Singapore : A liquidity seizure arising from Europe's worsening debt crisis could drag the global economy back into recession.

According to Paul Schulte, Head of Multi- Asset Strategy in Asia excluding Japan at Nomura Holdings: "As Europe's problems unwind, liquidity is going to seize up. As liquidity seizes up, multiples are going to contract. Equities are not necessarily cheap."

Concern that Europe's sovereign-debt crisis would spread, sent the euro to a four-year low against the dollar on June 7 and has wiped out more than $4 trillion (Dh14.68 trillion) from global stock markets this year.

Global investors have little confidence in Europe's efforts to contain the crisis, according to a quarterly poll of investors and analysts.

European Union leaders unveiled an almost $1 trillion (Dh3.67 trillion) loan package last month after Greece's budget deficit expanded to almost 14 per cent of gross domestic product, exceeding the EU's three per cent limit.

Some European nations risk a ‘double dip' economic slowdown if the region fails to manage its debt crisis, the World Bank said today.

Investors withdrew some $12 billion (Dh44 billion) from US and European equity funds in the week to May 19, the most in almost two years, on concern Europe's crisis will slow global growth, EPFR Global said on May 21. Global equity funds are slowly putting money back into the market, absorbing $1.5 billion (Dh5.5 billion) of inflows in the week ended June 2, the Cambridge, Massachusetts-based research firm said this week.

"What we are having is a sort of liquidity seizure because of the dislocation in the euro," Schulte said. "If we are not careful, that could tip us back into recession again."

Schulte's views contrast with that of the International Monetary Fund, which said yesterday the European debt crisis has been contained and that it still expects global growth of about 4.2 per cent this year. European Union governments, this week, vowed to police national budgets at an early stage and introduce a wider range of sanctions on excessive deficits, to prevent a repeat of the Greece-fuelled debt crisis that weakened the euro. They also pledged to press ahead with deficit cuts next year.