Sunday, January 22, 2012


The objective of this article is to find out the hidden time bomb of Euro zone be which will derail the world economic growth in 2012. Just three weeks of the new year of 2012 and it seems that the Europe is slowly landing to resolve its debt problems. The world is thinking that words of IMF and ECB have resolved the debt problem of the European economy. In fact this has also lead Euro zone to sell its debt and find investors’ appetite for its bonds. Even the recent downgrade by S&P of the nine states of Euro zone has been shrugged off by the Euro zone. All these are with stark contrast to last month of 2011 where majority of the Euro zone was struggling to meet their debt obligations as the cost of managing the debt climbed higher and even the governments of Athens and Rome went for a tailspin.

A quick glance at the debt executed by the Euro zone nations.

• Portuguese successfully sold euro 2.5 billion of its national debt.

• France easily sold euro9.5 billion, or about $12.2 billion, in bonds at interest rates lower than in previous auctions when the country enjoyed AAA ratings

• Spain raised euro6.6 billion ($8.5 billion), far more than its initial target of euro3.5 billion to euro4.5 billion.

Well it depicts that euro was able to find more stable sell of its bonds after the rating made by S&P. Euro zone found comfort in selling of its bonds since ECB has backed or rather has tempted to carry out the buys. In December ECB said that it will lend unlimited amounts of money to stabilize the Euro Zone.

Sudden Appetite of Bonds

In December, the ECB said it would lend banks unlimited amounts of money to stabilize them. Further it also added that it will also lower the interest rate on the loans to 1%, and even extended the maximum term of the loan period from 1 year to 3 years. Well this was enough to tempt the banks to raise funds and invest the same in the bonds and hence making an internal trade profit. Banks borrowed around euro489 billion ($632.6 billion) at 1% interest rates for a period of 3 years. European banks has used the funds to buy bonds at cheap funds from ECB and buying higher yield carrying sovereign bonds, resulting profit for the banks as an recapitalization mechanisms and that is also at the expense of taxpayers expenses.
The Warning.

That’s, why the world is thinking the debt problem of Euro Zone is solved. But practically it cannot be solved even within a decade even. I would like to make a warning note to all my readers that the first half of 2012 will bring crash for the world market and lot of intense time of testing nerves of investors and every one as Europe is about explode its debt burden.

Euro zone will find a debt maturity of around €770bn in the first 6 months of 2012.To add more pain Euro zone banks will find another €520bn of debt coming due by this June. Just five euro zone countries Italy, Spain, Ireland, Portugal and Greece – have around €200bn of debt maturing between now and April. Well clubbing altogether its stands around €1 trillion repayment schedule to explode by June 2012.

The biggest problem is that banks are reluctant to release their original liabilities positions. Euro zone will begging severely to china, IMF and ECB to funds its debt payment. This also raises questions about the Euro zone banks stress Test reports. Further from 2012 all banks have to abide with the Basel III norms and by now we find many banks and think tanks of the world has started raising questions about the mechanism by which the "tier-one" capital ratios have been calculated. It has been found that Euro zone will need around 1 trillion dollars to solve the debt problems and chances of funding are negligible. More over the European banks depends heavily on traditional ways of raising funds which at present is of no use.

I find outflow of funds from emerging economies is about to begin since requirements of funds will be prime battle. More over who ever goes for buyout and any mechanism of funding will result to outflow of dollar from all the risky assets. Well for the time being the world stock market is riding up again. Stock indexes in Britain, France, Germany, Italy and Spain along the Dow Jones industrial average in the United States has climbed back close to their levels from last August. In my research I have found that historically when ever any economy has been downgraded the market reacts opposite to that negativism. When Moody downgraded Japan in November 1998, for example, Japanese shares surged by more than 26% in the subsequent 12 months. When Canada lost its AAA credit rating in 1992, its equities gained 30% in the next year. And since the United States was taken down a notch by S.& P. last August, the S.& P. 500 has gained more than 9%.

Well for now it might be an opportunity of the investors to exit and make over their losses of 2011 to some extent and press the button of exit for 2012 till Europe gives a clear signal. No other technical chart of astronomic algebraic calculation is required to find the direction of world market. Europe alone is the biggest signal. Emerging economies needs to formulate policies internally to derive growth otherwise prolonged slow growth will kill the world economy. More importantly I will request the financial market product designers to design products for the senior citizens since they are going to be the worst affected. I will not be surprised that in 2012 we will find many times World GDP growth to be sliced off further. Well ECB will offer it’s another credit facility slated for 28th Feb 2012.Till then it’s time to shop out and not shop in.


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