-profile investment by legendary investor Warren Buffett Thursday.

"Markets seem to have looked a little bit too much at the negative news rather than the positive," said Keating. "A more decisive Greece default might not be as disastrous now as six months ago.

"If you get serious constitutional amendments and economic reform in some of the countries that have been weaker in the past, such as Spain and Italy, then you can see the way open to more sensible and rational use of a euro bond," he added.

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