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.
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"[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."