Does 2012 spell suicide for the Eurozone?

17th January 2012

And we're not done yet. The fund set up to support indebted countries is only as good as its backers, and S&P said that the EFSF could face further downgrades if "additional credit enhancements" were not put in place. Meanwhile, its outlook on the Eurozone's 14 nations remains negative.

ECB head Mario Draghi stressed that Europe is in a "very grave" economic situation. Portugal's borrowing costs have soared to record levels, while Greece is still in a pickle, and set to default in March unless another bailout is organised.

Policy makers and experts across the board are likening the Eurozone to the stricken cruise ship Costa Concordia, while William Hague said this week that Britain was braced for fresh disasters.  

Shaun Richards, Mindful Money's economist blogger, says on his blog: "The S&P downgrades mostly affected countries where their government bond prices and yields had already mostly adjusted to its description of their problems.

"…The EFSF has no money and has to go and borrow it. So now it is going to leverage money it has not even borrowed yet!"

More downgrades to come as the crisis rumbles on.

JW comments on Shaun's blog:  "Did you see the comments of Rietze the CEO of Linde on Reuters over the weekend? Looks like the Germans are finally drawing a line in the sand and are openly talking about exiting…It will take a lot longer than the Italian cruise ship, but she's going down."

Will 2012 see Eurozone suicide?

The big questions this year will remain the same, reports the Daily Telegraph: where's the financial backstop (ECB?); where's a proper firewall (EFSF?); and how to create a fiscal union from countries as different as Greece and Germany?

While the leaders wrangle without resolution, sovereign states will crack on. Spain and Italy will reassure markets with their tough austerity plans but on the streets they will face dangerous civil unrest.

Shaun Richards says on his blog: "Not much left now is there? If we look at the remaining AAA rated nations we see that so much of the burden now falls on the Federal Republic of Germany. I have been arguing that this situation was likely for some time, but now rather than being an implicit problem for those who think about these issues it is beginning to be more explicitly displayed for many more to see. One sign of this is that Germany's share (capital key) of the EFSF has risen from 27% to 29% as Greece,Ireland and Portugal have "stepped out"." He suggests "The Three Euros" as one resolution to the crisis. 

Robert comments on the blog: "One can write numerous different scenarios for the EZ over the next 12 months (2 EZ's, 3 EZ's, 17 different currencies etc), but there is now an above average chance (which is probably increasing), that there will be a disorderly breakup with substantial implications on both the EZ and none EZ countries."

Keith Wade, chief economist at Schroders, says: "We look for the cycle to take a more deflationary turn in 2012 as the Eurozone falls into recession, dragging on global activity. 

"Such a backdrop will trigger more sovereign restructuring in the Eurozone and a continued search for yield as interest rates remain pinned to the floor."

Tackling the crisis for a positive future

Leave a Reply

Your email address will not be published. Required fields are marked *