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Financial markets rallied in 2012 and have continued that rally so far in 2013, despite worries over slow growth in the United States and the realities of no growth in Europe and Japan.

Why? The combination of money from the world's central banks and investors' belief that those banks have the power to backstop financial assets.

The traditional advice has been "don't fight the Fed." For 2012, that advice broadened into "don't fight the Fed and the European Central Bank." It was good advice, as cheap money from the Fed and the European Central Bank - and promises of even more cheap money, if necessary -  more than made up for slow growth in the U.S. economy and no growth in European economies. Markets moved up on the central banks' guarantee.

But I can see a major test of the belief in that guarantee shaping up around the middle of this year. And, should it tank your stocks, you can blame Europe.

Back to the crisis

The big challenge to the markets this year, in my opinion, isn't going to be the U.S. fiscal cliff, the battle over the debt ceiling or a continuing resolution to keep the U.S. government going. By around the middle of the year, we're likely to see a return of the eurozone debt crisis that could challenge the central bank's belief in that guarantee.

Now, I don't think that crisis will be enough to shake the market's faith in the power of the world's central banks permanently. That won't happen yet -- in large part because the markets want to believe.

But we know from experience that, at some point, a market that believes it has a guarantee will overextend itself -- the technology stock crash of 2000 and the housing crash of 2006 to 2007 are good examples. At that point, central bank guarantees turn out to be less powerful than everyone assumed and inadequate to head off the crisis. As I watch money flow back into Spanish and Italian bonds despite the lack of any solution to the underlying problems of the eurozone, I wonder if I'm seeing a replay of that dynamic.

I think the faith in the power of the central banks will weather this replay. But I can't rule out the possibility of the crisis getting serious enough to rattle that faith for a while and do some damage. With that in mind, I think it's worth taking a look at the shape of the likely replay of the eurozone debt crisis in an effort to see how much danger it represents to global financial markets.

Signs the trouble is back

I think I can make a strong case that we're headed back to something like the same conditions that roiled markets in the first half of 2012. I think it's even fair to say that all the problems that were kicked down the road last year are about to come back to bite us in 2013.

What's happened recently to convince me that we're nearing crunch time in the eurozone again?

Last week saw a series of reports and warnings that focused on exactly how fragile the recovery in financial markets in Portugal, Ireland, Spain and Greece might be.

On Friday, the International Monetary Fund said that Portugal had done all the right things to reduce its budget deficit and to reform its economy since it received its 78 billion euro bailout ($103 billion) in May 2011. But fund officials said that  the country could be thwarted nonetheless in its goal of returning to the financial markets by September 2013. (Portugal plans to sell five-year debt in the next few days. That would be the country's first sale of anything other than short-term debt since the start of the European debt crisis. And it would put the country ahead of that September timetable.)

The problem, the IMF said, is that economic growth is slowing all over Europe, even in northern European economies, such as Germany, where growth had held up well during the crisis. Because of that slowdown, the Bank of Portugal said in its own forecast a few days earlier, the recession in Portugal will be worse than expected. The Portuguese central bank had cut its forecast for economic growth in Portugal in 2013 to a contraction of 1.9% -- double the bank's previous forecast.

The Portuguese government of Prime Minister Pedro Passos Coelho, perhaps because it is facing intense domestic opposition to its austerity policies, isn't as pessimistic as the IMF or the central bank. The government is still predicting a return to growth in 2014. The IMF, however, doesn't see Portugal recovering enough to achieve 2% economic growth -- hardly a robust figure itself -- until 2017. If the IMF forecast is accurate, that would amount to zero real growth for the decade from 2007 to 2017.

Italy's political wrangling

The story in Italy is similar, though the projected contraction isn't as severe. Last week, the Bank of Italy increased the depth of the contraction it was projecting for the Italian economy in 2013 to a 1% drop. The previous forecast from just three months ago had been for a drop of 0.9%. That's not a huge change, but the trend isn't positive.

How much the increasingly negative prospects for the Italian economy may be a factor in the rising fortunes of former Prime Minister Silvio Berlusconi is debatable, but Berlusconi is clearly rising in the polls. Berlusconi's right-of-center People of Freedom Party now trails Pier Luigi Bersani's center-left coalition by just 6 percentage points. That's a 4-percentage-point gain in a week.

So far, I don't think the Berlusconi surge is likely to propel the People of Freedom Party to victory in the election scheduled for Feb. 24 and 25. But it could force Bersani to include current unelected Prime Minister Mario Monti's center coalition in a new government. That might actually reassure financial markets, which would react negatively to a Berlusconi return. The former Berlusconi government showed little inclination to tackle Italy's budget deficit or to pass economic reforms, and I'm sure that financial markets would assume that a new Berlusconi government wouldn't do much better.

I believe that especially because Berlusconi's campaign is based on running as a rival to German Chancellor Angela Merkel in an effort to tap Italian anger at budget cuts and tax increases. Those policies, he has said, were imposed on Italy by a Germany that is out only for its own advantage. Even if Berlusconi loses, the strength of his support isn't going to make Merkel stronger in her own election position this fall or incline Germany toward compromising its opposition to any relaxation of the austerity economics advocated by the country during the crisis.

Spain and Greece

The recent dose of bad news from Spain wasn't about economic growth -- where past news has been grim enough -- but about the country's banking system. In Spain, the crisis has always been more about bad bank loans than the government budget deficit, and on that front the crisis continues to worsen. In November, the Bank of Spain reported, bad bank loans climbed to 11.4%, a new high, from 11.2% in October. Although Spain continues to be able to borrow at reasonable rates, thanks to European Central Bank President Mario Draghi's promise to defend the euro at all costs, all but the strongest Spanish banks are still going to need even more support from the Spanish government. And with Spanish unemployment at 25%, it's hard to see how a lot of Spaniards currently teetering on the edge of default on their mortgages won't wind up going over that cliff.

And then there's Greece.

The latest report on Greece from the International Monetary Fund concludes, in my reading, that the current austerity program isn't working. Too many of the rich and the self-employed continue to evade taxes, and what the report characterizes as a bloated and unproductive state sector has been subject to only limited cost-cutting. Greece faces a need for either higher tax revenue or further spending cuts to the tune of 5.5 billion euros ($7.25 billion) in 2015 and an additional 9.5 billion euros ($12.5 billion) in 2016, the IMF calculates. The European Union argues that the actual funding gap is smaller, but Europe's accountants don't disagree with the IMF's basic conclusion.

I'd carry the IMF's logic one step further: Greece will be unable or unwilling to close that gap, and the eurozone will be asked for more money and another bailout. The sums, so far, are relatively small (although likely to increase as European economies slow in the next year or two). But I don't think there's any more patience with funding Greece. That's especially the case when the IMF gives the critics of the bailout the ready-made argument that wealthy Greeks are cheating and the Greek government is a poor financial steward.

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