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Experts warn of worse financial crisis in 2012

A combined bond rollover of $6.5tr can trigger a storm

  • By Himendra Mohan Kumar, Staff Reporter
  • Published: 00:00 December 25, 2011
  • Gulf News

The headquarters of the European Central Bank in Frankfurt
  • Image Credit: Reuters
  • The headquarters of the European Central Bank in Frankfurt pix

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.

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.

Proposed

"[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.

No money after December

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."

Comments (8)

  1. Added 20:19 December 25, 2011

    Time is running out for Europe and the rest of the world.The next monetary base may be digital invisible intangible money.Capital goods market may be destroyed and all fixed income earners may loose out owing to great depression.

    Abdullah, Madina, Saudi Arabia

  2. Added 17:54 December 25, 2011

    Its shocking news . Business and job situation is not going well . It wil demotivate job seekers and young enterprenuers . Hope situation will improve .

    sam, Dubai, United Arab Emirates

  3. Added 17:31 December 25, 2011

    This world-wide economic meltodown has created a panic attack in everybody's mind, and with that attitude of fear and apprehension along with the daily negative economic news, the whole situation is moving like an aircraft without rudder. Some positive news about the U.S. housing construction and lower unemployment rate are not going to make any economic miracles even in months. So, based on the current crisis in Europe and the slowing down in Asia etc are clear signals of some worse economic set backs in the year 2012.

    A. Sam Mathew, Ringgold, , United States

  4. Added 16:51 December 25, 2011

    Such media news only take away the left over confidence.!!!! Insted of continues chaos media should bring the experts to talk about the solutions! Please do not gift never end stress!!

    Shabir Madhur, Kasaragod, United Arab Emirates

  5. Added 16:38 December 25, 2011

    Only Western county is to blame. Unnecessary sanctions, war, interference with other countries internal affairs are major reason for the present financial crises.

    Mohammed Sullia, Dubai,, United Arab Emirates

  6. Added 16:15 December 25, 2011

    Capitalist system dying in the capitals of the capitalist system. The efforts to resuscitate this dying system is like digging one hole to fill other. We have spent the money that we never had and it is time to repay but question is how!!!!

    Ahmed, Abu Dhabi, United Arab Emirates

  7. Added 14:45 December 25, 2011

    It is really very tough to survive in this situation of global economical crisis. I want to know in these situation which country will be unaffected so that we can shift our business base there. I am a utensil distributor in UAE. I started my business in early 2007. Nowadays I am also facing a lot of pressure as public are not buying any new utensils. What to do.. what will be the resolution?

    Hari Elayath, Umm Al quwain, United Arab Emirates

  8. Added 14:36 December 25, 2011

    Yes! The solution is the offer of physical assets as collateral for more bailout money. This way had been practiced successfully by the German Government during the last decade using (including purchases of) owned real estates and land and could be used by any of the EU/EMU members for same purposes. There is a lot of means and ways of access to unlimited potentials and an estimated total of 30 trillion euros could be mobilized within short period and at any time the real economy could absorb money supply and policy/law makers decide to do so. The last intervention of the ECB to provide half trillion euro LTRO-funding to the private banking system demonstrates the ability of Europe of the 17 to create enormous capacities without affecting growth and stability. For this reason, the euro crisis appears as product of pure "morbid speculation".

    Al Bakri, Germany, Germany

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