Experts warn of worse financial crisis in 2012
Abu Dhabi: A new global financial crisis is in the making and could
unleash its fury as early as 2012, a year when bond rollovers in the US,
Asia and Europe worth a combined $6.5 trillion (Dh23.87 trillion) are
due, experts warn.
The Eurozone sovereign debt crisis has entered a critical new phase
with France's prized AAA rating being downgraded by Fitch and the
spectre of more sovereign downgrades looking imminent by the beginning
of next year.
As borrowing costs increase in the euro area amid slowing economic
growth, the 17-member currency union teeters on the brink of collapse.
Analysts fear there will be catastrophic consequences for the global
economy should the Eurozone break up.
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The
headquarters of the European Central Bank in Frankfurt pix |
So far, the efforts to tackle the Eurozone crisis have been
half-hearted at best, leaving more questions than answers. The
worst-case scenario in Europe includes sovereign debt defaults, probably
starting with Greece early next year, which may trigger credit default
swaps (CDS). Should this happen, the most natural outcome would be a
frantic sell-off in riskier assets worldwide. The spectre of a global
inter-bank crisis, wherein banks stop lending to each other, also looks
a possibility, given their heavy exposure to toxic assets, including
sovereign debts of peripheral euro nations.
“[Euro] member states need to repay €1.1 trillion of debt in 2012,
the bulk of it in the first six months. The Eurozone banks also have
$665 billion of debt coming due in the first half of 2012. Eurozone
leaders have proposed using the European Central Bank [ECB], the
European Financial Stability Fund [EFSF], the European Stability
mechanism [EMS] and they are now going around the houses to use the IMF
[International Monetary Fund],” said Gary Dugan, Chief Investment
Officer — private banking at Emirates NBD.
“However, whichever way you look at it, the Eurozone still cannot
safely say it can underwrite its bond markets in the coming 12 months
because it has insufficient funding.
“The EFSF has supposedly €440 billion to deploy but few people know
where the funds will come from. The EFSF has struggled to raise €11
billion in the public markets,” Dugan added.
As matters stand, Greece has money to fulfil its debt obligations
only through December. Any more bailout money from fellow Eurozone
member countries seems unlikely, unless Greece agrees to offer physical
assets as a collateral.
“We saw glimpses of a worst case scenario recently with considerable
yield widening for Italy and Spain and the rise in yields even for
German bonds.
Assuming this trend carried forward, it would mean Italy and Spain
would be excluded from the public markets and hence raising the prospect
of a default with a catastrophic chain reaction across the core Eurozone
countries and a major ripple effect globally,” said Anastasios
Dalgiannakis, Head of Trading at Dubai-based Mubasher Financial
Services.
Giyas Gokkent, chief economist at National Bank of Abu Dhabi, said a
Greek default by itself would have manageable ramifications, but the
fear was always possible deterioration in the larger periphery euro area
economies and that is occurring. “The fundamental problem is that
periphery euro area countries are not competitive. Interlinked to this
is the emergence of high debt and lack of growth. Had these countries
had their own currencies, they would have devalued, monetized the debt
and cost of adjustment would have been easier.
With the single currency, the only way they can become more
competitive is for these economies to see sharp price and wage declines
which are politically very, very difficult. The current path is the
break-up of the euro unless politicians can take hard decisions: on the
periphery that will mean more austerity and on the core euro area that
will mean sharing more of the costs for sorting out periphery problems,”
said Gokkent. He said in the near term, the markets are interpreting
each passing day as more dithering by euro area politicians and choosing
to reduce exposure to periphery, whereby the economic situation is
deteriorating further. Pradeep Unni, Senior Relationship Manager at
Richcomm Global Services DMCC in Dubai, said the euro's current crisis
isn't likely to have a quick solution.
“If the current market conditions prevail, the euro may slide to
$1.20 or below in the next three or four months. The factors are clear –
zero confidence in the political/financial system of Europe, widening
bond yields, significant underperformance in core European Union
nations, and low to insignificant capital inflows,” said Unni. “Any mass
downgrade as feared by the rating agencies may increase the pace of the
slide.”
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